Porter Airlines, which just celebrated its 9th anniversary on October 22nd, has just receives the bad news from the new Liberal Government in Ottawa, that they will NOT re-open the tri-partite agreements between the City of Toronto, Toronto Port Authority and the Federal Government, which required unanimous consent to lift the current ban on jets from flying out of Billy Bishop Toronto City Airport (CYTZ). It is very bad news for CEO Robert Deluce who has built up a wonderful airline in the past 9 years, but one that has grown very little in the past 4 years and now under attack by Air Canada and WestJet through their regional partners, while Air Canada has turned things around and is now a serious competitor domestically and internationally.
Porter Airlines Previous Blogs: April 18, 2014 and February 3, 2015
In this case the Federal Government did not come to Bombardier’s side and help it save an important order, thought it is being asked to cough up $1.0 billion in tax payers money, while surely Air Canada is under extreme pressure to buy the CS100/300’s.
This torpedoes Porter’s plans to fly the 12 ordered and 18 optioned Bombardier CS100’s jets, valued at $ 2.3 billion (less 35% discount surely) from the airport on a vast network to Western Canada, the US market. It is also a major blow to Bombardier as Porter’s 12+18 order was only one of two orders from the very important North American market, with Republic Airways Holdings order for 40 plus 40 optioned CS300’s, is still on the books from February 25, 2010 when Republic Airways owned Frontier Airlines.
That order will never happen as Frontier is no longer owned by Republic Airways and the airline uses a new business model now, serving US majors as a regional CPA (capacity purchase agreement) partner, even CEO Bryan Bedford said “there is no place to operate the CSeries in that model”, but with only 53 firm orders for the CS100 and only 190 firm orders for the CS300 Bombardier misleads the public, investors and prospects with “phony” orders they know will NOT happen.
In fact take out 93 CS300 orders (40 x Republic Airways, 32 Ilyushin Finance, 5 x Iraqi Airways, 16 x Al Qathani for SaudiGulf) and 10 CS100 orders (Odyssey Airlines), and you are down to 97 “realistic” CS 300 orders and 43 “realistic” CS100 orders, or 140 ‘firm’ orders, that is it.
Now the future for Porter Airlines looks bleak, as the airline has been for over 4 years in a state of “limbo” operating 26 x Q400’s which indicates little growth (other than adding a few extra passenger seats to their Q400’s), and such an airline cannot undertake a IPO successfully when there has been little growth and now little promise of a bright future. The Q400’s economics are not very good, its why the ATR-72-600 is greatly outselling it today, and even worst after the 5 year warranties runs out, the only way it has been a major player is that it has been greatly discounted, and especially Canadian operators Porter, Chorus and Encore have received ‘sweetheart’ deals close to 50% off the ‘normal’ list price of $US 35 million today.
The CS100 order was what CEO Robert Deluce was really after, it is what he needed for a successful IPO, having failed in 2010 and while the company has had a good 9 years, today it faces a much more efficient, profitable and aggressive Air Canada (AC) and its CPA partner Chorus Aviation (Jazz) while WestJet Airlines (WJ) Q400 operator WestJet Encore has moved into Eastern Canadian market, and Porter Airlines is being squeezed into its sole hub and its only competitive strategy, the control of CYTZ. Without the CS100 at Porter, a successful IPO would be very difficult, as you do not go public with a company that is not growing and has nothing in its back pocket to indicate it will become a even bigger company with big profits, it is at a cross road after 9 years, what options does it have to ‘breakout’ of its current constraints and grow revenues and profits ?
The CS100 strategy was to me very questionable from the beginning, to fly 110 seat airliners against A320’s and B737’s did not make economic sense, it sole attraction was the convenience of the island airport so close to downtown Toronto, but how big is that market for more distant destinations like San Francisco, Nassau, Fort Myers, Los Angeles, Vancouver, etc. ? it also has to be priced well, and with both AC and WJ getting B737Max8 aircraft in the next 4 years, the CS100 will be at a major disadvantage on a CASM ($ cost per available seat mile) basis, and in the long term, I do not think the strategy would work anyway. Air Canada is becoming a lean mean machine that is lowering its CASM with a low cost subsidiary (rouge) and new fuel efficient B787’s and eventually B737Max’s, while WJ is struggling to contain its CASM advantage as the fleet ages and employee seniority pushes costs up.
The Porter strategy of solely flying out of CYTZ was always questionable from day #1 as a long term sustainable strategy, and its only hope of that being exploited was the use of small jets like the CS100 to expand its market catchment area and to keep growing. The airline does not report load factors for a few years but when it did, it was not above 60%, and if that has not improved surely yields surely have been reduced with more aggressive competition from AC and WJ in Eastern Canada, and little growth past 4 years, so it has hit a “wall”.
The one good news is that Porter Airlines was somehow able to find a very optimistic risk taker to buy the CYTZ passenger terminal last year for $C 750 million, which few understand that valuation, especially since it was valued around $C 58 million back in 2010, a 1,200% increase in value ?? I am sure the investors at Nieuport Aviation Infrastructure Partners GP have to be worried today about that investment today, but it did help Porter Airlines become debt free as it did have $C300 million in debt back in 2010 during its IPO and surely the early investors have been paid out, as it is commom knowledge investors want to cash out, hence the need for the IPO.
Someone was VERY optimistic that they had the jet decision in their favor, as this controversial decision was in the hands of politicians, like the previous infamous Major of Toronto, Rob Ford who was close to CEO Robert Deluce, and maybe why Porter was comfortable with a positive outcome, but putting your fate in politics is never a good idea. In this case few predicted the Liberals would win with a majority and Canada would finally say good buy the Prime Minister Harper, who has made Canada into US lackey. Gone are the days when Canada was loved and respected around the world home for refugees, a peacekeeping leader, now we bomb and fight in wars that have nothing to do with our safety.
Anyway, there is no way the terminal building is worth anywhere near that $C 750 million today, as the airport today handles less than 2.0 million passengers a year but with the CS100’s it was expected to handle at least 4.0 million passengers per year, probably one of the main points against the jets was the expansion and new traffic around the airport.
So where is Porter Airlines heading now ? will it let its CS100 order fade away ? or will it fly them from Toronto Pearson International Airport (CYYZ) ? CEO Robert Deluce has said that the company “will remain viable, with or without jets”, but that is highly questionable. It is launching its longest route to date, and maybe the longest Q400 scheduled route in the world on December 19th, with a CYTZ to Melbourne, Florida (MLB) a distance of 937nm with a 3 hour and 10 minute flight, it is only a winter seasonal service as is its Myrtle Beach and Charleston service.
But what else can it do ? It cannot go toe to toe with Air Canada or Westjet and their regional partners, and here lies the problem for Canada’s 3 largest scheduled airline, it has little room to maneuver and carve out a market outside CYTZ, and what happens if Encore wants in ? or Air Canada wants more flights ? luckly, few US CPA regionals have turboprops today, so a US threat is minimal.
As competitive pressure mounts on Porter Airlines, I firmly believe that either Chorus Aviation or WestJet Airlines could make a play, in fact recently on October 7th, Chorus Aviation appointed Steve Ridolfi as VP Strategic Investment, Mergers & Acquisitions to grow and diversify the company, it may signal a move by chorus to do more Voyageur type acquisitions, through which it can ‘off load’ older DHC-8-100/300’s for operation by lower cost operators in various regions of Canada, like B.C., Alberta, Saskatchewan, Manitoba and Quebec.
Well there are not very many investment opportunities in Canada’s airline industry, few good family owned airlines, Pacific Coastal Airlines (BC regional-Smith family)), WestWind Aviation (Saskatchewan regional-Goll family), Pascan Aviation (Quebec/Labrador regional-Charron family)), Transwest Air (Saskatchewan regional-Campling family)) and that is about it for medium sized regional airlines worth anything.
Chorus did buy Voyageur Airways (read my Blog on that) this year to be its low cost subsidiary like Rouge for Air Canada, to operate older equipment with low cost employees. The other BIG regional airline player in Canada is Exchange Income Corporation (EIC) of Winnipeg, that owns Perimeter, Calm Air, Bearskin and Provincial (Newfoundland & Labrador), and by the number of regional airliners it has more aircraft than Chorus. It also has a monopoly in Manitoba that no one talks about, but one that should be of concern for locals as they have no alternative choice, and a strong market share in Nunavut and NW Ontario, with rumors that it is looking at Wasaya Airways, where one of its former executives, Michael Rodyniuk is now President/CEO.
Or could Porter Airlines be in play soon ? would Chorus Aviation want to buy Porter ? I think so as and to a lesser degree WestJet Airlines, at the right price which in Canada’s regional market has been around 0.7 x revenue or EBITDA x 3.7 to 4.5.
It is always interesting to predict future events, but it will be NO surprise that now that the Quebec Government has ‘bailed out’ Bombardier, and now owns 50.5% of the CSeries program, that Quebec will want more jobs taken from Ontario. This goes back to when Bombardier bought de Havilland in 1992, and beginning what many de Havilland employees called “Quebecois nepotism”, which is no small part one of the reasons for the vast problems within Bombardier today, where inept management is at all levels, many promoted over the past 20 years on place of birth and 1st language criteria.
The writing is on the wall, as Bombardier’s Q400 and CRJ are down to 2.5 years of backlog at best, and now want to move Q400 and cockpit work to Mexico. One day all work will leave Toronto, and Downsview will be sold to some real estate developer and fetch Bombardier $1.0+ billion. It has been done before, when Bombardier took over Canadair and now forgotten Cartierville Airport (CYCV) became a golf course and a residential development project, fetching lots of money for Bombardier.
Till next time, thanks.