Also, the CEO lurks on AvCanada
For Globe and Mail subscribers; the article has a couple graphs and images on the supply and demand of pilots as well as air travel trends in Canada.
https://www.theglobeandmail.com/busines ... sion-plan/
Porter embarked on an ambitious expansion plan just as the industry hit massive turbulence, including a pilot shortage that could be its single biggest challenge
In September, two dozen pilots hired by Porter Airlines to fly its expanding fleet of jet aircraft filed into a classroom in Hangar 5 at Billy Bishop Toronto Island Airport—the downtown hub that has become synonymous with the 17-year-old carrier—to start their training. At a time when nearly every industry complains about the struggle to find workers, airlines face one of the most acute shortages of all, with the global shortfall of aviators predicted to widen to 35,000 in two years. Which makes what’s happening at Porter, and what it takes to put just one of these pilots behind the stick, so astonishing.
You’ll forgive us if we skip some steps. Like finding someone with the confidence, intellect, spatial awareness and calm under pressure—the right stuff, if you will—to shoulder responsibility for a $100-million flying machine and the lives of so many souls; a person who may have easily had to shell out $100,000 or more to get fully licensed; and one who has already paid their dues flying cramped air taxis and remote commuter runs on bumpy turboprops to log the bare-minimum 1,500 hours of flight time needed to qualify for a first officer position (4,500 hours for a captain).
That’s the baseline, just to get in the door for an interview.
From there, pilots plunge into a month of in-class and virtual ground-school training, absorbing doorstopper manuals on every facet of how to operate and deal with emergencies aboard the Embraer E195-E2, Porter’s jet of choice. In a flight simulator—an exact replica of the aircraft’s cockpit that’s jacked up on hydraulic legs with wrap-around video screens—recruits are put through weeks of ever more intense drills, emergency scenarios and extreme weather conditions, like a combination of strong winds, thunderstorms and blinding fog. (Or, as Samuel Carter, Porter’s assistant chief pilot, puts it, “landing in St. John’s.”) And after another 25 to 60 hours of what’s known as “line indoctrination”—flying the actual aircraft under the supervision of a specialized training pilot—the recruits’ skills are put to the test by a “check pilot” and a final examiner.
Porter’s rivals in the industry may all follow a similar three-to-four-month process for training new pilots. What sets Porter far apart is that the month after the September batch, another 24 recruits hit the books and simulators. And after that, so will another 24. And another. Month after month. For five years in total.
There’s a reason Porter’s CEO, Michael Deluce, calls the pilot shortage the single biggest challenge that could hamper his company’s growth. In a year of remarkable upheaval in Canada’s airline industry, Porter has embarked on one of the most audacious expansions in the sector’s history. Other Canadian upstarts, like ultra-low-cost carriers Flair and Lynx, have each said they plan to buy dozens of aircraft in the coming years, but Porter has a firm order to buy 50 Embraer narrow-bodies by the end of 2024—it had already taken possession of 17 as of September—with purchase rights that would give it 100 jets by 2027. “We’re launching 100 planes. Flair wants to do 50. Lynx wants to do 50. Canada Jetlines wants to do 15,” says Deluce. “It’s an impossibility for that actually to unfold. There are insufficient pilots to satisfy all of that ecosystem.”
For Deluce, who replaced his father, company founder Robert Deluce, as CEO in 2019, the ride since announcing Porter’s transformation into a transcontinental carrier two years ago has been exhilarating. “This year, we’re adding capacity at a pace that has never been added in Canada on a sustained basis,” says Deluce, 45. “There are times you go, Wow, what are we doing? But it’s working. Sometimes it’s hard to sleep at night—not from fear but excitement.”
In some ways, Porter’s plan is a radical departure from its roots of flying turboprops from the conveniently located Billy Bishop airport, near downtown Toronto, to regional destinations like Montreal, Ottawa, New York and Boston. Porter tried and failed for years to win approval to expand the runway at Billy Bishop, which would’ve allowed it to fly jets from there. While its turboprops continue to fly from downtown, its E2s now fly out of Toronto’s chaotic Pearson International, recently ranked the second-worst large North American airport by J.D. Power.
But Porter is also looking to take its strong regional brand and reputation for service—passengers on its flights all receive complimentary beer and wine, plus free snacks—and disrupt the industry by bringing it to the rest of Canada.
Porter has set its sights on the disgruntled yet discerning economy passenger—price-conscious travellers fed up with being nickel-and-dimed by extra fees, but who are also turned off by the cramped seats and bus-like experience of travelling on an ultra-low-cost carrier. The two-by-two seat configurations on Porter’s jets means there are no dreaded middle seats. And its jets are equipped with free high-speed WiFi. “There are 131 passengers on board, and the speed is as fast as if you’re in your own living room,” says Deluce, while soaring above the Prairies on Porter’s inaugural flight from Toronto to Winnipeg in September.
As Deluce rhymes off Porter’s trajectory for the coming months and years—to grow its employee count from 1,500 before the pandemic to as many as 8,000, extend its network of destinations right to the U.S. west coast, overtake WestJet in the number of flights out of Pearson, become the largest carrier serving Ottawa—there’s a self-assurance, almost an inevitability, in his tone.
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Deluce knows there are doubters. That’s been the case with Porter since even before its first flight; to them, it’s been on the cusp of failure for 17 years.
But if Porter’s growth unfolds as planned, it will emerge as the second-largest carrier in eastern Canada, after Air Canada, in an industry that has grown increasingly fragmented since the start of the pandemic. With WestJet’s decision last year to slash service in Ontario, Quebec and Eastern Canada to focus on the West, and Air Canada’s available seat miles still below pre-pandemic levels, a flurry of discount rivals have expanded across Canada. According to Cirium, an airline data and analytics company, Porter’s share of the domestic flight market will end the year at around 7%, based on available seat miles, just behind Flair. However, Porter’s share could grow significantly by the end of next year once it has 50 jets in the air and rounds out its flight map to all major domestic destinations.
As a private company, Porter doesn’t disclose its financials, but Deluce admits revenue this year is expected to come in between $600 million and $800 million—”hopefully on the high side of that range”—and says that by the end of 2028, it’s targeting annual revenue of close to $4 billion. “It’s just math at this point,” he says.
Yet, Canada’s airline history—littered with defunct carriers like Roots Air, JetsGo, Greyhound Air, Canada 3000 and Wardair—offers too many examples of overreach gone wrong to ignore. For now, though, Porter has the wind at its back, and the worn-down Canadian economy traveller stands to benefit.
Deluce is the first to admit Porter had no choice but to embark on a radical rethink of its business model. When COVID-19 shut down the world of travel, Porter, like many other companies, thought the pause would be relatively brief. But as the weeks turned to months, and Air Canada and WestJet retook to the skies, Porter—which had laid of 95% of its staff—kept extending its shutdown. But it wasn’t the failure so many had been anticipating. Instead, Deluce and his team were plotting their next steps after securing a $135-million loan from Export Development Canada.
The company had already been in talks with Embraer in 2019 about buying a smaller number of E195-E2s to build a jet business around Ottawa, says Deluce. And the outlook for its regional turboprop business looked increasingly uncertain. “When you’re sitting there on remote Zoom calls and, frankly, enjoying remote work, you start to question if business traffic will ever come back in the manner it was prior to COVID,” he says. So in June 2020, Deluce approached Kevin Jackson, Porter’s chief commercial officer and said, “I have a really crazy idea.” And the national expansion plan was born.
Deluce was just a year into his role as CEO and still finding his footing. He had big shoes to fill. Since Porter’s inception in 2006, Robert Deluce, a pilot himself—with an ego and energy to match—had been the face of the company, kicking, scratching and charming his way through battles with politicians, regulators and rivals, most notably Air Canada, over access to the limited number of landing slots at Billy Bishop. It’s not for nothing that observers have often likened the elder Deluce to the wily animal that serves as Porter’s mascot, a raccoon. (Robert Deluce is now executive chairman and continues to be responsible for dealing with Transport Canada.)
Michael Deluce is not a pilot, nor a natural extrovert. Taller and stockier than his father, Deluce had operated in the background at Porter since day one as chief commercial officer. He’s a self-professed “avgeek,” a term for extreme airplane enthusiasts. Rather than watch TV, Deluce, a married father of two boys, spends his time lurking on online forums like AvCanada.ca and Airliners.net, ingesting data and information about the latest aircraft, rival capacity changes and pilot gossip.
“Bob excels at doing media and in the political areas, and I’ve always been more of an introvert, making things happen without the flash and bang,” he says. But as a CEO leading the company through COVID and on the cusp of its most aggressive expansion ever, he knew he needed to “flip” his personality. Deluce began engaging more with employees, business partners and Porter’s board. “Mike quickly got his head around what you need to do to manage people, not just downward but upward in his relationship with the board,” says Don Carty, the former CEO of American Airlines and Porter’s chairman since 2007. “Mike listens carefully to the board, but he knows when to push back. He knows when he knows more than a board member does.”
And Deluce’s message to the board and its investors was that the timing was ideal to make big bets on Porter’s future. For one thing, the world was awash in cheap money. What’s more, Embraer had yet to find its first North American customer for the E195-E2. Porter rekindled talks with the manufacturer and announced its initial deal for 30 aircraft (later bumped up to 50) in July 2021.
The company has touted the E2 as the quietest and most fuel-efficient aircraft in the segment. But it’s also smaller than the planes its rivals fly on the same routes, like the Airbus A220 and Boeing 737, meaning it carries fewer passengers. On longer hauls of more than three hours, the lower number of paying passengers might make it more difficult to drive down the unit cost per available seat mile of revenue to the same level as rivals, says Robert Kokonis, the managing director of AirTrav, an industry advisory firm. “It’s a very cost-effective aircraft, but there is a sweet spot.”
The list price for Porter’s jet purchase was US$5.8 billion. That’s not what Porter paid, however. Deluce won’t divulge the actual price, saying only that he got a “once-in-a-generation” discount.
Kokonis believes the savings could’ve been massive and help offset the lower passenger capacity. “Boeing and Embraer will often discount new aircraft 40% to 50% if you’re a strategic buyer, and I wouldn’t be surprised if Porter got some of these aircraft at an even cheaper cost of capital,” he says. Porter has also signed a number of sale and leaseback agreements, a common transaction in the industry that sees airlines resell planes bought at a discount to lessors and then lease them back, pocketing profits in the process. “One of the biggest reasons airlines fail is undercapitalization, but I think Porter is in good shape there,” says Kokonis.
Because Porter’s turboprop service had been shut down for 18 months during COVID, losses were kept to a minimum. Years earlier, in 2015, Porter had also sold the terminal it designed and built at Billy Bishop to Nieuport Aviation Infrastructure Partners for an undisclosed sum estimated to be $700 million, allowing it to become debt-free. (Deluce says that sales estimate is incorrect, but wouldn’t say in which direction.)
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One financial question that has hung over the company for months has also been resolved. Last year, a judge ordered Porter to pay $131 million in damages to Nieuport after the airline stopped paying terminal fees during its pandemic shutdown. Porter appealed, and in early October the two sides reached a negotiated settlement, the terms of which are confidential.
To shore up its balance sheet ahead of the expansion plan, Porter tapped its existing shareholders for new capital. Deluce won’t say exactly how much its shareholders—which include the Ontario Municipal Employees Retirement System pension fund, his family’s Regco Capital and private equity firm EdgeStone Capital Partners—invested, but he describes it as a nine-figure equity transaction.
“If someone said we want to grow the business 10 times, or even more, with a massive undertaking of new jets and new destinations, that would generally be a much harder or slower decision to make,” says Gil Palter, co-founder and chief investment officer of EdgeStone about supporting Porter’s expansion plan. “I won’t say the circumstances and opportunities of COVID made this a no-brainer, but this is the most exciting time for the company since maybe Porter’s inaugural flight.”
Other sweeping changes have played in Porter’s favour, the biggest of which was the dramatic decision by WestJet in June 2022 to pull back from Eastern Canadian routes and focus on the West.
Earlier that summer, Deluce sat down in Calgary with Alexis von Hoensbroech, who’d taken over as WestJet’s CEO that February, for a casual chat. By then, Porter had already announced its plan to buy the Embraer jets, and von Hoensbroech asked Deluce when he expected to take possession of the first 50. Deluce thought it an unusual question for a competitor to ask, but since Porter had already disclosed its rollout, he told the WestJet CEO the plan was to get the 50th plane in the air by the end of 2024. “His jaw dropped,” says Deluce, while another WestJet exec remarked: “That’s really fast.” (WestJet said von Hoensbroech wasn’t available for an interview.)
Deluce says he doesn’t know if Porter’s expansion plans had any influence on WestJet’s new strategy, but it’s obvious he’s tickled that it might have. “They had the data, they knew they’d already lost in the East, but I like to think that had an impact,” he says. Either way, WestJet’s move opened up gate space at Pearson and gave Porter even more room to grow. “It was a gift from god on the eve of our expansion plans,” says Deluce.
As it turned out, von Hoensbroech ended up flying on Porter’s inaugural Calgary-to-Toronto flight this past February after several WestJet flights were cancelled due to weather. “I understand he enjoyed the flight and the fast, free streaming WiFi,” says Deluce with a wry grin.
Even as Porter expands its fleet at an unprecedented pace, the company is revisiting its past as an airport developer, this time in Montreal. In February, the company signed a deal to build a nine-gate terminal at the sleepy Saint-Hubert Airport, on the city’s south shore, that’s capable of handling four million passengers a year and providing an alternative to the overburdened Montréal-Pierre Elliott Trudeau International Airport.
Building new airports is a chicken-and-egg dilemma. Airlines won’t fly in unless there’s a terminal, and no one will build a terminal without a guarantee that airlines will come. As the only airline in the world with a side hustle building terminals, Porter can do both. In July, it brought on Macquarie Asset Management, one of the world’s largest infrastructure asset managers, as its 50-50 partner in the $200-million project, slated to open in 2025. Yanic Roy, the CEO of Montréal Saint-Hubert Airport YHU, says the airport aims to have five airlines on board on opening day, building on the traffic that will already be in place from Porter and Pascan Aviation, a Quebec regional carrier.
Not everyone is convinced. Chris Murray, an analyst at ATB Capital Markets who covers the airline sector, says a lack of connections to other destinations can limit the growth of secondary airports. “It’s nice in theory, but we’ve heard this argument before.”
As for Deluce, he calls the project a “slam dunk,” pointing to analysis Porter conducted showing well more than half of people in the Montreal region would save time by flying from the new terminal, which Porter eventually expects to sell to institutional investors. “You get to own the only terminal at an airport in Canada’s second-largest city that no one else wants to develop, and we’ll bring the traffic ourselves?” he says. “It’s like infrastructure-investment cheating.”
One decision Porter had to make early on was how to position its new jet service. Given the company’s success attracting the Bay Street crowd to its turboprop service over the years, some in the company argued it might make sense to follow suit—and follow the suits—with a business-class offering. But Deluce says doing so would’ve repeated a mistake WestJet made in trying to unseat Air Canada’s lock on the premium business segment. “Why would you go after Air Canada on what they do best?” says Deluce. “You go after them on what they do worse, which is economy, which is 90% of people.”
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Air Canada didn’t make any of its executives available for an interview, but in an emailed statement in response to Deluce’s comments, Air Canada’s executive vice-president of marketing, Mark Nasr, said Canada’s largest carrier is ready to take on more competition. “Air Canada offers spacious aircraft across the country; they offer small regional planes designed for shorter hops on every flight,” his statement read, without directly naming Porter. “We offer complimentary entertainment with personal screens and WiFi messaging; they offer connectivity on some flights, to some places. Aeroplan offers over 1,400 destinations, partnerships with the best brands and hundreds of ways to collect points; they offer three dozen places, and one way to earn.”
While the airline bad-mouthing may be inevitable given Porter’s plans to challenge Air Canada on transcontinental routes, so far the industry has avoided an all-out price war. Murray at ATB attributes that to supply and demand. Canadians have continued to show an insatiable desire to travel, with the number of passengers back to where it was in 2019. Yet, despite companies like Porter and Flair ramping up flights, that doesn’t make up for the drop in capacity from WestJet’s reduced trips. Meanwhile, Air Canada is still only operating at 90% of its 2019 flight capacity. “Air Canada will tell you they never take any competitor lightly,” says Murray, “but it is so busy right now, I don’t think they’re going to be stupidly competitive.”
Flyers certainly have a range of fare options to choose from. According to Cirium, the average economy fare offered by Porter in the second quarter was $138, compared to $227 for Air Canada and $184 for WestJet. At the other end of the spectrum, Flair’s average fare was $63.
As Porter continues to push into new domestic markets, Air Canada may start to take more notice. Consider a mid-November flight from Toronto to Vancouver at the same date and time. Air Canada’s cheapest fare is $363, but requires extra fees for seat selection, checked bags and meals. Porter’s Reserve fare includes all that, with its roomiest seat, for $324. Its cheaper à la carte Classic fare is $223.
Likewise, Porter plans to ramp up its loyalty program, VIPorter. Deluce is guarded about his plans, but he admits the company is working toward offering a co-branded credit card tied to its loyalty program.
All of this is likely to attract greater investor interest if it plays out as planned, though memories of Porter’s previous run at an initial public offering linger. In 2010, the company sought to go public but pulled the offering at the last minute due to lacklustre interest. Deluce is noncommittal. He says Porter is alone in the industry in having “significant positive shareholder equity” on its balance sheet and says the company is fully capitalized to sustain an aggressive spending plan for the next two years. Even so, existing shareholders see Porter eventually landing on the public markets. “At the scale we are building to, an IPO seems like an obvious event for the company a few years down the road, when the jet expansion is proven,” says EdgeStone’s Palter.
None of this is to say Porter’s expansion has been turbulence-free. Earlier this year, it found itself in a quandary. The company had hired close to 100 pilots ahead of its first jet flights in February. To become fully certified, however, those pilots needed to log dozens of hours under the supervision of training pilots, as well as those final qualifying flights with a check pilot. But Porter was struggling to make its schedules work. That left the airline with a backlog of uncertified pilots and a schedule that depended on them being in the cockpit. In the end, Porter slashed its planned flights by up to 20% on some routes between April and June before resuming its frantic rollout. “We got it wrong,” says Deluce. “It was disappointing, but it was a lesson to learn.”
It was also a blunt reminder of the worsening pilot shortage. To maintain its pace of growth, the company is actively targeting pilots who already have extensive experience flying jets for other carriers, either here or abroad. That’s not always easy, since changing carriers means giving up seniority—on top of joining an outfit with an uncertain future. “In the early phase, we were maybe seen as being a risky option—we didn’t have the aircraft, the training program wasn’t set up—so there was some skepticism as to whether it was actually going to get off the ground,” says Porter’s assistant chief pilot, Carter. Now that the planes are flying, and new destinations and capacity are being added, that’s changed. “We’re seeing a huge uptick in applications,” he says.
It helps that Porter has powered up how much it pays first officers and captains. Porter is the only airline in North America that doesn’t have a union representing its pilots, which Deluce says has given it the flexibility to revise its salary scales twice this year, most recently after a nearly averted strike by WestJet pilots resulted in a 24% pay raise over four years, including a 15.5% increase this year retroactive to Jan. 1. With Porter’s most recent pay bump, some positions—including captain on the E2—are up around 40% since the start of the year.
With costs soaring from rising salaries and fuel prices, and with so many discount carriers competing for the budget passenger in Canada, Deluce says it’s inevitable we’ll see a repeat of past chaos in the sector, when airlines like Canada 3000, JetsGo and Zoom abruptly suspended operations. “It’s dramatic when there’s a failure, because it’s not like other industries where a company just goes away in the night. Thousands of people get stranded,” he says. “That event will happen in the next 24 months. It won’t be Porter, I guarantee that. But it will happen. The math doesn’t work.”
With Porter’s financing in place and new planes—and pilots—rolling into the hangar each month, the test for Deluce over the next two years will be to show results as it grows, without losing the brand’s strong connection with passengers. “We’re focused on winning our place in this market,” he says. “We’ll always be striving to keep what is special about Porter, and that’s going to be our focus for the next five years.”
Thanks for the exciting future!
