Upstart Porter Takes on Air Canada, WestJet

What to do when you've got a raccoon problem? The question is a familiar one for residents of Canada's biggest city, where the varmints infest attics and gardens with abandon. But it's also top of mind at AIR CANADA and WestJet these days.

Upstart Porter Takes on Air Canada, WestJet

What to do when you've got a raccoon problem? The question is a familiar one for residents of Canada's biggest city, where the varmints infest attics and gardens with abandon. But it's also top of mind at AIR CANADA and WestJet these days. Since October, when Porter Airlines first lifted off from its base at Toronto City Centre Airport, the scrappy upstart with the raccoon mascot has become a major pest for both companies. With its convenient location just a short ferry ride from downtown, a growing list of prime destinations and some very deep pockets, Porter is the most promising new airline this country has seen in years. And judging from the tactics of Porter's two big rivals, it seems they are determined to take a familiar approach to their raccoon troubles: ruthless extermination.

The wacky world of Canadian commercial AVIATION is littered with the wrecks of failed airlines like JetsGo, Roots Air, Canada 3000 and Harmony, just to name a few. Some suffered flawed business plans and questionable management from the start. But predatory pricing, where established airlines target upstarts with below-cost fares impossible for smaller airlines to sustain, has played a big part in Canada's long history of aeronautical misadventures. For consumers, fare wars may seem great at the time. Over the long run, though, every time the dominant airlines manage to run a new rival into the ground, the reduced competition leads to higher ticket prices and diminished service. As Air Canada and WestJet begin to offer insanely low prices on Porter's key routes between Toronto, Montreal and Ottawa, the risk is the new airline will be crushed like so many before it.

The starkest example of rock-bottom pricing came in late April when WestJet offered a brief sale on flights leaving Toronto for Ottawa and Montreal for as low as $11 one way. Air Canada quickly followed with a similar offer. At other times the two giants, which together control 95 per cent of the domestic market, have promoted fares well below $50 on those same routes. Analysts say Porter actually triggered it all when it chopped the price of a Toronto-to-Ottawa ticket to $59 from $99 for passengers who book two weeks in advance. But the resulting price war has bordered on the ridiculous. As Ben Cherniavsky, an analyst at Raymond James, noted in a report, if Air Canada customers bought such a ticket and took a pass on perks like Aeroplan miles and checked baggage, they'd "actually get paid to fly!"

There's no way dirt-cheap tickets pay the bills, industry observers say. "It's ridiculous because those fares are not covering the costs of leasing the aircraft, fuelling them and crewing them," says David Jeanes, president of lobby group Transport 2000. "We have a record of this kind of price competition leading to bankruptcies of airlines and travellers being left in the lurch. It doesn't work."

But predatory pricing is just the latest stumbling block for Porter. The brainchild of aviation veteran Robert Deluce, the company faced years of opposition to the revival of full service at the tiny island airport. Toronto Mayor David Miller has blasted the airline as a blight on the city's revitalization plans. Waterfront residents grumble about increased noise levels, and environmentalists campaigned to have the airport grassed over. But backed with $125 million from prominent Toronto investors, not to mention crucial support from the Toronto Port Authority, which controls the island airport, the airline's fleet of 10 Bombardier Q400 turboprops got off the ground and is expanding. In June, Porter plans to add Halifax to its list of destinations.

But Deluce also knows how cutthroat the airline business can be. In the 1980s his family, along with Air Canada, launched Air Ontario. The aviator clan owned a quarter of the new carrier, which eventually began service out of the island airport to compete with rival City Express. Those were hopping days on the island, which served 400,000 passengers a year at its peak. Within months, City Express went out of business. Air Canada then forced the Deluces out of Air Ontario, swallowed the smaller airline, and shifted most of its business to Pearson International Airport, west of the city.

This time around, the wily entrepreneur has taken steps to handicap the competition. Ahead of launching his airline, Deluce bought up most of the hangars on the island and handed Air Canada an eviction notice. But Air Canada is still trying to use its clout to clip Porter's wings, attempting to block the upstart from expanding its reach into the United States, where the new airline hopes to eventually serve nine cities among its 17 target destinations. Deluce has plans to begin service to Newark, N.J., soon, but Air Canada and several American airlines are petitioning the U.S. Department of Transportation to block Porter because they say it holds a monopoly on flights from the island. Deluce points out that only one foreign airline, US Airways, has applied for access to the island airport, which it got in March.

The most effective weapon for the big airlines remains their tried-and-true ability to undercut the competition on price. Almost every airline entrepreneur who has flamed out in this country has at one time or another blamed predatory pricing for his company's failure. And competition regulators have tended to agree. A tribunal in 2003 found Air Canada ran routes between Ontario and the Maritimes at a loss in order to thwart the expansion of WestJet and upstart CanJet, launched by Nova Scotia businessman Kenneth Rowe.

This lack of competition has been extremely lucrative for both Air Canada and WestJet. Analysts say that since JetsGo's demise in 2005, the duopoly has led to price stability and record results for both companies. Earlier this month, WestJet chief executive officer Clive Beddoe told reporters that Canada is capable of handling two major airlines - the unspoken message being three's a crowd. Karl Moore, a professor of management at McGill University, studies the airline sector and says Canada's market is quite competitive, "but as long as there's a duopoly, prices will be higher than if we had a third vigorous competitor."

Canada is looking increasingly out of step with other developed nations, especially in Europe, where discount airlines like RyanAir and easyJet have flourished at the expense of high-priced rivals by offering bare-bones service and serving smaller airports where costs are lower. Porter aims to mimic this model in some key respects. Unlike its bigger rivals, it offers premium service like meals and complimentary drinks to all its passengers. Where it saves money is in the operation of its planes, which burn nearly 40 per cent less fuel than comparable regional jets, and require far less maintenance. What's more, Porter can avoid paying the exorbitant fees that Pearson, the world's most expensive airport, charges the big carriers. Deluce is confident that with the convenience of the downtown location, customers will be willing to pay a bit more rather than face the trek out of the city. "We're establishing a level of service that hasn't been seen in years," he says. "Today's passenger is quite sophisticated. They can determine the total value proposition."

There are still bugs that Porter will have to work out if it's to ultimately succeed. Many of its flights remain half-full, and some of its early days haven't been without delays and disruptions. But when these troubles are pointed out to Deluce he responds with all the necessary aplomb of an airline entrepreneur fending off two giants like Air Canada and Westjet. "The fact they have had these desperate-looking fares is proof that Porter is making a real impact on the Montreal and Ottawa routes," he says. This pesky raccoon might yet prove more difficult to evict than those that have gone before.

Maclean's June 4, 2007