Not quite getting it

I enjoyed this Toronto Star opinion piece on Porter Airlines’ upcoming IPO because it sheds some light on how certain industry analysts think, and that in turn colours how certain journalists think.

“People aren’t as afraid of taking risk,” says Basili Alukos, an equity analyst at Morningstar Inc. in Chicago, who adds that there’s “appetite” for airline stocks, appetite being one of Mr. Porter’s favourite words.

Alukos notes the recent loft in the share prices of even some debt-laden U.S. legacy air carriers.

The story Deluce, a pilot and past-president of Canada 3000, will take to the street is the story of the still upstart airline stealing a march on the competition while keeping a lock on what is now called Billy Bishop Toronto City Airport.

Well, nothing lasts forever, and Bob Deluce knows that. There will surely be other carriers on the island, and Deluce is a practical man. “Airline flying is a commodity,” sighs Alukos. “It’s driven by price. If there’s a new air carrier offering cheaper fares, people will be chomping at the bit.

If Alukos is right – and I do believe he is – brand loyalty will be weakened, eventually, by price war. Mr. Porter’s adorableness will only take him so far.

— Wells, Jennifer.  “Porter Airlines takes a flyer.” Toronto Star, 17 April 2010. [Emphasis mine]

That one sentence tells you right away that the analyst does not comprehend Porter’s business model.  Every airline is expensive to operate and generates relatively meagre profits, but almost all of them have refused to adapt their core processes to better reflect new realities of air travel.  Low-cost carriers (LCCs) are frequently cited as factor in driving down fares, and that is a valid point.  But LCCs alone do not explain air travel’s woes.  The bottom line is that air travel has become inconvenient, unpleasant and inappropriately priced relative to the true cost of operating an aircraft.

For example, a typical full-service airline will operate its aircraft to and from major hub airports, say from Pearson to LaGuardia, for example.  These are both busy, expensive and frequently congested airports.  The landing fees are expensive relative to smaller airports in the same metropolitan areas.  Many airlines fly into these large hubs, and with greater numbers of aircraft comes greater complexity and opportunities for delays.  A smaller airline such as Porter can avoid these potential hassles by choosing to fly into a less-congested airport (Newark, for example) near to the large hub.  This allows the smaller carrier the possibility of cheaper landing fees, better on-time performance, fewer delays, quicker embarkation and disembarkation of passengers, and so on.

Any airline could, in theory, switch hubs provided it negotiated appropriately with the relevant airport authority.  But most of the large airlines are locked into large, expensive airfields because that is where their partner airlines and connecting flights meet, or their maintenance facilities are located, and so on.  The genius of Porter lies in choosing airports which are close to the major cities they serve, but not as congested as the main international hubs.  Having to wait in the Customs line behind 1200 people that just got off a trio of arriving 747s can put a bit of a damper in your day.  There’s little chance of that happening when you fly into the airfields that Porter serves, and that’s a deliberate choice because they want better a better customer experience.

Which leads me to the next point: Porter’s animating philosophy is business class for everyone.  Or to be blunt, a more pleasant flying experience for everyone.  Even if the airline’s competitors slash their fares, they will have to match Porter’s convenience and superior customer experience.  The average Bay Street exec flying from Toronto to New York is not going to be wooed by a cheaper fare.  Let us say that Air Canada Jazz begins operating its Dash 8-100s from CYTZ as they did in former days.  The temptation for Jazz’s route structure will be to fly into a major international hub in New York where it can connect with Air Canada proper.  Even if Jazz slashed its fare to just above TTC bus fare, it would not destroy Porter’s market share.  Sure, a lot of people would give Jazz a shot, but they will soon realise that 1) the equipment is older and noisier, and 2) departure from YTZ might be faster, but extricating oneself from LaGuardia is still slow and painful due to large passenger volume.  Students and cheapskates will be wooed by cheap fares; the suits on Bay Street and downtown dwellers in general—arguably Porter’s primary audience—will not.  They will opt for a more pleasant and convenient experience even at a greater cost.

Any airline that hopes to eat Porter’s lunch will have to provide a similar level of service and convenience, and that won’t be easy unless they adopt a similar business model (which will, in turn, mitigate against their price being significantly lower).  Cheap fares are not the airline-killer; the real killer is cheap fares married to lousy product and great inconvenience.  That, unfortunately, describes the bulk of air carriers today.

RELATED: A Canadian Press report in the Star‘s business section gets it right.

Analyst Robert Kokonis of travel consultancy Air Trav Inc. said considering Porter’s stellar reputation, that figure is not out of the question.

He said the offering will generate a lot of excitement among investors because Porter offers a unique business model that focuses on customer service.

“It’s going to ignite a lot of passion and a lot of people to hop on board, so I wouldn’t doubt if this issue becomes oversubscribed,” he said.

“It’s a smart move to put your money into an airline that realizes you’ve got to pay attention not just to the cost line (by cutting costs), but realizes you’ve got to pay attention top line as well, by offering a great product, a great service.”

— “Porter plans IPO.” Canadian Press/Toronto Star, 16 April 2010.

Sort of sad that a “focus on customer service” is considered a unique selling point among airlines.  But maybe that’s all you need to know about why Porter’s successful, and other island airport carriers (such as Air Canada Jazz) were not.

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2 Responses
  1. MichaelB says:

    I fly back and forth from New York to Toronto a few times a year, and Porter’s service blows everyone else out of the water. Not only that, the fares are usually competitive with the other airlines anyway. Even if they weren’t though, it’s worth a significant premium to be treated as a valued customer instead of abused from check in to baggage claim. And I live in Queens – it’s a lot more trouble for me to get to Newark than Laguadia, but it’s still usually worth the trouble.

    A minor nit though, Laguardia is actually smaller than Newark, both by physical size and by passenger volume. The problem is it’s a high volume airport for its size, and it’s in desperate need of renovation/modernization/razing and rebuilding a proper airport. I suspect the reason Newark (and JFK) are nicer is that they have enough space to do major construction and renovation projects without dramatically cutting the airport capacity for the duration.

    • Chris Taylor says:

      Yes this is true… EWR is larger facility than LGA… but EWR’s ability to manage its throughput is heads and shoulders better.