Porter Airlines' sneaky strategy

Starting an airline isn’t that difficult. Making it profitable is a little harder. Doing it all in Canada, however, is harder than walking on the moon. Between bellicose incumbents, unforgiving geography, and stifling regulation, upstarts have to get everything right.

This makes the story of Porter Airlines all the more incredible. They’ve been flying their distinctive Q400s out of downtown Toronto for almost 15 years, and profitably since 2011 – by most accounts, anyway.

How has Porter carved out such a secure market position? Simply put, they’ve created their market.

At a high level, Porter mostly sells their passengers on convenience instead of price, successfully differentiating their services from Air Canada and WestJet. This article dives into this “blue ocean strategy”, examining critical decisions that led to the conscious creation of a relatively uncontested marketplace.

This article also serves as a prelude to a future piece about Porter’s post-pandemic prospects. That’s a much tougher exploration, but I’m betting that we can publish it before Porter actually resumes service; it’s currently slated for May 19th, but are we really going to get enough vaccines out by then 🤡

What is Porter’s blue ocean strategy?

Before diving into Porter, it helps to understand the surrounding theory. Originally popularised by INSEAD professors W. Chan Kim and Renée Mauborgne, blue ocean strategy revolves around value innovation – “the simultaneous pursuit of differentiation and low costs”.

This generates immense value for consumers whilst creating market spaces free from true competition, hence the metaphor of a vast, unexplored blue ocean. The converse is the well-defined market space, where cutthroat competition results in bloody red oceans.

Kim and Mauborgne propose that differentiation and cost reduction – and by extension, value innovation – can be brought about through 4 actions.

Differentiation relies on:

1. Raising hitherto ignored factors well above industry standards
2. Creating new factors that have never been offered

and cost reductions rely on:

3. Reducing certain factors well below industry standards
4. Eliminating factors that are taken for granted

Porter has done exactly this – moving 4 levers to achieve value innovation.

1. Raise the passenger experience

Porter’s slogan is “Flying Refined”, a guiding philosophy that seeks to deliver a premium customer experience at reasonable prices.

The carrier raised this factor for several reasons, one being differentiation; other airlines had long forced customers to compromise between experience and cost. Porter also understood that high-quality, and frankly just enjoyable, service was proportionally more valuable to their primary customers – business travellers – than the general demographic of Air Canada and WestJet.

This superior travel experience starts well before you board an aircraft. A complimentary shuttle takes you from the bustling Union Station to Billy Bishop, where Porter spent $50 million in 2009 on a new terminal geared towards the best pre-flight experience.

This meant a substantial increase in landing slots, more than double the number of check-in counters, and spacious areas teeming with amenities; free cappuccinos and shortbread cookies were a mainstay of the Porter experience until being unceremoniously pulled in 2018.

The carrier has also been trying to build a US Customs and Border Protection (CBP) Preclearance facility, further strengthening the passenger experience. Once on board, free wine and snacks complement leather seats and retro-look uniforms to offer a full-service quality absent from many carriers today.

Reasonable fares and a frequent-flier program round out the Porter experience, ensuring that customers aren’t forced to choose between good service and low fares. Extensive fare statistics are admittedly hard to find, so I’m going off of personal experience and travel forums; flying Porter won’t save you money, but it won’t cost extra either.

All this has resulted in the highest satisfaction score of airlines in Canada. By going well above the industry standard to deliver features that their passengers truly care about, Porter has greatly increased the value that they offer.

2. Create convenience

Despite the value delivered by their superior service, Porter understood that one factor – convenience – was by far their greatest asset.

By basing flights out of downtown Toronto’s Billy Bishop airport, a hitherto underused goldmine of a resource just south of Bathurst Street, Porter broke the established boundaries of serving the city with an overcrowded and unpleasant Pearson.

Prior to Porter, nobody had built a dedicated scheduled network around Billy Bishop; service to the island airport was sporadic or lackluster. Yet the airport was correctly identified as an opportunity to offer a previously-unseen level of convenience, especially for business travellers. The aforementioned shuttle from Union Station takes less than 10 minutes, and an Uber from the financial core won’t take much longer.

By contrast, it takes at least half an hour to reach Pearson from downtown, and that’s assuming you can somehow reach Union Station in 5 minutes to immediately hop on the 25-minute UP express. In most cases, an hour’s trip can be expected.

Porter unlocked an unrivalled degree of passenger convenience by creating scheduled service out of downtown Toronto. They augmented this by raising the aforementioned factors of service, giving themselves the opportunity to deliver massive customer value.

Kim and Mauborgne argue that buyer value is simply utility minus price, the latter being heavily determined by costs. We’ll now explore how Porter kept costs low through the deliberate reduction and elimination of certain industry factors.

3, 4: Reduce and eliminate complexity

Yes, these are 2 different “actions”, but it’s just a framework at the end of the day. The point is, Porter simplified their operations by using a single aircraft type, focusing on one “type” of service and customer, and creating a route network tailored to one home base.

These actions are complementary; with Billy Bishop’s downtown location acting as an anchor, Porter’s short-haul route network is tailored to those who have a vested interest in getting to the city centre quickly – typically business travellers or affluent tourists. This conveniently intersects at major markets like Chicago and New York, or leisure locations like Mont Tremblant or Muskoka.

By concentrating on who they’re serving and where they’d want to go, Porter avoids competing on route selection – a typical factor in airline competition. Instead, the carrier utilises Newark to partner with players like JetBlue and Qatar, offloading the complexity of superfluous routes while further capitalising on its downtown Toronto location.

Finally, Porter exclusively operates the Dash 8 Q400, a turboprop that burns less than 70% of the fuel required by regional jets – we’ve written all about the aircraft’s future prospects here.

Critical for Porter’s network and passengers is how the Q400 compares favourably with jets on capacity and speed, completing short flights at a similar time due to a lower cruise altitude.

The virtues of flying a single aircraft type are also well-espoused; carriers like JetBlue and Southwest do so to save on maintenance and training costs, among other expenses. Porter reportedly achieved an astonishing breakeven load factor of 49%; that was in 2009, but it’s still absurdly low compared to the 2020 industry average of 77%.

Reducing and eliminating factors that are often taken for granted, such as an expansive network and wide customer net, allows Porter to avoid costly features that don’t offer actual value.

Crucially, simplification doesn’t prohibit Porter from fully delivering on their value proposition of quality and convenience; conversely, it helps channel resources towards strengthening it.

How has Porter executed this strategy?

Porter’s strategy would’ve never escaped the purgatory of powerpoint hell without sound implementation. Kim and Mauborgne identify tipping point leadership as a critical element of execution, something that our raccoon-faced carrier wholeheartedly embodies.

Tipping point leadership “focuses on transforming the extremes: the people, acts, and activities that exercise a disproportionate influence on performance”.

Porter wasn’t an entrenched player attempting a strategic shift, but this idea of investing in performance-critical factors manifests itself in an employee-first culture with elements like profit sharing. I’m writing this as an outsider, but if news articles and forum threads mean anything, it’s that original CEO Robert Deluce “[ran] his airline like a family restaurant”.

Focusing on high-impact actions extends beyond the flight experience. A core tenet of Porter’s value proposition – convenience – rests largely on the ability to fly out of Billy Bishop. One of Deluce’s earliest moves was to purchase the company that owned the terminal at Toronto City, giving him the ability to evict Air Canada Jazz from the airport. Porter therefore enjoyed a monopoly over scheduled service before they flew a single flight, a virtually unheard of position of strength in the airline industry.

Even the ongoing struggle to accommodate jets at Billy Bishop, a virtually impossible task given some aggressive community backlash that I don’t fully understand, features several sneaky moves that characterise tipping-point leadership.

Deluce hitched the proposal to a very public proclamation that Porter would be the first Canadian carrier to fly the Bombardier CSeries, now known as the Airbus A220 😢.

With agreements for 12 aircraft and options for 18 more, Porter turned their expansion plans into a story about supporting and growing Canadian industry. Emphasis on being “proud to be the Canadian launch customer for Bombardier’s CSeries aircraft” embellished the venture with undeniably patriotic undertones.

What's next?

A redder ocean

Unfortunately for Porter, their ocean isn’t so blue anymore. Despite maintaining an 85% share of seat capacity at Billy Bishop through 2017, competitors are chipping away at Porter’s strengths.

Air Canada has capitalised on Billy Bishop’s lack of US preclearance to offer business travellers an enticing service from Pearson directly to New York’s LaGuardia, bypassing the nightmare of Newark. Sidenote: I’ve only connected through EWR twice, and both times my flight was delayed by a day, resulting in very comfortable nights in the terminal. With a plushy Maple Leaf lounge at LGA, the benefits of LaGuardia vs. Newark can easily outstrip the convenience of Billy Bishop vs. Pearson.

There’s also more traditional price competition. When Air Canada launched out of Billy Bishop in 2011 with a Toronto-Montreal route, they brought their already-aggressive $149 fare below $84 with promotions designed to take on Porter.

Additionally, Porter’s small size, downtown hub, and ability to serve business travellers combine to form an enticing acquisition opportunity; such rumours have abounded since Porter pulled their IPO in 2010.

Finally, smaller players like PAL Airlines have slowly moved into Atlantic Canada, and newly-formed Connect Airlines announced last week their intentions to offer a “rewarding premium travel experience” using Q400s operating out of Billy Bishop… nope, don’t know where I’ve seen that business model before 🤔

They’ve filled the ocean

Yet the biggest issue facing Porter – arguably more than COVID – is how they’ve run out of runway, both figuratively and literally. They’ve done a fine job squeezing value out of Billy Bishop, yet they already serve most – if not every – viable destination within the Dash 8’s radius. That’s a problem when costs are perpetually increasing, and especially when at least 3 other companies are actively looking to end your existence.

Porter can’t rely on jets coming to Billy Bishop any time soon. Between community opposition and environmental concerns, I’m half surprised that the airport still exists. If you’re looking for another anecdote for how long things take, a tunnel to the airport was started in 1935. One finally opened in 2015 – 80 years later.

This leaves Porter with few options for growth. They could look to establish secondary hubs, but would this dilute key factors of their blue ocean strategy? If they opened a hub in Vancouver, for example, would their premium experience be enough without a convenience increase similar to Billy Bishop? It certainly runs counter to the idea of reducing complexity, another element of their success.

In conclusion

I find Porter Airlines to be an incredible story, both from a passenger and business perspective. Their ability to not only identify and formulate a blue ocean strategy, but also implement it in a hostile and volatile environment, showcases the exciting risk/reward tradeoff that every business hopes to win.

Personally, I’m glad that somebody finally managed to utilise Billy Bishop for the asset that it is. No other major city can dream of such a luxury – an airport just 15 minutes from the downtown core.

I just hope that Porter finds a way to keep the magic alive through the pandemic and beyond, but that’s the topic of a future article.

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