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Porter Air at the Toronto Island Airport.Peter Power/The Globe and Mail

Don't look for world domination from Porter Aviation Holdings Inc.

The company, which owns a fast-growing airline and has a subsidiary that runs the airport terminal near downtown Toronto, is kept busy just sticking to its regional niche.

Porter filed a preliminary prospectus late Friday for an initial public offering that's expected to raise $120-million from new investors.

Here are three reasons why Porter looks like a good bet, and three challenges on the horizon.


Regional focus: Porter's strategy is to focus on markets in Central Canada, Atlantic Canada and the U.S. Northeast. So far, the regional strategy has worked, at least for attracting passengers. In 2007, the first full year of flying, about 300,000 passengers flew on the carrier. Last year, more than 900,000 people took to the skies on Porter's planes, including 800,000 through Billy Bishop Toronto City Airport, located on an island near the downtown business core. The rest flew outside Toronto, such as the Ottawa-Halifax route. With the Toronto terminal expansion expected to be completed at the end of this year, there will be room to handle more than two million travellers annually at Billy Bishop.

Low break-even point: The airline almost broke even last year, despite filling less than half of its seats. Its break-even load factor, or the proportion of seats filled by paying customers, was 49.3 per cent. As it turned out, Porter lost $4.6-million on $151.2-million in revenue in 2009. In the first quarter of this year, the carrier had a load factor of 47 per cent, up from 41.3 per cent in the same quarter of 2009. Porter launched in October, 2006, with just two Bombardier Q400 turboprops. Its fleet will grow by two by the end of this month to a total of 20 fuel-efficient Q400 aircraft. Another seven aircraft orders are envisaged by mid-2011. With rising passenger loads, Porter is poised to fly into the black.

Being the landlord: Porter Aviation Holdings wholly owns Porter Airlines Inc. and City Centre Terminal Corp., the landlord of the Billy Bishop air terminal. Even if the carrier loses its island monopoly later this year as Air Canada's Jazz affiliate makes plans to compete, "any additional commercial operators would lease terminal space and gates" from City Centre, according to the 135-page prospectus. Robert Deluce is chief executive officer of the holding company, the airline and the terminal - a Triple Crown for investors.


Losing monopoly: Jazz is plotting its return to the Toronto island airport, after being ousted in February, 2006, by a company headed by Mr. Deluce. It won't happen overnight, and it will likely start on a small scale, but the entrance of Jazz will entice consumers hooked on Aeroplan points. Jazz even has plans to fly Bombardier Q400s, the same type of aircraft flown by Porter. Air Canada and Jazz combined already have 58 per cent of the Toronto-Ottawa market, through Toronto's Pearson International Airport, well ahead of Porter's 23-per-cent market share on the route, through Billy Bishop.

Expansion risks: Porter Airlines' expansion strategy raises concerns about being over-extended. Chicago, for instance, has proven to be a tough sell. Winnipeg could be added down the road, but it will be difficult to keep costs under control as the airline goes farther away from its Toronto base. Philadelphia and Washington are two U.S. destinations on the radar. Packaged holidays and partnerships with U.S. carriers to attract connecting passengers are possible in 2011, but costly computer upgrades are needed.

Rising operating expenses: While revenue has been soaring, the bills are surging, too. Porter Aviation Holdings saw operating expenses of $155.7-million for the year ended Dec. 31, 2009. The cost per available seat mile, or CASM, averaged 23.8 cents last year. While that's a vast improvement from its early days, the worry is that even with Q400 planes, the airline will face escalating fuel bills. Fuel accounted for 18 per cent of operating costs last year, salaries in the non-union work force for 21 per cent. The balance sheet is weighed down by $306-million in long-term debt and capital lease obligations.