Porter Airlines, Canada’s 3rd largest scheduled airline (though it has less than 2.5% of the C$ 13 billion a year Canadian domestic and trans-border market) was heading into its 9th year of operation in a state of oblivion, as its fleet of 26 Bombardier Q400’s (74 passenger seats) and 1,400 employees has remained constant since November 2011, serving 20 destinations in Canada and the US, clearly indicating a lack of real growth at the regional airline.
NOTE: Read my blog article “Is there a sustainable business model for Porter ?, IPO, CSeries or WestJet in its future ?” (April 18, 2014)
Porter Airlines has 83% market share at the Billy Bishop Toronto City Center Airport (CYTZ), which handled 2.4 million passengers in 2014 and should be handing +4.5 million if and when Porter Airlines operates its planned Bombardier CS100 for which it has 12 ‘conditional orders’ and 18 options. Now that it has successfully sold its passenger terminal at CYTZ for a reported C$ 750 million, Porter now has the capital to expand after 3 years of having 26 x Q400 turboprops with little growth and increased competition from Air Air Canada Express and slowly emerging WestJet Encore. The CS100 plan is now centered on approval from the Toronto City Council as jets are not allowed into the airport and the short 3,988 foot runways needs and extra 1,312 feet for the CS100.
With money in hand the politicians will tow the line, why would any investor pay so much for a passenger terminal at an airport with a short runway that few turboprop airliners can operate from and where jets are not allowed and slots are capped at 202 per day ?? unless you know your risks are covered !
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The airline is being squeezed in by Air Canada Express and now Westjet Encore, so all 3 operate Q400’s, and Encore is going to grow in Eastern Canada as presently it only has 16 of the 40+5 Q400’s it has ordered, and Porter Airlines will find it harder and harder to compete as competition will squeeze RASM hard as yields are and will be under pressure, one reason it has not grown its fleet in 39 months.
It is a well run airline, Robert Deluce knows how to run an airline and his Chairman, Donald Carty, probably Canada’s most famous airline executive, whose experience as CEO at AMR Corp (Parent of American Airlines), Chairman at Virgin America, Director at Hawaiian Airlines, CHC Helicopters and a former Air Canada executive, is the envy of any Canadian airline executive.
Porter Airlines has an impressive list of interline/code share partners from JetBlue, Qatar Airways, South African Airlines, Singapore Airlines, Icelandair, El Al, etc. and is the #3 scheduled airline in Canada, with potential for more, yet the duopoly in the Canadian airline industry hinders progress and keeps Canadians captive to 2 airlines that controls the vast majority (84% of seats, 93% of traffic) of the Canadian market.
Porter’s expansion plans at Billy Bishop Toronto City Airport (CYTZ) with the 108 seat Bombardier CS100 airliner in the hands of possible financiers, Toronto’s city council, Toronto Port Authority (TPA) and the federal government, as a restrictions exist on the use of jet aircraft and the number of flights/slots per day (202 as of today) and this is in place till 2033 and only the 3 parties can change that.
A vote is expected by the Toronto City Council this spring, will the people of downtown Toronto want the extra automobile traffic, noise, construction as the passenger terminal will need expansion if the CSeries joins Porter Airlines and CYTZ traffic is expected to reach +4.5 million ?
Today, Porter Airlines has a 83% market share at CYTZ with 17% going to Air Canada which flies Q400’s into the airport through its Air Canada Express partner Sky Regional. The top 2 Domestic routes for Porter from CYTZ are to Ottawa (CYOW) with around 13,000 roundtrip seats per week and to Montreal (CYUL) with 12,500 roundtrip seats per week, then the market falls of rapidly as the #3 route to Thunder Bay has only 4,500 roundtrip seats per week.
Last week, things moved forward very fast, the anticipated deal to sell and leaseback on the terminal building at CYTZ, which apparently went for a whopping C$ 750 milllion, which really raises eye brows given that the terminal building was valued at $49 million in Porter’s failed IPO prospectus in 2010 and some valuations were in the $350 to $500 million range. Either way, the airline has money, will some investors want out ? rumors say Chairman Donald Carty wants out ($20+ million), and what about Borealis the investment arm of OMERS ? Edgestone Capital Partners ? this is the time to cash out, before its re-invested back into the next chapter at Porter.
The buyer of the passenger terminal is InstarAGF Asset Management Inc. a joint venture between AGF (Toronto based money manager with C$34 billion under management), through a company named Nieuport Aviation Infrastructure Partners GP which contributed C$105 million while Scotiabank, Desjardins and National Bank provided financing, with Scotia Bank holding a C$650 million mortgage on the passenger terminal.
Porter Airlines has 26 Bombardier Q400’s in service, the aircraft were originally configured with only 70 seats instead of the standard 78, due to runway limitations at CYTZ, whose 3,988 runway is at the edge of the aircraft’s performance (per AFM) with large passenger loads on wet weather days. The airline installed 74 seats in 2013 as only CYTZ is limited and inbound flights could easily operate in with 78 seats, but not out. Porter Airlines as with other Q400 airlines have received huge discounts on their Q400’s as the OEM has had to discount 30-40% to compete with the ATR-72 which today out sells the Q400 by a huge margin due to much better economics. The production clock on the Q400 is now ticking, low orders, diminishing backlog and failed production plan to have an assembly line in Russia, Bombardier is now in talks with the China about assembling the Q400 there. The Q400 is best on 300 nm to 450 nm sectors where its speed can be of some advantage, on short legs it is very uneconomical.
Chorus Aviation (Jazz Aviation and Air Canada Express operator) just ordered 13 x Q400NG’s and 10 options possibly worth $758 million (less discounts), surely needed to deal with WestJet’s Encore Q400’s, now numbering 16 in operation and heading East (Toronto to Thunder Bay, Montreal, Quebec City and Fredericton) and as there are 29 more on order or options, Ontario will see lots of Q400’s battling it out between Porter, Encore and Air Canada Express in the coming 2 years.
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With this kind of money now in Porter’s hands, things will start happening, as money talks the loudest in politics and business, so I am assuming the financiers know something we don’t, because without the lifting of the ban on jets and the extension of the runway there is no CSeries for Porter, which means there is no substantial growth to be expected at the airport or at Porter Airlines. The investors must have surely assessed all the risks, and must be very certain that the ban on jets, the runways extension and the CSeries order will all happen, as otherwise CYZT will not grow and therefore not be worth the reported $C 750 million.
The roughly 15 x book multiple ratio paid for passenger terminal is very high indeed, but worth it if all goes as planned, and noone makes such investments without some high probability, so yes Totonto City Council will approve of the ban and extension and Bombradier will get its CS100 order, soon.
Porter Airlines CEO Bob Deluce said in September, that selling the passenger terminal was an alternate to going public with another IPO, and the pressure was on Mr. Deluce to move the CS100 jet plans forward, as sadly the airline has not grown much since 2011. The IPO did not work in 2010 as the timing was wrong, with the economic slowdown then, and it would not work now, investors need to see growth, Porter has had little growth since 2011, and one of the reasons for the CSeries order was to get some excitement for a possible IPO, you need hype and to show a bright future, without the CSeries, times are tough right now with Encore moving into Toronto’s YYZ and a rejuvenated Air Canada has its own LCC Rouge and growing fast.
The Porter fleet is the same as in 2011 though seating on the Q400 was increased in 2013 to 74 from the original 70. The reason Porter does not use the standard 78 seat configuration, is not about comfort, its more to do with the Q400’s performance out of the short 3,988 feet (1,116 meter) runway (08-26).
In fact, it has always been on the edge of the Q400’s performance, little margin for error when wet or slush on runway, and yet the Q400 operation into CYTZ has made it the 9th busiest airport in Canada with traffic estimated at 2.4 million in 2014.
Through Porter’s City Centre Terminal Corporation, Porter has invested several millions of dollars into the passenger terminal since 2010, which but it does not explain why someone would pay such an extravagant sum, unless something BIG was in the works, and Porter needs some spark to move it into a new chapter.
Porter Airlines has been angling for an IPO or takeover for sometime after the failed IPO of 2010. The airline is privately owned, so financial are not available, and it stopped providing traffic statistics in April 2013 after recording low load factors and yields, in January, 2013 Porter recorded a 2.1% drop in load factor to 53.6%. While load factor is only a part of the profitability equation of RASM (LF x Yield) minus (-) CASM, it’s yield would have to have a serious premium over Air Canada and other competitors to overcome it’s CASM. I have the question why Porter is shy to reveal its normal traffic stats, never a good sign.
Today’s airlines regularly report average load factors of 80-85% which has brought airlines into profitability (RASM>CASM). If the load factor at Porter has not gone above 60%, I would question if the airline is making money today. In 2010, its IPO prospectus showed a CASM of $0.238 and a yield of $0.481 so breakeven load factor was 49.5% (AC had 79.1% LF and WJ 80.9% LF).
For comparison, though not apples to apples exactly, Chorus Aviation/Jazz, in the 3Q/2014 had a CASM of 26.53 cents and excluding fuel it was 19.76 cents. Chorus has fleet of 127 aircraft (21 x Q400’s, 35 x DHC-8-100’s, 28 x DHC-8-300’s, 16 x CRJ705’s and 26 x CRJ-200’s) so the costs are a little skewed, but for comparison it is ok. The Q400 fleet is getting older, and maintenance is surely increasing, adding 4 seats to the original 70 was a good move, still more leg room than the standard 78 and it improves CASM by 5%, more seats equal lower CASM, and a trend that is being undertaken by many airlines around the world, up-gauging aircraft to higher seating capacities and taking existing aircraft and adding more seats.
Since then yields have almost stayed the same in Canada, as focus has been on costs at WJ and AC, but Porter’s costs have had to go up as the majority of the Q400 are now over 5 years old (had 18 in 2010), which means warranties have expired, and maintenance costs have increased substantially. In fact, the high maintenance costs of the Q400 are infamous in the industry, and the one of the big reasons why the Q400 struggles in sales while ATR and Embraer are doing very well.
On this note, Mr. Deluce confirmed to the Financial Post, that is “profitable and sustainable airline as it presently exists”, but selling its crown jewel, the passenger terminal makes me wonder.
Now, Porter Airlines has an outstanding commitment or “conditional order” for 12 CS100’s which has a list price of $US 62 million ($US 574,000 per passenger seat), making it a $US 744 million order and as before with the Q400 order, Porter will most surely receive a discount in the 30-40% range, so $446 million is possible, and with 85% financing available from various sources, Porter will need to put down 15% or $US 67 million on the first 12 x CS100 order, as soon as possible.
No doubt Bombardier had a big hand in the passenger terminal deal, it is ‘deperate’ for CSeries orders, and needs a North American order badly (no, Republic Airways will NOT take its 40 x CS300 order from 2010-forget it). The CSeries must penetrate the North American market if it is to be a successful program, today that is really America, United, Delta, Southwest, Air Canada and maybe WestJet, the LCC’s have no need for aircraft with low seating (below 160 seats).
So I expect the “conditional order” to be firmed up as soon as possible, and now they need to work on the politics of Toronto, as the Feds and the TPA are more likely in support of the jets at CYTZ, money talks in politics, now the ‘lobbyist’ will do their work to make it happen.
The CS100 in brief is an off the shelf new airliner using the new generation of P&W 1500G engine which has also been adopted by Airbus for the A320neo family and by Embraer for the new E2 line of commercial airliners as well as the new Mitsubishi MRJ airliner. For rhetoric of it being a “game changer”, it was when it was announced in July, 2004 as a replacement for the BRJX program, but 11 years later the driver of the economics of the aircraft, the engine, is on other aircraft and the competitive advantage is simply gone !
This is the future of Porter Airlines, the 108 seat, $62 million Bombardier CS100 airliner. Now that Porter Airlines has its money, it is expected to move forward with deposits. This will be a major coup for Bombardier, and I am sure they were in some way involved in orchestrating the passenger terminal deal, for Porter has 12 CS100 ordered and 18 options which could be worth $US 1.8 billion based on list price. The aircraft is not the “game changer” once proudly hyped as other OEM’s have adopted the same P&W 1500G powerplant on their aircraft and the economics is plus/minus the same today.
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The CS100 seats 108 in a 2 class seating, needs at least 4,800 feet of runway for takeoff, and this is why CYTZ needs to be extended by 400 meters (1,320 feet) to at least 5,300 feet. It has a max. range of 2,950 nm (5,458 km) and cruises at a max. speed of 870 km/hour (0.82 Mach), basically what the Boeing B737-700/Max7 and Airbus A319/319neo do but with 12+ (+11%) more seats in the 2 class configuration.
Hard for find economic numbers on the aircraft as Bombardier is no longer proudly displaying the aircraft’s great economics, as airlines have found out, they are no better than what Boeing, Airbus and Embraer are offering.
As a benchmark, the latest $US DOC (direct operating costs) CASM (cost per available seat mile) numbers for various aircraft and big airlines that the CSeries and Porter Airlines will compete with as they plan to fly to (Vancouver, Calgary, San Francisco, Las Vegas, Los Angeles, Orlando, Miami, Fort Myers, Tampa, West Palm Beach, Nassau, Washington on top of the current Q400 destinations like Myrtle Beach, Washington, New York, Chicago) :
DOC (Direct Operating Costs) of various aircraft and airlines:
- American Airlines (AA) Airbus A319 (128 seats) 6.5 cents
- American Airlines (AA) Boeing B737-800 (150 seats) 8.0 cents
- Delta Air Lines (DL) Boeing B737-700 (124 seats) 9.5 cents
- Delta Air Lines (DL) Boeing B737-800 (160 seats) 7.5 cents
- United Airlines (UA) Airbus A319 (121 seats) 10.2 cents
- United Airlines (UA) Airbus A320 (145 seats) 9.0 cents
- Frontier Airlines (F9) Airbus A319 (139 seats) 7.3 cents ULCC ultra low cost carrier)
- Spirit Airlines (NK) Airbus A320 (178 seats) 6.4 cents ULCC ultra low cost carrier
- Spirit Airlines (NK) Airbus A321 (197 seats) 5.1 cents ULCC ultra low cost carrier
- Southwest Airlines (SW) Boeing B737-700 (143 seats) 7.7 cents LCC
- Southwest Airlines (SW) Boeing B737-800 (175 seats) 5.9 cents LCC
- Allegiant Airlines (G4) MD-80 (166 seats) 7.6 cents ULCC ultra low cost carrier
- Allegiant Airlines (G4) Airbus A320 (178 seats) 5.6 cents ULCC ultra low cost carrier
Note: DOC’s are generally around 70% of total operating costs for network carriers, so indirect costs would be an additional 40%-60% on top of DOC’s, so you can use 50% for IOC, therefore a DOC CASM of say 8 cents would be a total operating cost of 12 cents, for LCC the indirect costs are about 35% on top of DOC’s. It goes without saying that the more seats in a given aircraft the lower the CASM, ULCC/LCC are very good at maximizing aircraft seating density.
Seat density is going up, for instance the A320 has a a maximum of 180 seats (going to 186 soon) and ULCC’s like Allegiant and Spirit have 178 seats in them, while American, Delta, JetBlue and United have 150 seats. On the B737-800, Ryanair in Europe has 180 seats, and just ordered up to 200 units of the 200 seat B737-Max200 (B737-800 with 20 extra seats) which was designed for Ryanair’s need for a 200 seat aircraft while Southwest has 175, United has 166 seats, Delta 160 and American is going to 160 from 150, the difference between 178 seats and 150 on the A320 is equal to an increase in capacity of 18% which means cost per seat will be 16% lower all else being equal.
The Porter Airlines CS100 will have to compete with some big airlines networks, like Air Canada, WestJet, American, United, Delta and Souwest (AC’s LCC Rouge A319 seats up to 142 – ABOVE PHOTO) and many low cost airlines in the US, and it will be all about seat mile costs, as many now have driven their CASM’s down to levels of 5 to 8 cents per ASM, and the higher the seating the lower the CASM, a 108 seat airliner will be at a major disadvantage versus a 143 seat B737-700, right off the bat a 32.4% disadvantage in seating density.
The future route network of Porter Airlines is very ambitious out of CYTZ, I am sure AC, WJ, AA, UA, AA and others will have something to say about some of those planned routes.
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IF Porter has a chance to be successful with the CS100 it will need higher load factors than it has had with the Q400 (+/- 60%), it will need a premium on air fares versus what is and will be available by major airlines (Canadian and US) from Toronto Pearson International Airport (CYYZ), and have $US DOC CASM less than 8.0 cents per ASM, which equates to $8.64 per mile or roughly $3,369 per block hour for DOC’s and assume 50% indirect costs, you get to 12.0 $US cents per ASM (today roughly 15.0 Canadian cents) or $US 12.96 per mile to a total operating cost of $US 5,054 per ($C 6,317) block hour for Porter to really be able to compete with the CS100 against the BIG boys, Boeing and Airbus fleets.
In 4Q/2014, WestJet Airlines, had a average load factor of 79.4%, yield was 19.57 Canadian cents/RPM, CASM was 15.59 Canadian cents per ASM, and of interest was that Encore had a 2% increase in unit revenues, slowly the Q400 operation is increasing fares as its network expands beyond the current 16 Q400’s.
For comparison presently, Delta Air Lines is highest in the US with their Total CASM at 15.7 cents followed by AA at 14.2 cents, United at 13.7 cents. On the ULCC side, Spirit is lowest with 10 cents, Allegiant with 10. 2 cents and on the LCC side, Southwest has 12.1 cents, JetBlue at 12.2 cents and Alaska at 11.5 cents. It is a tough world out there, very competitive, and you need to really have some competitive advantage to survive, either very low costs, or be able to get a premium on your pricing, or exceptional demand by occupying a unique market and segment.
To win in this business, you need need to maximize yield ($/RPM) and load factor (%) and minimize CASM, so that RASM (yield x LF) > CASM ($/ASM), simple formula, very complicated to achieve in reality, it may surprise you but though 2014 was a good year, with global airline revenue expected to top $US 743 billion with 3.3 billion passengers and a profit of $US 19.7 billion, yet sadly it is only a 2.6% profit margin or $US 5.97 per passenger !
Lastly, Air Canada says it is thinking of pulling out of CYTZ where it runs 15 Q400 flight a day, and where 2014 was a good year, but as Air Canada is still in its cost transformation mode, it is accessing CYTZ for its costs, which will probably see increased terminal rates , with slots limited to 202 per day, it would be good news for Porter, but leave it with a monopoly at CYTZ, unless WestJet Encore comes in.
The Canadian domestic market is worth C$ 7 billion, Porter has less than 3% of that but the big prize now is the trans-border market, which is worth C$ 6 billion a year and here the CSeries can open up new markets beyond the range of the Q400, squeezed in at home from AC and WJ, Porter needs to go beyond its traditional markets or stay at home and battle it out.
The choice has been made and now it has the money to buy the aircraft it needs. Who pays for the expansion of the already crowded existing passenger terminal to handle the doubling of current passenger traffic to +4.5 million passengers is not Porter’s problem anymore , but a huge investment and new space will be needed, and the good people of Toronto will need to put up with a lot more automobile traffic, construction and parking problems downtown near the waterfront, I don’t think that anyone thought that millions of passengers would be travelling through CYTZ.
The C$ 750 million sale leaseback gives Porter Airlines the cash to grow its business and it needs to grow its stagnant business, but that money has a cost, somewhere around C$ 3.58 million a month (using 4% over 30 years), and that is a big cost for a small airline.
The CSeries strategy I get, few options out of CYTZ available, but it is a role of the dice, and I hope it works for Porter Airlines, it’s a wonderful brand, sadly Canada is a duopoly, always has been and its very difficult to break that AC and WJ domination. We Canadian suffer high fares, because there is little competition in this country, WJ started off as a LCC (low cost carrier) to get established, but has realized it does not have to be a low fare airline, charge what AC charges and you have bigger profits. I wish Porter Airlines much success, the money it now has allow it to begin a new chapter.
We need a LCC carrier, but the progress of planned LCC’s Naked Jet and Canada Jetlines are not giving me much hope they will launch, more on that in future articles.
Till next time, please continue reading, thank you.