The man who’s driving Air Canada crazy - Macleans.ca

The man who’s driving Air Canada crazy

How Robert Deluce took over a Toronto airport, launched Porter Airlines and screwed over Air Canada

by

Photograph Jessica Darmanin /Andrew Tolson

At first glance, Robert Deluce seems an unlikely giant killer. The founder and chief executive of Toronto-based Porter Airlines stands shorter than many of the retro-uniformed flight attendants working his airplanes, and his small-town Ontario mannerisms—unfailingly polite with a tendency to ramble—are about as far away from Bay Street big shot as you can get.

On a recent afternoon, he ambled through the departure lounge of Porter’s terminal at the Billy Bishop Toronto City Airport and chatted awkwardly with pilots and other staff, resembling a sort of Columbo of Canadian commercial aviation, minus the scruffy trench coat. And like the fictional TV detective, he is not to be underestimated.

Just ask Air Canada. The country’s biggest airline has unsuccessfully waged a four-year battle aimed at forcing its way back into Toronto’s tiny island airport, a 90-second ferry ride from downtown, after one of Deluce’s companies bought the airport’s terminal from the private company that previously owned it and promptly had Air Canada evicted. The shrewd tactic gave Porter an effective monopoly at the airport in the run-up to its 2006 launch, a protection that was bolstered by a deal with the airport’s operator, the Toronto Port Authority, or TPA, that guaranteed Porter the lion’s share of available takeoff and landing “slots” for more than three years. Not surprisingly, Air Canada cried foul and launched a flurry of legal actions—all of which were either withdrawn or thrown out by the courts.

This year, however, Porter’s monopoly will end and Air Canada will finally have its shot at revenge. While Porter will still dominate— with a stranglehold on the airport’s slots and a growing share of the lucrative business travel market in the busy “eastern triangle” of Toronto, Ottawa and Montreal—Air Canada’s return to the island could spell trouble for the still fragile airline as it seeks to make itself a permanent fixture on the Canadian aviation landscape.

The battle has grown increasingly personal. In addition to stealing Air Canada’s most important customers—deep-pocketed corporate types, not to mention government ministers en route to Ottawa—in its most important market (while forcing it to watch from the sidelines), Deluce has foisted other indignities on its much larger rival. A few weeks ago, it was revealed that he and his wife have spent the past two decades flying around the world on Air Canada’s dime, racking up about $10,000 a month in air fares to London, Los Angeles, Vancouver and elsewhere. The free flights, some of which Deluce says were used for business purposes, were part of a deal struck when Deluce’s family sold its interest in Air Ontario and Austin Airways to Air Canada in 1986. “There were no restrictions on what we could use the travel arrangements for,” Deluce says.

Air Canada disagreed. It abruptly cut him off last year. Now Deluce is suing for breach of contract, claiming it’s yet another effort by Air Canada to “throw Porter off its game.” He says that, before Air Canada pulled the plug, he felt like he was being treated differently than other passengers, which in the past few years included “secondary searches and anything else that might be in the neighbourhood of harassment.” An Air Canada spokesperson declined to comment.

So how, exactly, did Deluce manage to repeatedly outmanoeuvre—and embarrass—an airline whose size and dominance has helped speed the demise of a long list of failed challengers? A unique and meticulously planned business model had a lot do with it. But he also received an unusual level of assistance from the airport’s troubled operator—and, it turns out, the federal government. The big question, however, is whether he can maintain the momentum he has built in a notoriously unforgiving industry.

Prior to Porter’s arrival, the island airport was a sleepy place. Catering mostly to hobby pilots, it was served by a rickety open-air ferry and a wood-framed terminal that dated from the late 1930s.

Passenger traffic through the airport hit a peak of 400,000 annually in the 1980s and dwindled to a low of about 25,000 in 2005 as Air Canada, which had operated there since 1990, began moving more flights over to Toronto Pearson International Airport, its main Canadian hub.

Today, by contrast, the island is busier than ever. Porter now flies 20 Bombardier Q400 turboprops to nine destinations in Canada, including Ottawa, Montreal and Halifax, and four in the U.S., including New York and Chicago. Last week, it signalled that it planned to continue its expansion with the purchase of four more planes, with the option to add as many as six more. Airport traffic, meanwhile, has ballooned to between 1.2 million and 1.3 million passengers a year.

Just as important as the head count are people’s impressions of Porter’s service—with its swank airport lounge featuring free cappuccinos. Once onboard, passengers are offered snacks, tucked inside a box displaying the airline’s Mr. Porter raccoon mascot, and complimentary glasses of wine or beer. But Porter’s biggest differentiator is the convenience of flying from the island, a $10 cab ride from Toronto’s financial district. By contrast, a flight on Air Canada through Pearson generally requires a $50 or $60 cab fare, a half hour spent navigating the city’s congested highway system and then more time spent in lineups. “The big problem with Pearson is the incredible amount of waste that takes place when you have to wait there for hours and hours,” says Doug Reid, a business professor at Queen’s University and former TPA board member.

It also helps that Porter is the only airline currently allowed to take advantage of the island airport’s strategic location. Reid says Deluce’s genius was to convince a money-losing TPA that they had a shared interest. As a federal port authority, the TPA is a non-profit corporation charged with overseeing Toronto’s port-related activities. But it was having trouble paying the bills, given the lack of shipping traffic on Toronto’s waterfront. The airport, on the other hand, offered more earning potential, but only if it had a committed airline partner (the TPA oversees the airport in accordance with the rules set out in a complicated tripartite agreement between itself, Ottawa and the city of Toronto). In short, Deluce needed the airport and the TPA needed a meal ticket.

Fortunately for Deluce, the TPA was fed up with Air Canada after years spent coaxing it to invest more heavily in the airport. “They restricted their service down to three flights a day, allowed their terminal lease to expire and refused to sign a new [operating agreement],” says Geoffrey Wilson, the TPA’s new chief executive. “The TPA had no choice but to say, ‘If you’re not going to sign and you’re not going to invest, we think, as a business, that we need to find another solution.”

Recognizing that Air Canada would grind any new competitor into the ground, the TPA agreed in 2005 to grant Deluce’s proposed airline an effective monopoly at the airport for at least three years to give it a fighting chance. And it received approval to do so from the federal competition board, which reasoned Air Canada was already the dominant carrier serving Toronto via Pearson.

The TPA’s help didn’t end there. To keep its prime tenant happy, it purchased a new ferry to handle the expected increase in traffic, and then another one when Porter outgrew the first. There are now plans to connect the island to the mainland via a $45-million pedestrian tunnel (an earlier plan to build a bridge was killed by the city’s mayor amid protests from local residents). “The hidden secret here—and this is where I give Deluce an awful lot of credit—is that he in effect has the port authority working for him,” says Reid. “The port authority primarily exists to make sure Bob Deluce is happy.” While Air Canada has loudly protested the cozy relationship, the courts have taken a different view. A federal judge concluded last month that there was no evidence to suggest “TPA and Porter were doing anything more than engaging in normal commercial activity.”

Deluce has also received considerable support from the federal government. More than half of Porter’s current fleet of 20 aircraft, worth more than $500 million, was financed with loans from Export Development Canada. EDC loans typically go to foreign companies seeking to buy Canadian products, but Phil Taylor, a spokesperson for the agency, says recent rule changes allow it to “take on domestic financing and insurance without a link to exports.” In the case of Porter, Taylor says the agency noted the airline planned to use the aircraft to launch new U.S. routes.

Fred Lazar, an economics professor at York University’s Schulich School of Business who provided guidance on Porter’s business plan, says Deluce took advantage of Ottawa’s longstanding political desire to assist Bombardier, which was having trouble generating initial interest in its Q400 turboprops. Deluce disputes the suggestion that Porter’s EDC loans were unusual, but doesn’t deny Ottawa’s interest in the airport’s success. “I think, generally, the federal government is interested in airports being self-sustaining and not falling back on the public purse.”

With Porter now well on its way, the airport’s operator is once again in the black, earning $1.3 million last year, a figure that should increase as the airport is opened to other airlines. The TPA recently granted 30 new daily slots to Air Canada’s regional carrier Jazz and 16 to Continental Airlines. Calin Rovinescu, the CEO of Air Canada, recently told analysts on a conference call that the airline intends to return service as soon as possible. “Our expectation is that we’ll have a good solid operation from the airport,” he said. But Deluce isn’t worried. Porter came away with 44 additional slots, bringing its total to 156 of the airport’s 202 takeoffs and landings. In other words, Porter will be flying nearly as many daily flights to Ottawa as Air Canada will be offering to all destinations from the island.

Yet, even with the advantages handed to it, Porter has not managed to turn a consistent profit. Documents provided to regulators for an initial public offering last spring (the IPO was pulled following the European financial crisis) showed an airline that was increasing sales, but still wallowing in red ink. Although Porter managed to eke out a slight $455,000 profit in the fourth quarter of 2009, it lost $4.6 million last year on sales of $151 million. It posted another $5.9-million loss in the first quarter of this year.

Air Canada’s return to the island promises further hits to Porter’s bottom line. But Deluce still has one more ace up his sleeve. Since he owns the terminal and associated equipment, he is now the airport’s de facto landlord (he says he’s currently negotiating with Air Canada to lease space in the terminal). “If you really look at the airline industry, the people who own the infrastructure and the ones who run the (aircraft) leasing companies—they’re the ones who really make the money,” says Lazar. “The airlines, by and large, are lucky if they break even.”

Which means Deluce could still come out on top, even if Porter ultimately loses its long battle with Air Canada. No wonder he chose a pest—Mr. Porter the raccoon—as his airline’s mascot.