April 1, 2014 MGSD01 Prof. Borins

Mohammad Ismail

(997967730)

Zaki Shams

(993987771)

Victoria Yuen

(998254437)

“Flying Refined.” – Porter Airlines

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Table of Contents Executive Summary ................................................................................................................ 2

About Porter Airlines ............................................................................................................. 3

The Team ............................................................................................................................. 4

Strategy at Porter .................................................................................................................. 5

Past Strategy ........................................................................................................................ 6

Culture .................................................................................................................... 6

Fare Environment ................................................................................................... 7

Business Model ...................................................................................................... 7

Future Strategy .................................................................................................................... 8

Strategic Analysis – SWOT ...................................................................................................... 9

Strengths ............................................................................................................................. 9

Weaknesses ....................................................................................................................... 11

Opportunities .................................................................................................................... 13

Threats ............................................................................................................................... 16

Strategic Analysis – Porter’s Five Forces Model .................................................................... 17

Suppliers ............................................................................................................................ 17

Substitutes ......................................................................................................................... 17

New Entrants ..................................................................................................................... 18

Competitors ....................................................................................................................... 18

Customers.......................................................................................................................... 19

Schools of Strategy .............................................................................................................. 19

Entrepreneurial School ...................................................................................................... 19

Positioning School ............................................................................................................. 21

Environmental and Power Schools .................................................................................... 23

Consultant’s Aspect ............................................................................................................. 27

Investor’s Aspect ................................................................................................................. 29

Conclusion and Future ......................................................................................................... 31

Appendices .......................................................................................................................... 36

Bibliography ........................................................................................................................ 44

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Executive Summary

This report provides a detailed analysis of the Porter Airlines case. Our group has

gathered information from primary (such as the investor interview and Porter‘s

IPO prospectus) and secondary sources, such as the newspaper articles and

opponent campaigns. Using all this information, we provide an in depth analysis

of the Porter Airlines‘ current situation and highlight their strategy by looking at

the investor test, consulting test and connection to different schools of strategy.

Operating from the previously ―money losing‖ airport, Billy Bishop Toronto City

Airport (BBTCA), Porter has successfully has established itself as the short-haul

carrier of choice by providing superior service while maintaining a low breakeven

load factor. To expand its operations, Porter Airlines is looking into the purchase

of Bombardier CS100 jets but needs the permission for the necessary runway

expansion and permission to fly jets from its downtown Toronto airport.

Proponents claim that such expansion plan could provide economic advantages

and better customer service. However, opponents, competitors, and counselors at

different levels of the government believe this would cause permanent damage to

the waterfront. Although there is much debate about Porter‘s expansion plans,

Porter‘s investors are confident in getting the approval from city council to

expand the runway and fly Bombardier CS100 jets out of BBTCA (Soobotin

2014). The expected conditions to be placed by city council in regards to noise

level, flight frequency, and ongoing curfews are reasonably expected to be met

without issue by Porter (Soobotin 2014).

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About Porter Airlines

Founded in 2002 by Robert Deluce, Porter Airlines has established itself as a

unique company in the airline industry providing point-to-destination flights in

select high traffic cities throughout Eastern and Central Canada and the U.S.

Porter, which mainly focuses on time-sensitive frequent business and weekend

leisure travelers. Porter‘s constant focus and innovative approach to cost savings

coupled with its responsiveness to customer needs has allowed it to carve a niche

and enviable position in the travel industry.

Through providing ―convenience, speed and service‖ as its customer value

proposition and operating a single smaller size aircraft out of secondary airports

with smaller runways, Porter has successfully developed a good low-cost

structure with high frequency service in the Canadian airline market.

Consequently, such operational efficiencies allow it to pass on some of these

savings to its customers while ensuring a healthy profit margin for its investors.

Porter Airlines is located at Billy Bishop Toronto City Airport (formerly known

as Toronto City Centre Airport), an island six minutes away from downtown

business district in Canada‘s financial capital (Aviation 2006). The airport

location allows business personnel to cut commute time travelling from airport to

office in both the departure and destination cities.

Porter Airlines‘ parent company is the privately-held Porter Aviation Holdings

Inc. (formerly known as REGCO Holdings), which provides ―commercial and

regional air transportation services and terminal, hangar, and office spaces‖

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(Bloomberg 2014). It is also supported by three primary institutional investors –

EdgeStone Capital Partners, OMERS Strategic Investments, GE Asset

Management Incorporated, and Dancap Private Equity Inc.

Ranked as a 4-star airline at SKYTRAX (Skytrax 2014) and won the title of ―Best

Small Airline in the World‖ through Conde Nast Traveler‘s Readers Choice

Award (Conde Nast 2014), Porter Airlines has a proven success along with its

tagline, ―Flying Refined‖. The airline currently offers flights to Toronto, Ottawa,

Montreal, Quebec City, Moncton, Halifax, St. John‘s, Thunder Bay, Sault Ste.

Marie, Sudbury, Timmins, Windsor, New York (Newark), Chicago (Midway),

Boston, Washington (Dulles) and has seasonal flights to Mt. Tremblant, Que.,

Myrtle Beach, S.C., and Burlington, V.T. (Appendix 1).

The Team

Robert J. Deluce, Founder and Chief Executive Officer of Porter Airlines,

was born to a family with deep roots in aviation. Deluce and his brothers all

obtained professional ties to the industry with a father who had been a flyer for

the Royal Canadian Air Force during the Second World War (Power 2009). Being

a veteran of over 50 years in the airline industry, he had held a number of

executive positions at various Canadian airlines, such as Air Ontario, Air Alliance,

and Air Manitoba (Morassutti 2008). After selling the Deluce family‘s Canada

3000 Airline in 1998, he began to search for an opportunity in the industry. As a

founder and head of Porter Aviation Holdings Inc, Deluce put together a team of

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experienced individuals and gathered a significant amount of venture capital

funding for its own wholly-owned subsidiary Porter Airlines Inc (Porter 2014).

Donald Carty, Chairman of the Board of Directors of Porter Airlines, also

has a rich experience in the aviation industry as a retired chairman and CEO of

American Airlines. While appointed as Chairman of Virgin America in 2006, it

was also announced that Carty would serve as Chairman of Porter Aviation

Holdings Inc., which launched Porter out of BBTCA (Reuters 2006).

Porter Aviation Holdings Inc., Parent Company of Porter Airlines, is a

holding company that operates through a number of wholly-owned subsidiaries,

with Porter being its core business. When it first started, Porter Aviation Holdings

Inc. had teamed up with GE Asset Management and Dancap to reach $125.7 to

support its business plan (Ranson 2006). Being the landlord of BBTCA (Sorensen

2006), Porter has become the main commercial airline flying out of the airport.

Strategy at Porter

“Porter’s primary goal is to establish itself as the short-haul carrier of choice by

providing superior customer service and convenient and high-frequency flights to

key North American business and leisure destinations.” – Porter Airlines‘ IPO

Prospectus 2010.

Implementing a differentiation strategy within the aviation industry, Porter chose

not only to compete merely on price, but also the high-quality flying experience

they can deliver to the travelers. By traveling with Porter, travelers can enjoy the

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complimentary snacks and beverages, Wi-Fi, computer usage, changes and

cancellations depending on fare type (Appendix 2), just to name a few.

Past Strategy

Porter is a unique business because they also own the airport and hangars at

BBTCA besides operating their airline. This makes Porter not just an airline

industry investment but an infrastructure investment. The infrastructure piece and

resulting revenue stream from other airlines flying out of BBTCA makes Porter a

more favorable investment than another airline (Soobotin 2014).

Culture

The strong culture at Porter was a part of the inauguration strategy (Soobotin

2014). Given the public troubles of Air Canada in relation to hefty labour costs,

retirement packages and disputes, and the resulting deterioration in customer

service, Porter had a clear opportunity from non-union employees who were

excited and motivated to help customers (Soobotin 2014). Porter‘s strategy hence

included having a young and engaged workforce, showcased by its commitment

to customer service, and embodied by the crisp uniforms worn by everyone from

the airport to the flight. Porter‘s lower cost of labour, and potential for dividends

from great customer service, further made Porter a favorable investment for

Edgestone and others (Soobotin 2014).

Fare Environment

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Given the location advantage of BBTCA, it was originally anticipated that Porter

could command a fare premium given the savings in commuting cost and time

compared to Pearson Airport (Appendix 3), as well as due to the premium service

such as free drinks in the lounge and in the air (Soobotin 2014). However, this

idea did not pan out for Porter as they quickly realized that customers are

extremely sensitive to price of the actual flight, and do not take ancillary costs

into consideration when comparing flight tickets across airlines (Soobotin 2014).

Porter was not large enough to be a price setter and had to accept market price,

not being able to charge any premium on its fare (Soobotin 2014). Porter

frequently runs 50% off sales on its flights (almost monthly) in order to stay

competitive in the industry (Soobotin 2014).

Business Model

Porter Airlines has a good business model which may serve it well in the near

future as is. The airline industry is a business with a high cost of entry and high

fixed costs, hence it takes a long time for new entrants to recoup this initial

investment and build up an adequate economy of scale to start bringing in profits

(Soobotin 2014). Up to the point where Porter airlines was releasing financial

information for its upcoming IPO, Porter was still running in losses although

these losses were shrinking quickly. Porter is now past this initial breakeven point

and now turning a profit for its investors (Soobotin 2014). Porter‘s customers and

flights continue to grow, which is a good signal that these profits are on the rise.

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Future Strategy

On April 10, 2013, ―Porter Airlines has signed a conditional purchase order for 12

Bombardier CS100 aircraft, with option for an additional 18 CS100 aircraft.‖

(Porter 2014) With the ambition of expanding their airline services towards the

west of Canada and down south in the U.S. (Appendix 1), Porter plans to extend

the runway of BBTCA by 400 metres (Appendix 4) to accommodate the new

longer-range plane to their fleet – Bombardier CS100 (Moore 2014).

Understanding that the increase of air traffic would consequently trigger higher

noise pollution, Porter has picked the newest Bombardier CS100 for as they are

―the quietest commercial jets in production‖ (Porter 2014) and much

environmentally efficient than their current Q400. In addition, the interior of the

plane is roomier, which would give extra comfort for travelers (Appendix 5).

Claiming that such expansion plan could provide economic advantages, however,

opponents from various advocacy groups such as the Transportation Action

Ontario and NoJetsTO believe this would cause permanent damage to the

waterfront. Although there is much debate about Porter‘s expansion plans,

Porter‘s investors are confident in getting the approval from city council to

expand the runway and fly Bombardier CS100 jets out of BBTCA (Soobotin

2014). The expected conditions to be placed by city council in regards to noise

level, flight frequency, and ongoing curfews are reasonably expected to be met

without issue by Porter (Soobotin 2014).

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Alternative expansion plans for Porter within current limits of 500 nautical miles

include flying to new destinations like Cleveland, Ohio (Soobotin 2014). Porter

could also expand its codeshare partnerships similar to the one it currently has

with Qatar Airways, where travellers purchase on ticket to fly all the way to Qatar,

switching planes in New York. Porter can further expand its revenue from

terminal vendors and concessions, it recently added new vendors including Hertz

car rental to increase leasing revenue (Soobotin 2014).

Porter is also still looking at getting US Customs Preclearance at BBTCA, which

will not only streamline travel for passengers, but also open up access to new

airports like LaGuardia which are designed for local travellers and do not support

inbound US customs clearance (IPO 2010).

Strategic Analysis – SWOT

Strength

1) Base of Operation

Porter has a long-term lease, together with operating rights, at BBTCA

until 2033 (Porter 2014). Located six-minute away from Canada‘s largest

city and financial capital, Porter is able to keep up to its promise of

convenience to travelers. Although it is located on an island offshore,

Porter offers complimentary shuttle buses and ferries that carry passengers

across. Other than that, being the owner of the airport gives Porter

maximum control on customer experience and entrance of new businesses.

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2) Experienced Management Team

Led by aviation veteran, Robert J. Deluce, he collaborates with a highly

experienced management team of members with proven history in the

industry. Being a private company, Porter is supported by primary

investors including Porter Aviation Holdings Inc., OMERS Strategic

Investments, EdgeStone Capital Partners, and GEAM International Private

Equity Fund, L.P.

3) Lower Cost Operating Structure

a. Modern, Single Class Aircraft

Porter operates Canadian-built Bombardier Aerospace Q400 turboprop

aircraft, which is relatively more fuel efficient than comparable jet

aircrafts. Being considered as the quietest turboprops, the Q400 also

provides extra comfort for passengers with its revolutionary noise and

vibration reduction technology.

In addition, by focusing on a single aircraft yields lower operating costs

related to maintenance and training, as Porter‘s mechanics and aircrew all

work on the same aircraft.

b. Non-unionized Workforce

In Wings Magazine‘s interview with Robert J. Deluce (Pigott 2014),

Deluce had indicated that Porter‘s staff is non-unionized because of the

healthy relationship that they built with their employees. As he

emphasized, ―The front-line team is very enthusiastic and happy; they are

largely the ones who deserve credit for the high level of customer

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satisfaction that we enjoy with all our passengers‖, the non-unionized

workforce results in lower labour costs as compared to its competitors.

4) Strong Brand

Being ranked 4-star by the renowned world airline rating company,

Skytrax, it signifies the overall satisfaction on Porter‘s exceptional cabin

service. When picking the company to travel, a brand‘s reputation is a

strong factor influencing consumer‘s choice of airline. Therefore, being a

top airline gives the company and competitive advantage in the industry.

Weakness

1) Poor Economy and Rising Fuel Price

As the global economy has suffering from recession since the financial

crisis in 2008, the unfavourable market conditions caused Porter Aviation

Holdings Inc. to defer their IPO in 2010 (Airline 2010). It requires high

investment capital to run a business in industries like aviation, therefore, it

could be challenging for Porter to gather funding that supports their future

expansions. In addition, as shown on Appendix 6, the price of fuel has

been increasing since 2009. While high fuel price means higher breakeven

load factor1, Porter must adjust their other expenses to achieve a

breakeven and remain competitive.

2) Future Expansion Uncertainties

1 Every airline has what is called a break-even load factor That is the percentage of the seats the airline has

in service that it must sell at a given yield, or price level, to cover its costs, see "Airline Economics"

http://www.avjobs.com/history/airline-economics.asp

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Although the CSeries are still in flight testing stage, Porter must begin to

make a decision on whether or not to put down the non-refundable deposit

based on the conditional approval from council. While a business

expansion might be a good way to boost up revenue for Porter through

capturing more market share, there are a lot of uncertainties coming from

the external environment such as regulations and oppositions from new

destination and advocacy groups.

3) Opposition to Expansion

Porter is facing opposition for its expansion from some city councillors as

well as NoJetsTO, a group organized solely to oppose the expansion at BB

Airport and disallow jets on this airport. One of the major challenges

raised by opponents to flying CS100 jets out of downtown Toronto is the

possible increase in noise. Given the subjective nature of noise reception it

is hard to say definitively whether Bombardier CS100 jets will make any

more noise than the current Q400s (Semeniuk 2013). The noise level

during landing, takeoff, and braking varies greatly, and the noise limits

usually placed are based on a combination of noise during these intervals

(Semeniuk 2013). This means the CS100 could possibly make more noise

during one of these three instances than the Q400, but would be

considered within the noise limit as long as it compensates for this extra

noise during another interval. The noise level also depends on the

environment, wind direction and other atmospheric details, making it

difficult to assess the volume of noise until the CS100s are actually flown

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to and from BBTCA (Semeniuk 2013). Finally, what constitutes

unbearable or annoying levels of noise is also subjective and varies from

person to person. All these factors combine to make the possible noise and

harm to waterfront due to jets a lively and continuing debate.

4) Privacy

Porter faces an uphill battle in rallying citizen support for its proposal

while releasing very limited information to the public about its operations

and profitability. Given Porter is a private company it has no obligation to

provide this information to the public. Furthermore, Porter has a strategic

reason to withhold this information to maintain competitive advantage

(Soobotin 2014). Porter‘s business may be increasing but it remains a

small player in the larger picture, and having its financial and business

position available can allow larger airlines to price out or otherwise buy

out Porter (Soobotin 2014). This is comparable to Air Canada not

disclosing how much money it is losing operating out of BBTCA while

trying to give Porter some competition (Soobotin 2014).

Opportunities

1) Dying Airport

Porter had seized the opportunity of investing into the dying airport. In

2003, Toronto City Centre Airport (TCCA, now BBTCA) was facing

devastating financial difficulties due to the lack of air traffic traveling

through this airport. In order to preserve this location, the Toronto Port

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Authority (TPA) planned to renovate the terminal buildings and tried to

attract Air Canada for more flights, who had minimal interest because

there was no competition. Understanding that a regional airline could be

run out of the TCCA successfully, Deluce pitched his idea to the TPA and

eventually became the landlord of the airport who was facing bankruptcy.

2) Runway expansion for CS100 jets

Porter has several alternatives available to expand its business, and

Porter‘s business continuity does not entirely depend on the runway

expansion for jets (Soobotin 2014). Nonetheless, runway expansion and

permission to fly CS100 planes out of BBTCA will provide a major step

forward and allow Porter to become a bigger player giving more

competition to larger rivals like Air Canada and Westjet. The potential for

Porter is huge given new destinations like Alberta, British Columbia,

California, Florida, and sun destinations like Bahamas. A quick

comparison of fares between Toronto to Vancouver and Buffalo to Seattle,

which are very similar in distance, reveals the price is almost double in

Canada, and there is much room for increased competition on these routes

(Soobotin 2014).

Air Canada which currently operates a few airlines out of BBTCA would

not support the expansion at BBTCA (Soobotin 2014). Air Canada

operates a few flights primarily to compete with Porter, it would be more

efficient for Air Canada to limit operations to its one base which is

Pearson Airport. For Air Canada, Pearson can support both its small and

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larger aircraft, and operating any flights from BBTCA increases operating

costs. Air Canada would also be at the end of buyer list for Bombardier

CS100 planes if it got into the game now, providing Air Canada another

reason not to support the expansion.

If Porter did however get the approval and built the extended runway, Air

Canada, WestJet, and possibly other new entrants could start operating

their own flights out of BBTCA. The challenge will be that given the

curfews and limitations on number of flights likely to be placed by City

Council, Porter might max out the available flights themselves, or keep the

capacity for themselves. In any case, any other airlines flying out of Porter

will provide additional revenue for Porter through service fees/taxes for

takeoff/landing, hangar use, refueling services and miscellaneous services.

Hence the expansion will further strengthen Porter‘s infrastructure

business on top of promoting their airline business.

If the CS100s do get permission to be flown from BBTCA, there is also a

future possibility for Porter to fly as far as Europe by reducing the number

of seats on the planes (Soobotin 2014). While Porter has done this with the

Q400s reducing the number of seats from 78 to 70 (later adding back 4

seats), the ability to reduce seats on the CS100 to fly as far as Europe may

not be entirely feasible because as much as half the seats may have to be

removed to allow this journey (Soobotin 2014). Nonetheless, the

opportunity to offer a first class only type flight between Toronto and

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London might be a possibility subject to demand and cost based on this

modified plane configuration.

3) Connection to Toronto Pearson Airport

In light of more frequent flight schedule after the expansion, Porter can

benefit from the Union Pearson Express coming in 2015. The Union

Pearson Express will bring passenger to travel from Union Station to

Pearson Airport in 25 minutes (Union 2014). Using the free ferry ride

from BBTCA and free shuttle bus to York and Front Street, travelers can

conveniently arrive at Pearson Airport for a connection flight. However,

Porter must bear in mind that the Union Pearson Express would provide

the convenience for Air Canada travelers as well.

Threats

1) Competition

Started as a regional airline, their expansion could become difficult when

facing players such as Air Canada and WestJet, who might have higher

capital to afford more aggressive actions. For instance, reduction in fare

prices through promotions and frequent flyer incentives to retain loyal

travelers.

2) Government Intervention

With an arising number of advocacy groups opposing to Porter‘s operation

at the BBTCA, it would not be a surprise that the government to take an

action in answering the public‘s concerns. Although they have an

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agreement with the Toronto Port Authority for access to the airport until

2033, this threat should not be overlooked as the location is one of the

major competitive advantages of Porter.

Strategic Analysis – Porter’s Five Forces Model

Supplier

The bargaining power of supplier, which includes Bombardier, fuel suppliers,

mechanics, and flight crews, is considered moderate. Although Bombardier is the

only major supplier for the business, Porter is also the main purchaser of the

Q400s. Porter‘s strong market base and the way they differentiate from

competitors give Porter a better position in negotiations.

Substitute

The threat of substitute products is considered low to medium, although its

competitive advantage of convenience due of the airport location is parallel to

what other transportations can offer in downtown Toronto, such as VIA Rail and

buses. In terms of price, train tickets are relatively pricier than most of the

economy flight tickets. In terms of time saving, traveling on road takes longer

than air.

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New Entrants

By buying up the land and hangars at BBTCA, Porter has reduced the threat of

entrants to low through limiting their access of these facilities. However, Porter

must keep an eye on new low cost brands like Air Canada‘s Jazz and other

competitors such as WestJet, especially when they want to expand to the west

coast of Canada.

Competitors

The competition within the aviation industry is considered high with Air Canada‘s,

their major competitor, ability to capture market share and eliminate small carriers

through price reductions. Therefore, it is important for Porter to focus on the main

competitive advantages that differentiate themselves from the competitors such as

location, customer experience, and convenience. As mentioned, Union Pearson

Express could provide an advantage to Air Canada as it becomes less time

consuming to commute to the Pearson Airport, hence, diminishing the

convenience benefit of the downtown airport location. As a result, it is crucial for

Porter to come up with another differentiation strategy, such as the expansion plan

to new destinations at competitive price.

Customer

The bargaining power of customer is considered medium to high due to Porter‘s

lack of differentiation points among competitors. Therefore, the company must

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keep up every aspect of its business to provide the best quality possible at

competitive price. For instance, it is a must to keep customer service a top priority.

Schools of Strategy

Entrepreneurial School (A Visionary process):

The entrepreneurial school looks at the strategy as a visionary process. A process that

relies heavily on intuition, wisdom, experience and insight of that leader. Robert J.

Deluce, the current president, CEO and founder of Porter airlines Inc. came up with the

idea of creating a regional airline using Bombardier turboprop aircraft to major cities of

Canada within the range of Toronto. He is one of Canada‘s most knowledgeable and

respected airline owners and operators and brings to the industry over 60 years of Deluce

family experience in successfully owning, financing, restructuring, operating and

managing a number of regional airlines in Canada. He also won the Ontario Entrepreneur

of the Year award for emerging entrepreneur.

Traffic to the island airport declined for decades, and by the early 2000s it had

become a chronic money-loser. Its last remaining scheduled carrier, Air Canada

Jazz (created, ironically, from the ashes of Air Ontario), had essentially given up

on it. To Deluce, that airport was a grossly underused asset. So when the Toronto

Port Authority announced its intention to make the airport self-sufficient by

increasing traffic, Deluce hatched his plan: an airline that would fly fuel-efficient

turboprops on well-travelled business routes, as well as to Northern Ontario

destinations whose passenger demand and pricing sweet-spots he knew all too

well.

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Since Porter‘s 2006 launch, when its two lone aircraft shuttled back and forth

between Toronto and Ottawa, Porter has grown to a fleet of 26 Bombardier Q400

turboprops. By 2012, Porter‘s share of passenger traffic on the Ottawa-Toronto

corridor had risen to 25%, and its list of destinations has grown to 19 cities across

eastern North America. Porter opened a new, larger, passenger terminal at the

island airport in March 2010. In 2013, Porter made a proposal to expand Toronto

Island airport and to allow Bombardier CS100 planes equipped with ―whisper jet‖

engines that would allow Porter to serve more destinations. The proposal is

subject to intense debate in the city council these days.

He‘s arguably the most successful entrepreneur in Canadian aviation history.

Whatever the outcome, one thing is certain: it‘s not smart to bet against Deluce.

He‘s taken Porter from two planes and a team of 200 back in 2006 to 26 planes

and 1400 team members. And while debate over jets continues, an 800-foot

pedestrian and utilities tunnel is currently being built to BBTCA – with an

expected completion date for the spring of 2014.

Deluce has the feisty spirit of all true entrepreneurs, having overcome high-profile

obstacles like former Toronto mayor David Miller‘s campaign to stop the bridge

to BBTCA. In an industry that attracts only the most outgoing, competitive, risk-

taking entrepreneurs, Deluce is the highest-octane of them all. Both his backers

and his opponents describe him as shrewd, iron-willed and, above all, persistent—

like a Survivor contestant, he‘s able to outwit, outplay and outlast larger rivals.

Under his influence, that airport has gone from desertion to prosperity. As

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Calgary-based consultant Rick Erickson puts it, ―If you cut his arm, I swear,

aviation fuel would spill from his veins.‖ According to one observer, ―He runs his

airline like a family restaurant.‖ And according to one lawyer, ―The airport

should be renamed Bob Deluce Airport, because of his extent of control and

influence,‖ says one lawyer, Julian Falconer.

The way Deluce tells it, going from turboprops to jets will be no more disruptive

than upgrading your cellphone: the new one is faster, more efficient and just as

quiet.

Positioning School (An Analytical Process)

The positioning school places a business within the context of its industry and

looks at how the organization can improve its strategic positioning within that

context. It looks at the strategy from a scientific and analytical lens and bases the

decisions on hard facts. When Entrepreneur Robert Deluce launched ―Porter

Airlines‖ in 2006, no one could have imagined that the low-cost carrier would

survive in an already crowded North American Airlines market, where many

competitors were shutting down their activities. However, two years after starting

its operations, Porter Airlines reached cash break-even and since then, the

company is profitable. The key to Porter‘s success was the focus on

differentiation. According to Michael Porter (1985), ―a firm differentiates itself

from its competitors when it provides something unique that is valuable to buyers

beyond simply offering a low price‖. In the low-cost carrier market, most

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companies focused on high-density route and low price to gain market share.

Porter Airlines analyzed the value chain and found a niche in the downstream

where it could avoid competing on price. The company decided to enhance

customer service and focus on regional business traveler that value convenience

and premium service.

Porter opened a 10-gate terminal in 2011 at a cost of $50 million, one that avoids

the conveyor-belted people-processor feel endemic to airports. Once you‘ve

checked in at BBTCA, a brief escalator ride takes you down to sleek, intimately

arranged lounge seating with coffee tables and lamplight. Off to the side, a

spacious self-serve area offers various refreshments, all free of charge. As for the

attention to detail, instead of paper cups, the lattes are served in mugs, and are

held in a special countertop rack that warms them as they wait to be used. With

respect to the main Toronto airport, business travelers, the main focus of the

company, could leave downtown Toronto and board in less than an hour. A free

shuttle and ferry is provided and that creates a significant advantage. On the flight,

The Q400 bombardier fleet fitted with leather seats and extra leg room enhanced

customers value.

The key to Porter Airline uniqueness was to choose an airport 5 minutes from

Downtown Toronto and the loyalty built through customer services. By

differentiating oneself and being unique in a way that is difficult to duplicate, it‘s

possible to thrive even in highly competitive markets. The result, Potential IPO in

2010 and Porter Airline‘s current efforts to buy up to 30 CS100 jets from

Montreal-based Bombardier, which would expand the regional carrier's

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reach from coast to coast, and take direct aim at Air Canada and WestJet. "We

believe it is time to spread our wings," president and CEO Bob Deluce said at a

news conference at BBTCA, where Porter is based. "And so I present to you our

vision for the future of Porter Airlines — a vision with service to destinations

across North America, from Calgary and Vancouver, to Los Angeles, Miami and

Orlando." However, this move pushes Porter into a potential new position of

direct competition with Air Canada and WestJet as a national carrier, while

setting up a potential political standoff over expansion of the island airport in

downtown Toronto.

Environmental and Power Schools (A Reactive Process and a

Negotiation Process)

According to the environmental school, strategy is a response to the challenges

imposed by the external environment. Similarly, the Power school proposes that

strategy is a process of negotiation between power holders within the company

and its stakeholders. In the case of Porter Airlines, both these schools coincide at

various occasions. Porter forms a strategy looking at the environment and then

has to negotiate it with stakeholders, to implement it. "Given current market

conditions, we believe it is prudent to defer the IPO at this time. Our company is

well-positioned to wait until the equity markets stabilize before deciding whether

to proceed with a new public offering."- Robert Deluce. ―It's going to be

interesting to watch how WestJet and Air Canada react once Porter starts biting

into their business. They're going to retaliate, and the only way they can retaliate

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is lower prices. This may trigger a vicious price war,"- Joseph D'Cruz, UofT

professor and aviation expert. "The runway's not long enough and to get an

agreement to lengthen the runway, they‘re going to have to go before-three levels

of government (The City of Toronto, the federal government and Toronto Port

Authority), not to mention community opposition, environmental studies, so

there‘s a fair degree of long shot in Bob Deluce‘s plans for Porter today," said

Kokonis, who also questioned how the expansion will be financed. The

announcement could lead to a political dispute over the airport, which is near

residents on the island and the cities heavily populated downtown.

No Jets T.O.

A group called No Jets T.O., claim there are health risks and safety hazards that

outweigh the economic benefits. No Jets T.O. has made claims about air, noise

and water pollution, jet blasts, bird strikes, fuel spills and emergency landings.

The group also claims the expansion would jeopardize development along the

waterfront, hurt property values and increase gridlock. A report prepared by

Transport Action Ontario, another volunteer group opposed to the plan, claims the

expansion would lead to wider restrictions for watercraft in the harbor.

In mid-April 2012, Porter conducted Canada‘s first bio-fuel powered revenue

flight. The successful flight was intentionally scheduled just before Earth Day

with a Bombardier Q400 turboprop. ―Q400 and Q400 NextGen aircraft are

already among the ‗greenest‘ aircraft in the world and the use of biofuel will make

the aircraft even more environmentally conscious.‖ – Deluce. "We knew that

25 | P a g e

operating from a downtown urban airport would require us to be responsible

operators and good neighbors, said Deluce. ―We believe that our track record of

nearly seven years has shown that Porter has delivered on the promises we made

when we announced plans to operate from this airport. We believe the CS100 is

the perfect aircraft for the next stage of our growth for many reasons, not the least

of which is that it is the quietest commercial jet in production."

Competition

Air Canada and WestJet have been watching closely and girding for a battle—but

not the one you would expect. Instead of trying to foil his expansion, they are

letting him do the heavy lifting with regulators; once that is done, they will fight

him in the skies. New competition is expected in the Canadian market. WestJet

unveiled Encore to target smaller locations in Western Canada. A few days later,

Air Canada rolled out Rouge, to service holiday destinations. Both are low-cost

carriers, cheaper to operate than flagship lines, because hiring new staff allows the

carriers to pay them less. Meanwhile, Porter wants to boost competition even

more by adding a slew of new jets and destinations in 2016, expanding from a

regional player to a national one. Porter Airlines, a regional carrier, caters

primarily to business travelers between Toronto, Ottawa and Montreal (the golden

triangle), but since launching in 2006, Porter has grown to service 19 destinations.

By 2016, it wants to fly Bombardier CSeries jets to more far-flung locales,

including Calgary, Vancouver, Los Angeles, and Miami.

Mayoral Candidates Weigh In

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Porter‘s proposal has become a hotly-contested item at city hall and a significant

point of debate in this year‘s municipal election. ―We should leave it as it is,‖

Olivia Chow, the former NDP MP said in a written statement. ―Taxpayers

shouldn‘t spend $100 million on expanding a runway at the island airport to allow

jets and next year, above ground rail will link us with Pearson Airport, making

travel faster and easier.‖ Porter could continue their downtown airport brand by

partnering with Union Pearson Express. Check in at Union Station, right at the

very center of the financial district -- no more shuttle bus -- and get whisked to

YYZ into a Porter lounge where you'll clear security, your check in baggage

already having been taken off your hands at Union station and loaded on to your

flight. The Toronto Region Board of Trade again spoke out in favor of Porter‘s

plan Tuesday, saying its support is based on two conditions: that the jets receive

noise certification from Transport Canada and conform to existing noise limits,

and that the TPA and city agree on a funded plan to address congestion issues.

Back in 2006, Porter Airlines and the Government of Canada signed an agreement

offering federal employees increased choice and flexibility when flying between

Toronto and Ottawa. Porter was the first airline to sign such an agreement prior to

start-up. The agreement was in support of the government‘s Shared Travel

Services Initiative (STSI), part of Public Works and Government Services

Canada. Currently, according to Porter, world-class cities have outstanding

transportation networks. Porter now wants to expand its operations – to create

another 1,000 jobs; help Canada‘s only aerospace manufacturer; provide

increased competition; and make it easier for more people to get to the heart of

27 | P a g e

Toronto. The company‘s new plans likely will create an additional $2-billion in

economic benefits for the city. All this while barely affecting the marine and noise

pollution. After the 11-1 vote in favor of Porter last week, Bob Deluce said earlier

on Tuesday that ―conditional approval‖ was a ―necessary next step,‖ but after the

vote he said he was pleased with the outcome. He reaffirmed his commitment to

abandon the proposal if the Bombardier CS100 planes he plans to purchase do not

meet noise conditions or if they require a material change to the safety zones in

the harbor.

Consultant’s Aspect

After analyzing Porter‘s strengths and weaknesses based on the external and

internal factors, it is suggested that investors should hold off investing into Porter

Airlines until a little later. As a growing company with an experienced

management team, Porter‘s traffic data has been increasing (Appendix 7) even

though the financial crisis happened a few years after they started. They had

successfully seized the opportunity of operating out of a city center airport, and

were able to eliminate a major competitor – Air Canada.

In addition, setting up a low cost operating structure also benefits Porter in

running their business. Although we did not have access to the company‘s

financial reports, it is apparent that by operating a single aircraft and having a

non-unionized workforce can provide savings in terms of maintenance and labour

expenses.

28 | P a g e

However, as the debate on Porter‘s expansion is still heated, there are lots of

uncertainties regarding their future. While the size of BBTCA is limited, Porter

can only operate a certain number of flights every day. Without further expansion,

it becomes difficult for the company to generate extra income. In addition,

competitors might turn this constraint into their opportunity by competing for

Porter‘s customers through better customer experience and cheaper air fares. If

the expansion plan is approved, Porter can gain more market shares by increasing

their destination options and it is suggested to invest now based on the company‘s

competitive advantages and their reputation. Otherwise, it would not be a wise

investment now as the status quo‘s payback would not be significant.

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Investor’s Aspect

From an investor‘s perspective, Porter Airlines currently stands on crossroads.

The biggest uncertainty facing the company is the approval from city council for

its proposed runway expansion and CS100 jet operations. If Porter does get this

approval it gets the ability to grow quickly and become a much larger competitor

in the industry. Disapproval means all future plans for growth face a serious

challenge.

Expansion Approval

If Porter gets the approval, it will become a larger airline with more and farther

destinations, and can compete on even ground with other airlines for market share.

Given Porter‘s history of innovation and brand value, Porter is reasonably

expected to gain a large chunk of the market share and maintain it. In this case

Porter Airlines will appeal to investors looking for high returns, in both medium

and long term, with medium to high risk profile. There is higher risk also because

the approval is only the first (although important) step in executing on this

expansion plan. Bombardier CS100 jets are still in the testing phase and have not

gained approval to fly at any airport yet, there is some risk associated with this,

although the likelihood of fail is low. Porter may also face challenges in the

construction of this runway, and will face continued challenges and opposition

given the growth in traffic and congestion in the area. The construction of the

tunnel will help to get passengers to BBTCA.

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Expansion Rejection

On the other hand if Porter does not get the approval, it will continue to be a small

regional carrier with positive prospects while growing their traffic, and increasing

flights and destinations mildly to support this growth. Porter‘s ability to grow will

be seriously hampered, and it will be an indication that any sizable future growth

for Porter will be unlikely as it will need city approval for increasing flight

volumes past current limits, or to shorten curfews, etc. While Porter will continue

be a profitable company in this scenario, it will attract a very different type of

investor, those looking for long term stable growth with less risk.

Overall, we expect Porter to get the approval for runway extension and CS100 jets,

with certain restrictions placed by City Council. These restrictions should not

pose a risk to Porter‘s operation as it currently has several restrictions and curfews

which it operates under. Porter has previously been able to fight off noise and

other complaints, and it may need to continue doing so. Given the expected

approval Porter Airlines makes a good investment, especially if it does not

already charge a premium based on the expected approval. Porter Airlines

continues to be a medium to high risk investment like most of the airline industry,

and faces some additional risk given its downtown location, ongoing opposition

from citizens, and some uncertainty of political support. Even if the current

Government supports Porter‘s expansion, there is no guarantee that future

Governments will follow suit, and they may try to oppose, dispute, and even

revoke Porter‘s permissions like David Miller did with the bridge. Porter makes a

good investment for someone looking to bet money on Porter getting the approval

31 | P a g e

and being able to capitalize on the new opportunities for at least some time to

come. It is a risky investment, but the risk-taker may get a hefty reward for

sticking along for the ride.

Conclusion and Future

Trend

The airline industry plays an important role in both the Canadian and global

economy. The airline industry is particularly important in Canada given the

country‘s large territory and widely dispersed population. In 2008, Canadian

airlines carried over 75 million business and leisure passengers, with over 86

million daily seat-miles across the country. Canadian carriers also play an

important role in the transport of goods within the country and in the

import/export market. Over the past three decades, governments have gradually

reduced economic regulation of commercial aviation which has transformed the

airline industry, allowing new market entrants, including low-cost carriers, to

emerge and compete successfully with full-service airlines. However, in response

to reduced service levels from these new entrants, and heightened passenger

frustration with full-service carriers, the industry has seen many low-cost carriers

moving towards a ―hybrid‖ airline model - a strategy that blends low-cost carrier

traits with some full-service carrier business practices to help grow their

passenger base and expand market share. Some of the full-service carrier

attributes being introduced by these hybrid low-cost carriers include use of global

distribution system services, code-share arrangements, multiple fare options,

32 | P a g e

advanced ticketing procedures, multiple aircraft types, multiple classes of service,

and long-haul (including international) destinations. In addition, the customers are

looking for more convenience at lower costs, the operators are looking for

consistent growth and growing market share with low costs (fuel-efficient planes

being used) and governments are looking for more revenue and public support

and safety.

Competitive Landscape

New competition is coming to the Canadian market, with both WestJet and Air

Canada recently launching subsidiaries and Porter Airlines wants to boost

competition even more by adding a slew of new jets and destinations in 2016,

expanding from a regional player to a national one. All of these developments

mean consumers could benefit through more choice, increased flight frequency

and even lower fares. Some carriers are boasting of reductions of up to 50% on

certain routes. What‘s more, we could see a greater focus on customer service as

airlines fight for passengers.

Prospects

Jet-powered aircraft are currently banned at the island airport, which is governed

by a Tripartite Agreement signed in 1983 by the city, Toronto Port Authority

(TPA) and Transport Canada. All three sides must agree to amend the agreement

to allow the runway extension and the use of Bombardier CS100 jets that would

make way for Porter to expand its network to farther destinations in North

America. If council agrees to proceed with the negotiations, a long and

33 | P a g e

complicated process would begin with city staff presenting conditions that must

be met over three phases before they will even consider giving a recommendation

on amending the agreement. Those conditions include limits on passenger volume

and flight slots in an effort to manage the airport‘s growth. The caps are based on

forecasted passenger volumes and local road capacity. Staff also wants assurances

from the Toronto Port Authority and Transport Canada that concerns about noise,

road traffic, flight paths, chemical and fuel management and curfew hours will be

resolved.

Deputy Mayor Norm Kelly, long a supporter of airport expansion, said the latest

report represents a ―significant improvement‖ from one in November that said it

was ―premature‖ to approve an expansion plan. Among the major mayoral

candidates, Rob Ford supports island airport expansion and Olivia Chow is

opposed. David Soknacki, Karen Stintz and John Tory have been reluctant to

commit themselves, pointing to the unanswered questions the expansion plan

raises. Toronto‘s executive committee voted Tuesday 11 to 1 in favor of asking

staff to embark on negotiations that could lead to expansion of the island airport

and a lifting of the jet ban, but the final say wouldn‘t come until next year. An

attempt by councilor Peter Milczyn to stop studying Porter‘s plans altogether

failed.

Deluce says Bombardier has guaranteed him the CS100 will have a noise

signature similar to the Q400, and his purchase agreement is conditional on the

performance. “If the CS100 can’t meet the requirements, we don’t want it,” he

34 | P a g e

says. “My company is profitable, and we would be happy to continue as a

regional operator.”

Porter‘s future performance will depend upon a number of factors, such as their

ability to:

• Capitalize on their initial business strategy;

• Implement their planned growth strategy;

• Provide superior customer service at reasonable prices;

• Attract, retain and motivate qualified personnel;

• React to customer and market demands; and

• Maintain the safety and security of their operations.

Dependence on BBTCA, failure to achieve growth strategy, ability to obtain

financing for additional aircraft, litigation risks. Public safety, limited fleet and

operations (hence capped growth potential in operations and HR) and Industry

risks such as economic conditions, environmental requirements, seasonal nature

of the business, government intervention, regulations and intensifying competition

are the risks that Porter should worry about in the long run. However, As an

innovative growth company in the airline business, with business strengths such

premium service offering, integrated, scalable, low cost platform, modern fleet,

strategic base of operations – downtown Toronto at BBTCA, and a proven

management team with high level contacts and decades of experience, the

35 | P a g e

investors, supporters (general public and in government) and the CEO Robert

Deluce are confident about the bright future of Porter Airlines.

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Appendices

Appendix 1: https://www.porterplans.com/Plans

http://www.porterplans.com/Content/images/plans/routes/new-routes-870.jpg

37 | P a g e

Appendix 2: https://www.flyporter.com/Travel/Fare-Structure?culture=en-CA

Firm Fare Flexible Fare Freedom Fare

Flight Changes - Canada

Changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time for a $75.00 CAD/USD charge per change /cancellation per direction per passenger, plus fare difference and applicable taxes, subject to availability.

Changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time for a $50.00 CAD/USD charge per change /cancellation per direction per passenger, plus fare difference and applicable taxes, subject to availability.

Complimentary changes or cancellations are permitted online or through the Porter Call Centre up to 1 hour prior to departure time, subject to fare difference, applicable taxes and availability.

Same-day airport change

Same-day changes are permitted at the airport for $150 CAD/USD Per passenger per direction plus applicable taxes, subject to availability. Same-day changes are permitted at the airport for travel between Toronto and Montréal or Ottawa for $75 CAD/USD Per passenger per direction plus applicable taxes, subject to availability.

Same-day changes are permitted at the airport for $75 CAD/USD Per passenger per direction plus applicable taxes, subject to availability.

Complimentary same-day changes are permitted at the airport, subject to availability.

Refunds

Cancelled flights are credited (less change fee) for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance.

Cancelled flights are credited (less change fee) for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance.

Cancelled flights are credited for future Porter flights. All travel using applied credit must be completed within 12 months of original ticket issuance. Refunds can be obtained by calling the Porter Call Centre.

VIPorter points Eligible VIPorter members earn 375 VIPorter points per direction.

Eligible VIPorter members earn 750 VIPorter points per direction.

Eligible VIPorter members earn 1500 VIPorter points per direction.

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Appendix 3: Taxi fare to Pearson from Toronto $45 one way x 2 = $90

Taxi fare to Billy Bishop Airport from Toronto $10 one way x 2 = $20

Savings = $70

Appendix 4: http://www.porterplans.com/Plans

http://www.porterplans.com/Content/images/info/airport/200m-15-Rwy-08-and-26-overview.gif

39 | P a g e

Appendix 5: http://www.porterplans.com/Content/images/plans/planes/jet-comparison.png

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Appendix 6: Source: US Energy Information Administration

http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=60

2009 2010 2011 2012 20132014

(till Feb)

Average Price/Gallon $1.68 $2.15 $3.00 $3.06 $2.92 $2.95

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Average Jet Fuel Price/Gallon

2009 2010 2011 2012

Load Factor 45.90% 54.20% 61.70% 62.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Porter Airlines' Load Factor (Year 2009 to 2012)

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Appendix 7: Traffic Data from Porter Airlines‘ news releases

https://www.flyporter.com/About/News-Releases?year=2013&culture=en-CA

2009 2010 2011 2012

RPM 314.2 589.9 801.7 914.2

ASM 655.6 1089.5 1298.6 1475.3

0

200

400

600

800

1000

1200

1400

1600

(in

mill

ion

)

Porter Airlines' Traffic Data (Year 2009 to 2012)

42 | P a g e

Billy Bishop Toronto City Airport:

43 | P a g e

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