The last two months, since Porter announced the company would do a public offering of some of its shares (called and Initial Public Offering or IPO) on the Toronto Stock Exchange, have been very revealing for those involved in CommunityAIR (CAIR) and people living along the Waterfront.

To recap a little, CAIR members have been fighting the expansion of the Toronto Island Airport because they knew that the increased numbers of people and planes using the airport would bring more noise, air pollution, vehicle traffic and safety risks to the communities along the Waterfront.  The group was also disturbed by the actions of the Toronto Port Authority (TPA) that engineered the expansion.

The TPA is an arms-length federal government agency with a mandate to manage the port and the airport for the benefit of the public, but the agency has interpreted its role as the promoter of the airport even though that was against the wishes of a sizable number in the community.  The TPA recruited and encouraged Robert Deluce to provide turboprop service out of the Island using the Bombardier Q400 aircraft.  Once the bridge controversy was settled, it was the TPA that steered $20 million of the settlement to Deluce and his companies and encouraged him to press on in his plans to build an airline.  

Deluce established his company, Porter Airlines, and the TPA signed a lease with Porter on very favourable terms.  The port authority built two new ferries used primarily by Porter passengers and perhaps most important, the TPA managed to deliver a monopoly on the Island Airport to the new airline.  A publically owned facility had been delivered to a private company courtesy of the Toronto Port Authority.  Members of the public were not happy and used every opportunity to voice their objections but there was nothing they could do to stop it.

As Porter began operations it became increasingly difficult for CAIR and other members of the public who opposed airport expansion.  Porter started in 2006 with four Q400 aircraft.  The company was quickly granted loans guaranteed by the federal government to buy another sixteen aircraft, and today Porter has twenty planes operating out of the Island Airport.  As early as 2007 Robert Deluce declared that things were going exceptionally well for his airline and the start-up company was already profitable.  

The result of the massive airport expansion was not unexpected.  Residents of the Waterfront soon were complaining about the noise from the landings and take-offs of the Porter planes.  Engine run-ups, done for maintenance, were a particular problem.  Air pollution became a major concern of people living along the Central Waterfront as pollution from the airport mingled with exhaust from vehicles on the Gardiner Expressway and diesel trains.  Taxis rushed through the neighbourhood heading for the airport making the streets unsafe, and the smell of jet fuel came to prevail over the community.

Despite all of this, it was difficult for the residents to oppose Porter.  The company was running a legitimate business and many of its passengers praised the service.  The anger was turned against the Toronto Port Authority.  The TPA was condemned for allowing Porter to violate the terms of the Tripartite Agreement put in place to protect the community.  To an increasing number of people, the airport had become like an arrogant neighbour who refuses to abide by accepted standards of conduct.  Who was to blame? – The Toronto Port Authority.

But while Porter’s activities ramped up, members of CommunityAIR got hints that all was not what it appeared to be with the new airline.  There were many accounts that the Porter planes were flying half-empty.  Some of the routes, like Chicago, Boston and even Newark, often appeared to have very few paying customers.  Flights were cancelled and the only reason seemed to be that there were not enough passengers.  Passengers were left cooling their heels in airports waiting for the next Porter flight.  Curfew violations were a particular problem but there was no explanation why the flights were late.  Then, unexpectedly, two months ago all was revealed.  

The Board of Porter Airlines made the decision to raise money through an IPO.  To do this security regulations require a prospectus on the company’s operations.  The most important part of any prospectus is the detailed financials of the company.  These financials revealed that Porter was in deep trouble.

Robert Deluce had confidently told everyone who would listen that Porter was profitable.  The financials showed that in fact the company had been losing money since it was founded and continued to lose money.  Porter lost $11,486,000 in 2007, $3,317,000 in 2008, $4,609,000 in 2009 and $5,972,000 in the first three months of 2010.  By March 31 of this year Porter had accumulated losses of $44,505,000.  As well the airline company had an extreme shortage of working capital (the cash it needs to pay its bills.)  By March 31, 2010 its current liabilities (what it owes and what it must pay soon) exceeds its current assets by $33,467,000.

The prospectus also revealed, what members of CAIR had long suspected, that Porter has very low load factors (percentage of seats filled with paying customers) on all of its routes.
In the first quarter of 2010 the load factor for Porter was 47% down from 2009’s 47.9% even though tickets were seriously discounted in that quarter. This compares with much higher load factors of other airlines. Air Canada’s load factor in that first quarter was 79.4% and for 2009 it was 78.6%.  WestJet’s load factor was 81.7% for the first quarter and was 78.7% for 2009. Air Canada and WestJet fly larger planes that can carry more passengers than Porter and yet the percentage of passengers carried by these two airlines is still much higher than Porter and they are increasing over the previous year.  The load factor of flights into the United States for Porter was particularly low. The available U.S. Bureau of Transportation Statistics for 2009 show load factors for Porter flights at 22% for Chicago and 39% for Boston.

These were not the only problems.  

·   Credit card companies hold up to 85% of the revenue from Porter’s advanced ticket sales for fear that the company may suddenly become insolvent.  Not surprisingly WestJet had to give no security and even Air Canada, who had accumulated losses of $126 million, only had to give 25.

·   Porter currently flies into the United States on a temporary permit that is to expire on July 10, 2011.  There is speculation that the airline will not be given a permanent permit.  

·   The Greater Toronto Airport Authority (GTAA), that manages Pearson, objected to Porter’s request to post U.S. Homeland Security officers at the Island Airport to provide pre-clearance to passengers because they fear this will mean there are not enough at Pearson.  

·   Finally it appears that the Toronto Port Authority can no longer keep Jazz from providing service out of the Island Airport.  Porter’s monopoly will be broken.

But all of these problems paled in comparison to what befell Porter when the prospectus hit the Bay Street brokerage companies.  Porter planned to raise $120 million in the IPO by selling from 17.1 million to 20 million shares at between $6 and $7 each.  When the financial analysis and brokers went to work, they soon realized that this share value would give Porter a valuation that was higher than WestJet and the value was totally unjustified.  While WestJet had net earnings in 2009 of $98 million, Porter lost $4,609,000 in the same year.  How could Porter be worth more than WestJet?

The comments by brokers and others who follow the markets closely are revealing.  Some liked the company but others treated Porter with scorn.  “It is not sustainable,” said one.  “If I thought there was a buck to be made on this dog, I’d be all over it; however, I do not believe this to be the case.”  “They are selling a fairy tale to dumb investors.”

The company tried to recover from these attacks.  At first they delayed the offering and reduced the price of the shares to $5.50.  Porter announced they would sell 21.82 million shares to raise the $120 that the company needed but still it was not enough to interest the brokers.  Then owing to the delay, Porter was forced to issue a revised prospectus that included financials for the first quarter of 2010.  They revealed a deteriorating cash position and losses for three months greater than the entire previous year.  Finally on June 1st it was announced that Porter had withdrawn the IPO.  Robert Deluce said it was “prudent to defer the offering at this time and wait for better conditions to prevail.”  He went on to speculate that the company may do an IPO in November of this year.

So what can we conclude about all of this?  One thing is obvious.  The statements of Robert Deluce about his company have to be taken with a very large grain of salt.  Porter is in deep trouble.  They have lost substantial amounts of money and there is no hint that profitability is just around the corner.  The cash flow woes are mounting and there is no ready way to address them.  A November IPO seems impossible at this stage.  The company would have to demonstrate serious levels of profitability for it to fly and that seems very unlikely from what we know about Porter.  An even more difficult problem is countering the impression of failure that now hangs over the company.

The most important conclusion about the business side of this entire adventure is that the customer base of the Island Airport is just too small to sustain an airline.  The Island Airport is the graveyard of the dreams of airline entrepreneurs and the names of Robert Deluce and Porter Airlines are about to be added to the list of failed companies that proceeded it.

For Waterfront residents it will be a welcome relief to see the end of Porter.  An argument can now be made in all honesty that if Porter cannot build a successful airline, given its low operating costs at the Island Airport, the blanket advertising, the monopoly it was granted, the cappuccinos, free drinks and all the other bells and whistles they used to entice their customers, then no airline can be successful and the Island Airport must close.

Members of CommunityAIR can also be counted on to make the argument that the Toronto Port Authority must be shut down once and for all.  Without Porter the agency will quickly run out of money, but that is not the real reason.  The TPA and its various board members are responsible for imposing this unneeded and unwanted airline on the Waterfront communities.  The agency has turned into a pariah, scorned by the people, CAIR will argue.  What few assets the TPA still possess must be turned over to the City of Toronto and the agency finally and completely dismantled.

Bill Freeman