1. How did Porter Airlines take advantage of a transitory business opportunity in an otherwise difficult market to mitigate several critical forces that could have prevented its success?

2. Identify Porter Airline's target customer market(s) and the desired outcomes

3. What are the critical forces that Porter is facing and how are they mitigated?

4. Identify the critical resources and critical activities that are leveraged to meet the desired customer outcomes

( link all your answers with relevant information given in exhibits and the case)

PORTER AIRLINES-.31 Since its inception, Porter Airlines had successfully navigated the rst few years of its existence and disproved many who thought it was doomed to failure. It had tapped into unmet customer needs with a unique strategy. However, a critical question that needed to be addressed was whether this particular business model, so successful thus far, would remain valid going forward. Additionally, Porter needed to decide how it planned to expand and how aggressive it should be when entering new highly competitive markets. BACKGROUND In 2010, Toronto was widely regarded as Canada's commercial capital, a hub of finance and industry in close proximity to many of the large cities in Eastern Canada and the Northeastern United States, and as such, trafc through the city was predicted to increase over the coming years. Toronto represented more than one-third of the Canadian air travel market {see Exhibit 1}, and more than 25 per cent of Toronto passengers traveled to or from cities within a SUD-nautical-mile (nm) radius of the city. Within this segment, Toronto airports served trans-border and domestic travelers, business and leisure travelers, and connecting and origin-and-destination travelers [see Exhibit 2]. Toronto's main airport was Lester B. Pearson International Airport (Pearson Airport], located 2'? kilometres {km} northwest of downtown Toronto. It was accessible by car, taxia'limousine and bus, and travel time from the centre of the financial district {King and Bay Street) in downtown Toronto was approximately 40 minutes (but could take more than [.5 hours in rush-hour traffic}. It was Canada's busiest airport, handling 32.3 million passengers in 2003 {due to its size, check-in and security clearance could take up to 40 minutes], and was owned by Transport Canada and operated by the Greater Toronto Airports Authority. It had five runways ranging from 9,000 to 1 1,120 feet in length, and could therefore accommodate all types of turboprop and jet planes Page 2 Qll regardless of size and weight. Due to terminal renovations that had been in progress since the late 199s, the landing rights at Pearson in 20 If! were purported to be the most expensive in the world.' Pearson Airport served as a hub for Air Canada {the dominant airline in the Canadian market at that time}, Air Canada Cargo, and Air Canada Jazz {a subsidiary that was completely spun otf but became a partner through a capacity purchase agreement whereby Air Canada was responsible for sales and marketing and contracted Jazz tor ight operations}. Founded in 193d as the Commonwealth's ag carrier, Air Canada was, with a eet of 202 aircraft, the eighth largest airline in the world. Air Canada operated a variety of Airbus, Boeing and Embraer jets, while Air Canada Jazz provided regional feeder and commuter service on Bombardier CRJ jets and DashE turboprop planes. Together, the airline and its subsidiaries operated more than |,3T ights per day to I'll destinations worldwide. Following deregulation of the airline industry in the early IQSs, Air Canada had suffered from low protability despite growth of operations and the takeover of multiple smaller Canadian airlines. Dperating losses grew due to debt incurred during the modernization of its eet, costs associated with the maintenance of diverse aircraft types and landing rights at Pearson, and high labor costs and pension obligations, exacerbated by the unwillingness of its unionized workers to consider concessions.) Lack of competition had kept prices high for Canadian travelers {e.g. an unrestricted 1|r'class fare roundtrip from Toronto to New York on Air Canada cost more than CdnSlJW}, and Air Canada and other full service carriers dominated the shorthaul market. Flights on other carriers were often code-shared with Air Canada5 [which further decreased competition and kept prices high}, and most destinations within 500 nm of Toronto were served by only two carriers {one of which was Air Canada) providing little competition and consumer choice. As the longstanding dominant player in the Canadian airline industry [with a 55 per cent market share}, Air Canada had a long history of crushing {or buying} rivals in order to maintain its monopoly in the industry. It had the capital and the market share to engage in lengthy price wars and to ood the market with excess seat capacity, both of which it had used in the past to sabotage competitors. [ts predatory practices, used against smaller competitors without sustainable competitive advantages, had proved to be extremely successful in driving other competition from the marketb The Toronto City Centre Airport {TCCA}, renamed the Billy Bishop Toronto City Airport in February of Elft, was a small airport located on the Toronto Islands three kilometres south of downtown Toronto in Lake Ontario. Originally opened to aviation in \"3'39, it was originally used for Air Force training and was opened to civil aviation in IQEAI. The Toronto [sland land was owned jointly by the Toronto Port Authority {TPA}, the federal government and the City of Toronto, and was managed by the Toronto Port Authority. There were several small terminal buildings and hangars, of which one was owned by the Ministry of Health [for the operation ofthe Air Ambulance service] and the rest were owned by private investors {who leased use of the buildings to airlines]. Due to the small size of the terminal, time spent in checkin and security was about half what it was at Pearson, averaging about 2t] minutes. The Island Airport was a short {ve minute] ferry ride from a pier located approximately ID minutes from downtown Toronto {King Street and Bay Street], and ve minutes from Union train station, and terry service was complimentary for passengers. It had three runways ranging from 2,7343 to 4,000 feet, and as such, airlines operating out of the TCCA were limited to turboprop planes {most jets were larger and heavier and therefore needed longer runways to comply with safety standards}. There were a few jets that could have operated out of the Page 3 9B10M039 TCCA, but there was a jet ban in the tripartite agreement that governed the TPA's operation of the airport. This essentially restricted TCCA flights to short-haul regional destinations within 500 nm of Toronto. Landing rights at the TCCA were controlled by the TPA and were significantly less expensive than those at Pearson Airport (again, actual numbers were not publicly available, but they were estimated to be comparable to a small regional airport)." From 1984 to 1989, the discount carrier, City Express, operated out of the TCCA, offering flights to New York, Ottawa, Quebec City and Montreal. It grew rapidly (going from 150,000 passengers in 1985 to 400,000 in 1987) and quickly gained 25 per cent of the market, despite flying older Dash-7s (compared to Air Canada's Dash-8s), having no landing slot protection, and having poor infrastructure and operational reliability. This demonstrated that there was a strong market for travel out of the island airport. Disliking how it was rapidly losing market share to City Express, in 1990 Air Canada began to operate flights out of the TCCA, with its subsidiary Air Ontario (now part of Air Canada Jazz) aggressively competing on the basis of newer aircraft, increased frequency and reliability, and matched fares. In less than a year later, City Express filed for bankruptcy. With City Express no longer in the picture and with no other competitors wanting to fly out of the TCCA in sight, Air Canada proceeded to reduce its TCCA flight schedules to the absolute minimum - eventually coming down to three flights a day to Ottawa. With its hub at Pearson Airport, it was financially much more viable to consolidate its operations there, but it maintained a minimal presence at the TCCA to deter potential entrants to the market. By 2003, annual traffic at the TCCA was below 40,000, and the airport was facing bankruptcy. In order to preserve the viability of the airport, the TPA was ready to invest in renovating the terminal buildings and constructing a bridge to increase traffic and ease of access to the airport. It offered additional landing slots to Air Canada (who declined them - with no competition, it saw no reason to increase its flight schedule), after which the TPA was ready to give anyone who invested in the airport first right of refusal on the majority of the landing slots. With Air Canada concentrating on its operations at Pearson Airport, the situation at the TCCA was low on its radar - it really did not expect anyone to enter the market. HISTORY OF PORTER AIRLINES Porter Airlines was founded in 2002 by Robert (Bob) Deluce, a veteran in the airline industry with ownership and operational experience in almost a dozen regional airlines, including Air Alliance, Air Creebec, Air Manitoba, Air Ontario, Austin Airways, Canada 3000, Great Lakes Airlines, norAir, Superior Airlines and White River Air Services. By 1998, he had sold Canada 3000 and was searching for an opportunity to get back into the industry. Aviation was in his blood - his father was recognized in the Federal Aviation Hall of Fame, and Deluce and his brothers all had their pilot's licences as well as professional ties to the industry. Additionally, Deluce likely felt a special connection to the TCCA, having earned his pilot's licence there as a teenager." Convinced that a successful regional airline could be run out of the TCCA, and encouraged by the particular set of circumstances and opportunities that were emerging at the time, Deluce put together a proposal and obtained venture capital funding from three primary investors - EdgeStone Capital, the OMERS (Ontario Municipal Employees Retirement System) pension fund, and RCC (Regco Capital Corp.Page 4 BB1 MEB his own company)\" The amount of equity raised from the initial investors estimated at approximately $125 million was enough to see the company through its rst phase of growth. This was key because many underfunded airlines had failed due to prolonged fare wars with Air Canada. Deluce also put together an experienced management team, installing Don Wallace (with more than 30 years of experience in the industry) as the vice-president, and Donald Carty {retired chairman and CEO of American Airlines) as the chairman.II Armed with a signicant amount of venture capital funding, a strong proposal and an experienced management team, Deluce pitched his idea to the TPA. 1Unfith the TCCA facing bankruptcy,l2 the TPA was eager to help a new entrant to the market, offering funding to renovate and build a bridge connecting the island airport to a downtown pier and expressing willingness to sign a commercial carrier operating agreement with Porter that limited the number of takeoff and landing slots available to competitors a key piece of strategy to protect the fledgling airline from Air Canada s predatory practices. In an ultimately successful run for mayor in 20G}, David Miller made cancellation of the bridge to the TCCA the centrepiece of his campaign, arguing that increased traffic to the island airport would increase noise and generally decrease the quality of life for those living and working downtown. After the election, the contract was canceled by Miller and the City of Toronto, and the bridge was never built. Deluce responded by suing the city for breach of contract, and a protracted legal battle ensued to unwind the contracts and determine appropriate compensation.H As the legislation sat in the courts, the airport continued to lose money and the private owners of the terminal and hangar buildings expressed an interest in selling. The buildings were bought by Regco, which signed long-term leases for the use of the island land with the TPA. Owning the airport infrastructure and controlling the terminal allowed Porter to give priority to its passengers, to control the end-to-end experience, and to maximize its operational efciency. It did not have to worry about being delayed behind other airlines' planes, and was not dependent on independent contractors for refueling and de-icing. Its Fixed Base Operator [FBOJI at the TCCA provided:H Esso Service Centre for refueling Jet Al and Avtias Computerized flight planning and meteorology station De-icing facilities Access to a wide variety of on-site aviation services (including on-site maintenance] I Secure and economical hangarage and ramp availability The suit was eventually settled for an estimated $35 million.[5 and Porter Airlines began operations out of the TCCA alongside Air Canada Jazz in October 20%. Shortly after, Air Canada allowed its longterm lease on its terminal buildings to lapse, and continued its operations on a monthtomonth lease. In February 200?, Porter decided to renovate the terminal buildings and, in order to do so, cancelled Air Canada's lease. Air Canada asked the TPA for other terminal buildings to operate out of, but as there was no any space on the island to give the airline, it was forced to move its operations to Pearson Airport, leaving Porter as the sole commercial airline ying out of the TCCA. PRTER MISSION 1With a customer value proposition based on \"convenience, speed and service," Porter Airlines dened itself from the broader perspective of a \"quality journey" in all of its dimensions. It's corporate philosophy states: Porter wants to be more than the airline of choice for our discriminating passengers. 1|III-"hether you're a frequent business traveler or a weekend escape artist, Porter's convenience, speed and service should be extended to your entire journey. Porter is building hotel, transportation, retail and entertainment partnerships that will grow with us as we expand to more destinations.15 From our downtown location to our upscale amenities and refreshing approach to customer service, Porter Airlines is changing the way people fly. Gone are the hassles of getting to and from Pearson. Gone are the long checkin lines and unpredictable security lines. Gone are the things that stand in the way of a great ight. 1We've put years of research, planning and effort towards one goal: to become North America's premium shorthaul carrier. The result is an airline and a travel experience like no other. 1" CITIES SEREtEI"r Starting off by offering daily ights to Ottawa, Porter gradually expanded both its ight schedule and destinations served, testing its model by expanding rst within Canada {to include Montreal, lQuebec City, Halifax, Mount Tremblant and Thunder Bay}, and then to the United States {to include New York City, Chicago, Boston and Myrtle Beach}. Growth and expansion were slow and methodical, with many destinations such as Mount Tremblant being tested as \"seasonal destinations" before Porter decided to offer yearround service. Potential destinations were limited to cities within a SOD-hm radius of Toronto {see Exhibit 3}, and Porter's expansion plans included cities such as Philadelphia, Washington, D.C., Baltimore and Cleveland. Porter also had plans to add US customs proclearance with the next phase of its terminal development, which would open up secondary US. domestic airports like LaGuardia and Reagan. OPERATING PLAN AND COST STRUCTURE Porter's operating plan used many success factors of lowcost carriers like Southwest, including: Page 6 SEWIMIEQ Disciplined growth Singleaircraft eet [Bombardier 0400] Single class aircra Iligh aircra utilization Short turnaround time High frequency service {appeals to business travelers] Use ofseccndary airports [lower landing fees} Ticketless distribution Simple frequent yer program Porter's cost structure was signicantly lower than Air Canada's. and was more comparable to [or even lower than] Westjet's. It used secondary airports [like Chicago's Midway], which signicantly reduced landing fees. emphasized quick turnaround times to keep planes in the air, and relied heavily on web ticket sales (to eliminate the costs of issuing expensive paper tickets]. Porter's employees were nonunionized [and therefore lowercost} and the airline used a singleaircraft eeL which reduced the cost of pilot training maintenance and parts inventory. TARGET MARKET AND TARGET CUSTOMER Porter's target customer was the timesensitive frequent business traveler these customers were typically highvield passengers who tended to book more at the last minute and were willing to pay more for exibility. '3 The Porter business model was based on clan and convenience for the business traveler rather than no frills and low cost for family travel. Porter Airlines targeted mainly origindestination business travelers who needed to travel to and from Toronto. These travelers were predominantly working professionals on short business trips, usually one to ve days in length. To cater to this segment, Porter offered three fare classes: Freedom. Flexible and Firm.\" Each fare type provided an array of options including complimentary changes and cancellations. advance seat selection and sameday changes at the airport (see Exhibit 4}. Porter offered frequent ights to appeal to business travelers who wanted the exibility of being able to take a later ight {yet not having to wait hours] if meetings ran longer than expected or problems arose. Although there were few passengers on many of the midday flights. Porter realized that if the ight schedule was scaled back then it would be less appealing to business travelers {see Exhibit 5}. Additionally, the number of leisure travelers ying Porter was growing substantially (as ying Porter had become a mark of social status].1" The Porter brand was focused on a \"high class" image; from the lounge design. to the staff uniforms, to the glassware on the plane every piece of the service offering and everything that contributes to the customer experience was well planned. Page 7 9B 10M039 Porter chose to enter a market where many small regional airlines had failed; however, most airlines that launched were competing on fares, while Porter was competing on brand, location and level of service. BOMBARDIER Q400521 For its single-aircraft fleet, Porter chose the Bombardier Q400 turboprop, one of the most technologically advanced turboprops on the market. The Q400 was ideal for short-haul flights, with a new Pratt & Whitney PW150A engine designed for shorter sectors, smaller airfields, lower cruise altitudes, lower maintenance costs even with high utilization, lower pilot and flight attendant pay rates (for regional service), and lower airport fees (based on a lower takeoff and landing weight). In the past in the regional airline industry, older turboprops were passed over in favor of jets because of outdated technology, high cabin noise and vibration, and lower speeds. However, new technology in the Q400 generation of turboprop planes put them on par with regional jets, specifically in terms of their fast climb to cruising altitude and maximum cruise speed of 414 miles per hour. This reduced in-flight time to levels comparable to airlines flying regional jets, and gave Porter a significant advantage over airlines flying older-generation turboprops. The Active Noise and Vibration Suppression (ANVS) system made the aircraft the quietest turboprop in service. Most cabin noise in turboprop planes was due to airframe vibration caused by pressure pulses from the propeller blades beating against the fuselage. The ANVS actively monitored noise and vibration during flight and absorbers on the fuselage frames were programmed to produce counter vibrations that all but cancelled out the original vibrations. This resulted in a sharp reduction in both cabin vibration and noise, increasing passenger comfort. Additionally, the Q400 had a fuel burn and emissions level 30-40 per cent lower than a comparable regional jet, especially during short-haul flights (less than 500 nm), giving it a significant advantage in terms of operating expenses. Bombardier estimated that an airline with a full-service cost and fare structure operating a Q400 had a break-even passenger load of 35 per cent. The spacious interior of the Q400, leather seats and 70-seat arrangement with 34" pitch compared favorably to jets of a similar passenger capacity, and the 2-by-2 layouts eliminated the uncomfortable middle seats (see Exhibit 6). As part of the original contract negotiated with Bombardier, Porter also had an option to purchase an additional 10 Q400s at a fixed price, an option valued at more than Cdn$500 million. DETAIL SERVICE ATTRIBUTES AND AMENITIES OFFERED BY PORTER AIRLINES" Porter offered a variety of service attributes and amenities to enhance the travel experience of the customer. These included: Free shuttle service between Union Station and the ferry to the TCCA every 15 minutes Free ferry service across to the TCCA every 10 minutes (a 120-metre ferry ride across Toronto's Inner Harbor)Page 8 9B10M039 Web check-in for domestic flights . Baggage allowance of two checked bags, one carry-on bag (baggage skycheck), and one personal item at no extra charge The Porter lounge, featuring free wireless Internet access, a conference room with a PC projector, complimentary coffee/tea/soft drinks, and a business centre with workstations just steps away from airport security and the departure gates Snack and beverage service on all flights, including complimentary soft drinks, wine and beer Onsite licensed restaurant at the TCCA terminal . . Hotel and car rental arrangements Limousine and taxi service FUTURE PLANS As of 2010, Porter's expansion plans were predicted to include Philadelphia, Washington, D.C., Cleveland, Cincinnati, and Pittsburgh, among others. In addition to the U.S. expansion, Deluce also had plans to add destinations within Ontario, such as Windsor, Sudbury and Sault Ste. Marie. His long-term vision for Porter also included a push westward towards British Columbia, adding flights not based out of Toronto such as the Regina-Winnipeg and Thunder Bay-Winnipeg routes. With Vancouver, Calgary, Edmonton and Saskatoon all possible destinations on the horizon for expansion, Deluce was fully aware that Porter would be encroaching on the territory of other Canadian airlines based out west. Porter's battle with Air Canada continued but Porter was considering permitting Jazz (or Continental, which signed a partnership with Air Canada in the fall of 2009) to return to the island airport in 2010. A federal court was to rule on a suit filed by Jazz that it was unfairly voted off the island in 2006. Porter's fleet of Bombardier Q400 turboprop airplanes was 17 and growing, and there were no plans to eliminate or scale back the food and beverage service in the lounge or onboard or add any additional fees. Deluce was taking advantage of being both the tenant (as Porter) and the landlord (as Regco) at the island airport, with a $50 million new terminal that opened March 7, 2010." There were also plans to introduce a new ferry able to transport up to 200 passengers - double the existing capacity. An IPO sometime between 2010 and 2015 was an option being considered by Porter's board of directors in order to raise additional capital for expansion. This was in line with Deluce's vision that the Porter brand was "exportable beyond Toronto."24\fPage 10 9B 10M039 Exhibit 2 TORONTO AIR TRAVEL TO AND FROM CITIES WITHIN A 500-NM RADIUS 100.0% 90.0% Domestic 80.0% Origin- 47.2% Destination 70.0% 72.9% 60.0% 50.0% 40.0% Transborder 30.0% 52.8% Connecting 20.0% 27.1% 10.0% 0.0% By destination By type Source: Lehman Bros. Analyst Report.\fPage 12 9B10M039 Exhibit 4 FARE STRUCTURE Freedom Fare Complimentary changes or cancellations are permitted (subject to seat availability, fare difference and applicable taxes) up to one hour prior to departure time. Complimentary, same-day changes are permitted at the airport only (subject to seat availability). . Cancelled flights are credited for future Porter flights. Credit for future Porter flights is valid for 12 months from issuance of credit. Refunds can be obtained by calling the Porter Call Centre. Advanced seat selection is complimentary. Eligible VIPorter members earn 1500 VIPorter points per one-way Freedom Fare flight. Flexible Fare Changes or cancellations are permitted (subject to seat availability, fare difference and applicable taxes) up to one hour prior to departure time for a fee of $25 CAD/USD per passenger per segment plus any fare difference and applicable taxes. Same-day changes are permitted at the airport only. A $50 CAD/USD flat fee applies (subject to availability and applicable taxes). Cancelled flights are credited (less change fee) for future Porter flights. Credit for future Porter flights is valid for 12 months from issuance of credit. Advanced seat selection is complimentary. . Eligible VIPorter members earn 750 VIPorter points per one-way Flexible Fare flight. Firm Fare Changes or cancellations are permitted (subject to seat availability, fare difference and applicable taxes) up to one hour prior to departure time for a fee of $50 CAD/USD per passenger per segment plus fare difference and applicable taxes. Same-day changes are permitted at the airport only. A $100 CAD/USD flat fee applies (subject to availability and applicable taxes). Cancelled flights are credited (less change fee) for future Porter flights. Credit for future Porter flights is valid for 12 months from issuance of credit. Advanced seat selection is available for $15 CAD/USD per segment plus applicable taxes. Eligible VIPorter members earn 375 VIPorter points per one-way Firm Fare flight. Source: www.flyporter.com/fly2/FlyPorter/FAQ?culture=en-CA, accessed October 15, 2009.PORTER FLIGHT SCHEDULES (EXAMPLES: NEW YORK, MONTREAL) New York All New York flights arrive and depart from terminal B at Newark International Airport. Toronto to New York: New York to Toronto: Flight: Departs: Arrives: Day of Week: Flight: Departs: Arrives: Day of Week: 121 06:45 08:15 MTWTF -- 120 06:45 08:15 MTWTF - - 123 09:00 10:30 MTWTFSS 122 09:15 10:45 MTWTFSS 125 11:15 12:45 MTWTFSS 124 11:30 13:00 MTWTFSS 127 13:30 15:00 MTWTFSS 126 13:30 15:00 MTWTFSS 129 15:30 16:55 MTWTF - S 128 16:00 17:30 MTWTF - S 131 18:15 19:45 MTWTF - S 130 17:55 19:25 MTWTF - S 133 20:30 22:00 MTWTF - S 132 20:25 21:55 MTWTF - S Montreal All flights in Montreal arrive and depart from Montreal Pierre Elliott Trudeau International Airport (domestic terminal) Toronto to Montreal: Montreal to Toronto: Flight: Departs: Arrives: Day of Week: Flight: Departs: Arrives: Day of Week: 401 06:55 08:00 MTWTF - - 402 7:10 08:20 MTWTF - - 403 08:50 09:55 MTWTF - - 404 08:35 09:45 MTWTF - - 405 10:35 11:40 MTWTFS - 404 08:55 10:05 407 12:15 13:20 MTWTF - S 406 10:35 11:45 MTWTF - - 409 14:15 15:20 MTWTFSS 408 12:15 13:25 MTWTFSS 411 16:15 17:20 MTWTF - S 410 14:15 15:25 MTWTF - S 413 17:55 19:00 MIWTF - S 412 16:15 17:25 MIWIF - S 415 19:35 20:40 MTWTF - S 414 17:55 19:05 MTWTF - S 417 21:15 22:20 MTWTF - S 416 19:35 20:45 MTWTF - S 418 21:15 22:25 MTWTF - S Toronto to/From Chicago Halifax Mt. Montreal New York Ottawa Quebec City Thunder Tremblant Bay Daily takeoffs/landings 12 10 10 28 14 20 2 6 Average operating days per year 365 100 100 365 365 365 100 100 Total # of flights per year 4,380 1,000 1,000 10,220 5,110 7,300 200 600Page 14 9B10M039 Exhibit 6 PORTER Q400 SEAT MAP Stowage Wardrobe Lavatory Emergency Exit Emergency Exit Galley 10 12 13 14 15 16 18 Emergency Exit Airstairs 70 seats @ 34" pitch Source: with permission, www.flyporter.com/en/fleet.aspx accessed, October 15, 2009