Porter Airlines Conquering Complexity | by Azure Corporation and Rotman Information Solutions

Marlene Bonigut, Azure Corporation
Blair Severn, Azure Corporation
Heather Wilson, Rotman Information Solutions
Porter Airlines

Knowing how did they do it, how Porter Airlines entered a highly competitive industry and is winning against impossible odds, begins with understanding how aligning a company’s participation, offer and operating strategies create a winning model, even against bigger formidable competitors.

Porter’s story is both inspiring and provides key learning for entrepreneurs and new entrants. It is the proverbial ‘David’ taking on the incumbent ‘Goliath’ story. If you have a passion to disrupt a stale industry and a desire to ‘put an end to the status quo’, have a look at Porter’s story.

Conquering Complexity

Successful entrepreneurs, like Robert Deluce, CEO of Porter Airlines, understand that winning against big players and impossible odds is about simplifying the world through conquering the complexities perpetuated by an industry. To validate this truism, you need to look no further than Steve Jobs’ obsession with simplicity as a driving force behind Apple’s elevation from fringe player to industry and world leader. Steve Jobs said; “Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

Conquering complexity when the goal is growing a company begins with understanding the plain and simple truth that there are only two ways to grow, that’s it! (1) Be part of a growing market or (2) Win market share from others.

This leaves business strategists to determine: (i) Where can you win, where is there market growth? And (ii) How can you win, by what advantage can you expect to take market share from others? In strategy nomenclature, establishing ‘where to win’ means choosing a participation strategy. Establishing ‘how to win’ means choosing offer and operating strategies. Success comes from your ability to create competitive advantage by skillfully aligning your participation, offer and operating strategy choices into a winning model.

Who is Porter Airlines?

Porter is a regional short-haul airline founded in 2006. They are ranked an Official 4 Star Airline® in the World Airline Star Rating® by Skytrax and are rated second in the world in the Top Small Airlines category by Condé Nast Traveler’s Readers Choice Awards.

Serving eastern Canada and northeastern United States, Porter has routes to 13 Canadian destinations from Thunder Bay, Ontario to St. John’s, Newfoundland and from Chicago, Illinois through to the Atlantic coast. Fundamental to Porter’s business model are routes in and out of key business centres such as Toronto, Ottawa, Montreal, Chicago, Boston and New York as well as select recreational destinations including, Mont Tremblant, Quebec, Burlington, Vermont and Myrtle Beach, South Carolina.

Porter asserts that they combine a low-cost operating structure with a focus on higher yield passengers who value premium service. They describe this as “Flying Refined”: a high-quality flying experience for economy- class fairs. So the question is: how does a company deliver a premium service for an economy price? The answer lies in how they have aligned their participation, offer and operating strategies to conquer the economics of the industry.

Participation Strategy

Participation strategy means choosing where to play in the market and more importantly where not to play. Participation strategy is often misunderstood as being synonymous with targeting, but they are not the same. Targeting focuses on your ideal customer, whereas participation strategy defines the overall boundary of where and with whom you will do business (and beyond that boundary you do not do business). It can be a geographic distinction, such as routes and destinations. It can be a demographic segmentation such as business traveler. It can be a psychographic differentiation such as time-sensitive people. And it can be a product or service qualifier such as a people carrier versus a commercial cargo carrier. Participation strategy is best articulated when it defines where you exist in the world as a layered view on various dimensions, often applying all of the above.

Robert Deluce’s skillful alignment of Porter’s participation, offer and operating strategies began with choosing the Billy Bishop Toronto City Airport as the home base for the company. The choice of this location provided the foundation for their participation advantage and also contributes to the company’s inter-related offer and operating advantages.

Ideal for business travelers, the Billy Bishop Toronto City Airport is in the heart of Toronto (the largest financial center in Canada) and is strategically located to serve some of the busiest routes in the country. Located approximately 3 km from the Toronto downtown core and financial district, it is a participation choice that sets up the company’s offer strategy directed at time-sensitive business travelers. With quick check-in and security clearance, a short taxi to the runway, passengers in and out of downtown Toronto save up to two hours round trip. By contrast the next closest choice is Pearson Airport 28 km away.

Recognizing the strategic importance of this participation choice, Porter with great foresight and skillful maneuvering locked up the vast majority of the landing slots by purchasing the airport terminal and ejecting the much larger incumbent competitor Air Canada Jazz. CEO Robert Deluce stated “”¦this allowed Porter total domination at Billy Bishop – up until now”. After a court battle, Air Canada was able to return to the Billy Bishop Toronto City Airport in 2011. However, Porter’s participation dominance was by then well established. Porter captured a commanding 172 takeoff / landing slots compared to Air Canada’s now 30 slots. And with Porter owning the terminal, they created a new vertically integrated dimension to their participation strategy. By adding the terminal business to the carrier business, they have an incremental economics advantage because Air Canada has to pay Porter terminal fees at Billy Bishop Toronto City Airport.

Offer and Operating Strategies

Offer and operating strategies determine how you will win share and by what advantage. With all things being equal, a superior value (or advantaged) offer, available for the same price as competitors or substitutes, wins market share. Or alternatively an offer of equal value at a lower price will also take share. A lower price offer requires a lower cost (or cost-advantaged) operating strategy to be sustainable over time.

In Porter’s case their competitive strategy is to do both. According to their 2010 IPO prospectus, “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”.

Robert Deluce explains, “The Porter Experience is about putting the passenger at ease. It’s important to pay attention to the details and influence everything you possibly can about the entire trip. For example, it’s not simply about the flight, but also the reservation process, how people get to the airport, and the branding, among other things, which are recalled. When you can do this for someone in today’s age of air travel, it has a big influence in setting you apart from others.”

As other airlines are trading off customer comforts for price, Porter is including premium service perks, in all classes of fares, including free wine, snacks, free wifi, computers and espresso bars in some of their airport lounges.

They are able to accomplish this, at economy fares, not by stripping the services from customers but by driving costs out of the value chain in other ways including the vertically integrated participation strategy mentioned above and other cost advantaged operating strategy choices.

Robert Deluce has said, “Carriers who get their fuel economics right and stay focused on niche markets, have a much better chance of long term sustainability than those who don’t”. To achieve this, Porter as an operating (cost) advantage has selected to utilize a single class of aircraft, the Bombardier Q400 turboprop. This particular aircraft, according to Porter, is estimated to use as much as 23% less fuel than comparable jet aircraft but is still as fast as most jets for routes under 900km. Additionally, the choice of using this single aircraft serves to control costs of Porter’s fleet operations and maintenance.

What’s particularly successful about Porter’s operating strategy is the recognition that the entire supply chain needs to win. Less insightful companies see the value chain more as a zero sum game, seeking to do only that which advantages their company alone. Air Canada, for example, having refused to sign a long-term contract with the Billy Bishop Toronto City Airport, left the door open for Porter to gain their participation advantage. Robert Deluce saw an opportunity where others didn’t, a common characteristic of successful entrepreneurs. He explains, “Porter actually rescued the (Billy Bishop Toronto City) airport from bankruptcy. Firstly, Porter bought the terminal buildings from the airport, which improved the airport’s cash flow, and secondly, it signed a long-term, very favorable contract with the airport. ”

The Results Speak for Themselves

Taking on Goliath isn’t an easy task, as illustrated by Porter having lost $44.5 million in their first 4 years of existence from their launch in Oct 2006 to 1st qtr of 2010. And with a load factor of 62% for 2012 (an industry performance measure of how much total fleet capacity is used by an airline), Porter continues to trail the formidable competitors Air Canada at 82.7% and West Jet at 81.9%.

However, Porter turned the corner in 2011 posting its first annual profit and continues to impress on various other growth and performance measures.

At 2009 Porter established an operating cost advantage with an industry leading breakeven load factor at 49%, well ahead of their main competitors break-evens (Air Canada’s break-even load factor is 83%, WestJet’s 71%). This is a testament to Porter’s ability to drive costs out of the value chain in ways other than stripping customer services.

Porter’s skillful alignment of their participation, offer and operating strategies is allowing them to win share from the industry giants. For the calendar year 2012, Porter carried 2.45 million passengers up 15 % from 2011. Comparably, Air Canada only increased passenger traffic by 2.6% and WestJet by 7.1%.

Further reading:

  1. Case study – Porter Airlines, by D’Cruz Joseph, Financial Times (FT.com) (April 6, 2011)
  2. Speech, by Deluce Robert, Canadian Club (Montreal) (September 8, 2008)
  3. Carrier goes retro, looks ahead, by Johnston Katie, Boston Globe (October 18, 2011)
  4. Porter Airlines finishes 2012 with record 2.45 million passengers, Canada Newwire (January 7, 2013).
  5. From startup to upstart: A position report on Porter Airlines, Wings Magazine (2005)
  6. Executive Q&A with Robert Deluce, by President & CEO of Porter Airlines, Forrester Blog (June 9, 2011)
  7. Porter Airlines CEO, Robert Deluce, (CityLife magazine, Dec. 2011)
  8. Initial public offering – base prep prospectus, May 21, 2010. Accessed from sedar.com
  9. Jang, Brent. After five years, Porter to post first annual profit (The Globe and Mail, December 11, 2011)
  10. Statistics Canada. Operational statistics for major Canadian airlines, Level 1A (December 2012)

How Did They Do It

Pablo Picasso has been attributed to saying “good artists borrow, great artists steal”. Not that we are advocating stealing ideas from others but we are advocating what we believe is the intended truth in this statement: to learn, apply and expand upon the intelligence gained from others’ successes. Each month How Did They Do It will showcase how an idea became a success and offer valuable intelligence and insight that may resonate with you as you face similar challenges.

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