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TORONTO, ONT- 18/11/09 - Images of Porter Air in operation at the Toronto Island Airport. (Photo by Peter Power / The Globe and Mail )pmp

Peter Power/The Globe and Mail

With a hard hat, safety vest and steel-toed shoes setting off his elegant suit, Robert Deluce surveys the battle scene with satisfaction.

It's only a vast expanse of concrete floor right now, but it will soon be the new terminal of Canada's fastest-growing airport. And it is here, at Toronto City Centre Airport, that Mr. Deluce, the chief executive officer of Porter Airlines Inc., plans to triumph doing exactly what has felled many a small airline - competing head-on with Air Canada.

Although Porter is tiny compared to its rival, Mr. Deluce, 59, has one particularly sharp stone in his sling. He's fighting the dominant player in Canada's skies with a little monopoly of his own, courtesy of the Toronto Port Authority.

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The fight will intensify over the next year, both on the tarmac and in court. Air Canada's Halifax-based offshoot, Jazz Air, will likely start flying from the island airport itself in 2010, albeit at Mr. Deluce's indulgence.

Next year is also when a federal court is likely to move on a long-simmering complaint filed by Jazz that it was unilaterally voted off the island by Porter in 2006.

But the stakes are not limited to Toronto for either Air Canada or Porter, a short-haul specialist. In the barely three years since it ran its first flight from Toronto to Ottawa, privately owned Porter has evolved from a local curiosity to a success, adding destinations along the way. It overtook WestJet as the No. 2 carrier in the crucial battleground of the Toronto-Montreal-Ottawa triangle this spring.

In the coming months, it plans to encroach further on the turf of the two biggest Canadian airlines, adding flights between Thunder Bay and Winnipeg, as well as more American destinations. And if that goes well, Porter could eventually push all the way to B.C.

Mr. Deluce has gotten this far by innovating in an embattled sector whose history is littered with the corpses of companies that challenged Air Canada. Now, as the island airport expands and Mr. Deluce plots his moves for the West, he stands to realize his lifelong ambition to be a national player in the skies.

'Little guy from Timmins'

For a man who mingles with the Bay Street elite, Mr. Deluce does an impressive job of playing outsider, the northerner who's challenging an entrenched old-guard colossus.

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"He's the little guy from Timmins, Ontario. He's got that folksy Jean Chrétien way about him," says Rick Erickson, a Calgary-based aviation consultant.

Mr. Deluce comes from a family with deep roots in aviation and some history with Air Canada. Growing up in Northern Ontario, Mr. Deluce and his six brothers all obtained their pilot's licences as teenagers. Their father, Stanley, who had been a fighter pilot in the Second World War, ran a charter carrier.

The island airport has been on Mr. Deluce's mind since his high-school years, when he was sent to board at St. Michael's College in Toronto. He remembers skipping out of class early some Friday afternoons in 1966 to take flying lessons at the harbour airport. Back then, he recalls, the stately Royal York Hotel, all 28 storeys of it, dominated the Toronto skyline.

Even then, Mr. Deluce recognized the potential in the airport's location - so close to the action of downtown, where a cluster of office skyscrapers was emerging.

Over the years, the Deluce family added regional carriers Austin Airways and Air Ontario to their holdings. The family sold part of their stakes in those carriers to Air Canada in the late 1980s, and unloaded their remaining interests in the early 1990s.

In 1999, Mr. Deluce led a group that unsuccessfully tried to acquire the regional operations of Air Canada and Canadian Airlines International Ltd. While Mr. Deluce's ambition was thwarted, the defeat set him on the long journey to found Porter.

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Porter watchers say they aren't fooled by Mr. Deluce's polite manner and outsider act.

"He is deliberately self-deprecating to conceal a sharp mind well-attuned to influencing others," says Douglas Reid, a Queen's University business professor and former port authority director. "He naturally attracts support because he's the northerner, the outsider, the striver - even though he's at core an insider in Corporate Canada."

Porter's board includes Senator Pamela Wallin; David Wilkins, who formerly served as U.S. ambassador to Canada; and Jacques Demers, a high-ranking corporate lawyer who heads up a key investment unit of the Ontario Municipal Employees Retirement System, one of the country's largest pension funds.

Porter's shareholders include some of the smartest money on Bay Street: OMERS' Borealis Infrastructure Management Inc. (which holds 21.4 per cent of the shares), EdgeStone Capital Partners (18.3 per cent), GE Asset Management Inc. (14.6 per cent) and Dancap Private Equity Inc. (3.1 per cent).

But the largest block of shares, 42.6 per cent, is held by Regco Capital Corp., the vehicle of a group of investors led by Mr. Deluce, veteran Bay Street money manager Ira Gluskin and Donald Carty, Porter's chairman, with whom Air Canada clashed frequently when he was CEO of American Airlines Inc. and Canadian Pacific Airlines.

Samuel Duboc, founder and president of EdgeStone, was a key convert to the Porter concept. "We were the first investor in," says Mr. Duboc, a frequent flier and Porter director. "The first thing that attracted us was Bob."

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Mr. Deluce has a tenacious streak that shouldn't be underestimated, Mr. Duboc adds. Neither a losing battle to construct a bridge to the airport nor the onset of the recession have fazed him. In the fall of 2008, Porter's traffic out of New York collapsed. "Lawyers, business people and accountants quit flying for a while, but Bob Deluce stayed very true to his expansion strategy," Mr. Duboc says.

Porter's backers realized early on that there was an opening in the market after Air Canada emerged from bankruptcy protection in 2004. Frequent fliers in Toronto were ready for a spruced-up flying experience, not to mention savings in cab fares: A taxi ride to Pearson International Airport from the heart of Toronto's business district typically costs around $50, compared with $10 to the ferry terminal that serves the island airport.

It was a natural step for Mr. Deluce to tap the frustrations of the corporate crowd. His personal life is interwoven with that of his key customers. His wife, Catherine, founded Chestnut Park Real Estate Ltd. in 1990, a leader in the carriage trade in both Toronto and the cottage haven of Muskoka. The couple make the social rounds whenever their schedules permit, and on these occasions, Mr. Deluce is ever the Porter ambassador. Two of the Deluces' sons work at Porter: Michael is executive vice-president and chief commercial officer, while Jason works in IT.

The right connection

Air Canada and Jazz can be forgiven for regarding Mr. Deluce as a pest - Porter's mascot, after all, is a cartoon of a raccoon, a cunning trouble maker in Toronto neighbourhoods, even the tonier ones.

Mr. Deluce knew that to compete against Jazz, he needed to distinguish Porter's customer service. Porter's flight attendants wear pillbox hats, a throwback to the 1960s - part of the carrier's hearkening back to a time when flying meant glamour, not hassle.

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Where mainstream carriers around the world have divided customers into business and economy classes, creating a reliance on executive passengers that they've come to regret during the recession, the Porter style is positioned between the two. All customers get the same "premium economy" treatment, including perks such as free sandwiches, beer and wine on flights and access to the lounge at the island airport, with complimentary coffee, biscotti and WiFi access.

Those little frills help Porter stand out in an airline sector that is retrenching and devises new fees that irk consumers. But it is only a small part of the strategy. Mr. Deluce got his other advantage - a preferred position at the Toronto island airport - by discerning how his interests aligned with those of the Toronto Port Authority, a federal agency.

A few years ago, with Toronto's port receiving little shipping traffic, the TPA sought to revive its fortunes and generate revenue by expanding the airport, which was seeing only light use by Jazz.

The fusing of the ambitions of the TPA and Porter inflamed what has long been a sore spot in Toronto. Two generations of left-leaning municipal politicians have tried to protect the island, an idyllic adjunct to the metropolis, from overdevelopment.

For Mr. Deluce, it was essential that Porter overcome that opposition by cozying up to the TPA, since it allocates "slots" - takeoffs and landings - at the island airport. In 2006, the TPA moved to grant the first 120 slots to Porter.

Porter had just two planes when it launched in October of that year. Critics pointed to the company's oft-empty shuttle bus as evidence that the new flier's strategy made no business sense. Meanwhile, the airline feuded publicly with Toronto Mayor David Miller over the TPA's plan to build a bridge to the island airport. Porter lost, but in 2005 Ottawa paid Mr. Deluce's Regco Holdings Inc. $20-million to settle legal claims. (Porter passengers shuttle back and forth on a short ferry ride.)

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Thanks to its strategy and downtown monopoly, Porter wooed away customers from Air Canada, Jazz and WestJet Airlines Ltd. The fleet has grown to 17 aircraft, with one more on the way next month and another two by next April. "We would not have ordered 20 aircraft had there not been the availability of those slots," Mr. Deluce says.

Porter's network now has 11 cities - eight in Canada and three in the United States, with Myrtle Beach, S.C., to be added in February. The company's staff has grown to 850, Mr. Miller is leaving as mayor next year, and the bridge fracas is a memory.

The landlord/tenant

With the political ruckus over the airport having subsided, Mr. Deluce is entering the next round of the battle of Toronto Island. This is about business, and Mr. Deluce has an advantage: He's the landlord.

In 2005, he shrewdly cemented his hold over the federally owned island airport by buying the terminal. The following year, he evicted Jazz.

Nowhere else in Canada does a regional airline, as tenant, enjoy the advantage of having the same parent company as the terminal company, the landlord. Mr. Deluce is now investing heavily in it.

The first phase of the construction of the $50-million terminal expansion, privately financed by long-term loans, will be completed in January. Another wing will open in the fall of 2010.

In January, a new ferry will be in service to handle 200 travellers each ride, double the current vessel's capacity and a much-needed boost to handle Porter's growth. Porter estimates its planes will carry a daily average of 2,700 passengers next year. With more planes and destinations on the way, Porter is forecast to transport 4,400 people a day, or 1.6 million annually, in 2011.

That would mark a huge jump from the pre-Porter era, when only 80 Jazz customers a day went through the island airport. But having proved that travellers in Canada's largest city will pay to fly out of a convenient, smaller airport, Mr. Deluce knows that, as landlord, he must now open the island airport's gates to rivals.

To permanently exclude Jazz would not be politically sustainable within Canada. And as Porter prepares to expand to more U.S. cities such as Washington and Philadelphia, it must stay on side with U.S. regulators who are pro-competition. Thus the airport may end up granting access to Continental Airlines Inc., which signed a partnership pact with Air Canada last month.

Those relationships will inevitably be affected by the outcome of Jazz's court case.

Jazz argues that the port authority overstepped its bounds when it effectively handed a monopoly to Porter by giving it control of so many slots. Jazz has sued the authority and the various companies Mr. Deluce is involved with - Porter, City Centre Aviation Ltd. and Regco Holdings - and is asking the Federal Court to let it back in on terms that are not overly restrictive. The defendants have denied any wrongdoing.

In public, Mr. Deluce carefully avoids attacking Air Canada or Jazz. Behind the scenes, he doesn't hide his disdain.

"Knowing what I know about the predatory behaviour of Air Canada, well-established over a long period of time, nothing would surprise me in terms of the lengths that they would go to stop a competitor from actually launching," Mr. Deluce said in a 2006 transcript submitted in the Federal Court case. "It's called scorched earth and it's typical of the way they behaved."

In a 2006 affidavit, Mr. Deluce also fired back, saying Jazz enjoyed its own monopoly at the island airport for 16 years, but vastly scaled back operations, allowing Porter to pounce. "There were a whole stream of Air Canada and Jazz CEOs who could have developed the island airport, but they didn't," Mr. Deluce adds in an interview.

Whatever the outcome of the court case, Jazz will still have to reckon with Mr. Deluce as landlord. Since the port authority gave the first 120 slots at the island airport to Porter, there might be less than 50 slots up for grabs in the fall of 2010 for Porter, Jazz and others to divvy up.

In an interview, Air Canada CEO Calin Rovinescu declined to comment on the legal fight against Porter and the port authority. But he said he's determined to have Jazz return to the island airport in 2010.

"In one fashion or another, we intend to find a way to have access to the airport," Mr. Rovinescu said. "I can categorically say that our passengers would like us to have access to the island and, therefore, we are going to work very hard to achieve that."

Cost advantages

Porter's ability to restore "dignity" to flying stems from a number of cost advantages it enjoys over its larger rivals.

Robert Kokonis, president of consulting firm AirTrav Inc., says Porter's exclusive reliance on 70-seat Bombardier Q400 turboprops is part the reason why Porter has grown rapidly.

The fuel-efficient Q400s don't need as many passengers as the bigger planes used by Air Canada and WestJet to post an operating profit. Community Air, a residents group opposed to expansion of the island airport, says Porter's load factor - the proportion of seats filled by paying customers - was likely much less than 40 per cent earlier this year, but improving.

The smaller planes allow Porter to offer more flights, luring walk-up traffic and winning over business fliers seeking flexibility in taking earlier or later flights.

During peak travel times and holidays, Porter thrives, even though it tends to charge a slight premium over its rivals. On the Thanksgiving weekend, the island airport terminal was packed with customers.

By the spring of this year, Porter had overtaken WestJet as the No. 2 carrier in the eastern triangle of Toronto, Montreal and Ottawa. Air Canada and Jazz still dominate, with 55 per cent market share, but Porter's piece of the market has surpassed 20 per cent and it's closing the gap.

Another Porter cost advantage is in landing fees, which are sharply lower at the island airport than Pearson, which has the world's highest charges. With a non-union work force, Porter also has lower labour costs.

"Porter has passed the danger zone of the first three years of operation," Mr. Kokonis says. "The next danger phase is the next three years. They must ensure they to not expand too quickly, and that their expansion is based on operating only where they can do so profitably."

Mr. Deluce says Porter has been profitable since mid-2007 on a "fully allocated" basis, though he declines to give accounting details - information that would only become public if the carrier decides to raise equity financing through an initial public offering.

When Porter's board meets next spring to discuss a five-year plan, the agenda will include the possibility of an IPO some time between 2010 and 2015, he says.

The terminal expansion may be Mr. Deluce's biggest and grandest bet yet, but he vows that his aviation career has yet to peak. New destinations being targeted include the Ontario cities of Windsor, Sudbury, Sault Ste. Marie and his family's former home base of Timmins. Besides Washington and Philadelphia, U.S. destinations on Porter's short list are Pittsburgh, Cincinnati, Cleveland and Detroit.

He is also receptive to the idea of signing partnership deals with other carriers, perhaps benefiting from connecting traffic in the United States.

Mr. Deluce's vision calls for expansion into Western Canada, where Porter stands to make inroads in the Regina-Winnipeg route, which was abandoned by WestJet earlier this year. Porter already flies from Toronto to Thunder Bay and is considering a connection from Thunder Bay to Winnipeg by mid-2010. If all goes well, Calgary, Edmonton, Saskatoon and Vancouver are possibilities.

While industry experts say Porter is in danger of spreading itself too thin, Mr. Deluce counters that there is no growth without risk.

"Being in this business is not for the faint of heart. It does take a bit of determination, and you need to be flexible," he says. "Our focus is still very much on the Toronto area, but the Porter brand itself may be exportable beyond Toronto."

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