Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 3 - Evidence, November 1, 2011


OTTAWA, Tuesday, November 1, 2011

The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study emerging issues related to the Canadian airline industry.

Senator Dennis Dawson (Chair) in the chair.

[Translation]

The Chair: Honourable senators, I would like to call the meeting of the Standing Senate Committee on Transport and Communications to order and thank you all for being here today.

[English]

This morning we are continuing our study on the Canadian airline industry. Appearing before us is Robert Deluce, President and Chief Executive Officer of Porter Airlines Inc.

Robert J. Deluce, President and Chief Executive Officer, Porter Airlines Inc.: Thank you and good morning. Senators, I appreciate the opportunity to appear before you on behalf of Porter Airlines Inc. as part of your ongoing examination of Canada's air transportation policies.

Porter is Canada's third-largest scheduled airline. We are responsible for deciding which routes we fly, marketing services and operating flights at regularly scheduled times. In addition to WestJet and Air Canada, there are larger carriers who pursue different business strategies, such as charters and capacity purchase agreements. However, Porter is the third-largest scheduled carrier in the country.

Porter flies regionally as far west as Thunder Bay and east to St. John's, Newfoundland and Labrador. As of January, we will be flying to 18 destinations in Canada and the U.S. The split-out between the two is 13 Canadian and five U.S.

We will operate 26 Bombardier Q400 aircraft and directly employ more than 1,300 people by January.

On October 23 Porter celebrated its fifth anniversary and carried its five-millionth passenger the same week.

Milestones such as these relate to the primary focus of my presentation. Porter brings competition to the Canadian airline industry. This creates jobs, benefits airports and stimulates travel for individuals and businesses by offering a competitive, active choice.

In the markets Porter enters, we have historically seen a 60 per cent decrease in the base fare passengers pay. This is based on announcing our intention to serve a route, before we actually start flying. Rates typically come down once we have announced service. Using Sault Ste. Marie as a recent example, the one-way fare with a 30-day advance purchase prior to Porter's arrival was $296, plus taxes and charges. After Porter began flying to Sault Ste. Marie, the same fare was $79. That is a 73 per cent decrease in base fare.

Within our network, we compete against the two largest Canadian carriers and some of the largest airlines in the world in the form of U.S. carriers. This mix varies by individual route.

Nonetheless, the pricing dynamic is fairly consistent. Porter's presence in a given market reduces the cost of air travel based on the fact that people have another choice. Other carriers become willing to compete for business in new ways they had not contemplated previously.

Not surprisingly, the most striking examples are on routes where no competition previously existed. For example, Ontario regional markets such as Sault Ste. Marie, Sudbury, Timmins and Windsor now have non-stop flights being offered to Toronto from two carriers with the addition of Porter.

In one of these cases, we understand that total airport passenger traffic is up by more than 80 per cent on a year- over-year basis, largely because pricing is more attractive. More passengers leads to more investment from airports. Particularly in smaller regional centres, airports have initiated construction projects of varying scales to more effectively support increases in passenger levels brought on by Porter service. This results in both short-term and long- term job creation.

Porter is most directly associated with airport investments at our main operating base, Billy Bishop Toronto City Airport.

When you factor in the Toronto Port Authority's investment as the airport operator in addition to our own, well over $100 million in completed and committed projects are in place. This includes airport access infrastructure, airport services, passenger terminal facilities and administrative support offices.

The revitalization of Toronto City Airport has direct, positive implications for local hospitality and tourism sectors. Based on surveys they have conducted, some hotels have indicated that a notable portion of their customers are accessing the city via the downtown airport.

The Canadian aerospace sector also benefits from the airport's revitalization. Bombardier Aerospace completes final assembly of the Q400 aircraft that Porter uses in Toronto and throughout its network. As the city's largest industrial employer, thousands of highly skilled jobs are being supported.

In Quebec, Pratt & Whitney Canada manufactures the Q400 engines. Porter's pilot training program includes the use of simulators operated by FlightSafety International, one of the world's leaders in this field.

All of these benefits result from competition. Without it, almost none of the investments would be made. Conservatively, more than $1 billion in economic activity is directly attributable to Porter's presence as an airline. This includes aircraft purchases, infrastructure investments, direct job creation, and hospitality and tourism spending. A more formal analysis would likely come up with a higher number.

In addition to providing competition, Porter has taken the initiative to develop new routes, which comprise our seasonal program. Mont Tremblant, Quebec, Myrtle Beach, South Carolina, and Burlington, Vermont, are all destinations that lacked convenient air service for Canadians, if it existed at all. We are the only Canadian airline with non-stop routes to these locations.

In the case of Mont Tremblant, the program began in 2007 with two flights a week for the winter ski season. Currently, we operate up to 13 flights per week in winter with up to five return flights on Sunday alone. We have been flying in the summer for the past two years. This will be the first year that we fly to Mont Tremblant non-stop from New York/New Jersey.

This joint investment with our partners has created a new tourism market for Mont Tremblant, with access via Toronto from over 10 cities.

Canadian traveller leakage to U.S. airports is not something Porter is faced with to any noteworthy degree. We generally serve a customer base that recognizes the value of Toronto City Airport's convenient location, with the ability to save two hours or more of total travel time on a typical round-trip flight. Combined with competitive pricing in Porter's markets, the value proposition is worthwhile for a number of people.

We also see substantial numbers of passengers from Porter cities outside of Toronto taking advantage of connecting flights to the U.S. Attractive pricing makes this a viable option.

In the case of our year-round U.S. destinations — New York, Chicago and Boston — traffic is up substantially. In Myrtle Beach, we have been able to expand our presence over the last two years despite budget U.S. airlines operating across the border in New York state.

In general, Porter attracts significant numbers of passengers from the Golden Horseshoe region, who sometimes have cross-border choices available to them. Competitive pricing is just one factor in their decision making. I believe another is the premium service levels experienced with Porter that include a variety of complimentary amenities and services that are either not available on other carriers or come at added cost.

I hope this initial presentation has been beneficial. Thank you again for the invitation to appear before the committee. I am more than pleased to take any of your questions.

The Chair: Thank you, Mr. Deluce. Let me start by introducing my Senate colleagues: Senator Eaton from Toronto; Senator Verner from Quebec; Senator Boisvenu from Quebec; Senator Greene and Senator MacDonald from Nova Scotia — Halifax and Sydney; Senator Mercer from Halifax, Nova Scotia; Senator Merchant from Saskatchewan; Senator Cochrane from Newfoundland and Labrador; Senator Martin from British Columbia; and Senator Zimmer from Manitoba. I will start with Senator Mercer.

Senator Mercer: Mr. Deluce, thank you for coming. I have been an admirer of your operation since you went into this business. A few people have probably told you that a lot of us thought you were crazy when you took this on because your major competitor, Air Canada, has a reputation of using predatory pricing to knock you out of the game as early as possible.

You gave us the example of the price from Toronto to Sault Ste. Marie, pre-Porter's arrival, as $296, plus taxes and fees. After you arrived, it was $79, plus taxes and fees. How are you able to compete when they drive the price down to that level?

As a supplementary question, after you are in the market for a while, does their price and yours creep up to something less than the $296 but more than the $79?

Mr. Deluce: To start with, in terms of our ability to be able to compete, there are a number of factors. The first is the aircraft itself. Operating the Bombardier-made Q400 gives us a pretty good advantage over some of our closest competitors. The airplane enjoys a 23 or 24 per cent fuel burn advantage over the typical regional jet or narrow body jet. That is a big factor today, with fuel prices being, in some cases, one third or more of one's total operating cost.

The second thing is we are operating from a secondary airport, with about half of our flights coming or going from Toronto City Airport. That is an advantage; there is no question about it. I think when you are starting fresh and you are putting in place a certain corporate culture that lends itself to service and you become known for that, that helps considerably.

When you factor all of it together, the big thing about how we can stay in a market even when we are being literally hammered by our competitors, as happens from time to time, relates to the fact that we have a break-even load factor that is in or around 50 per cent. In 2009, it was 49 per cent; in 2010, it was 50 per cent. With fuel prices this year, we will probably be just slightly above 50 per cent, but we will probably always be in or around that 50 per cent break-even load factor.

We are running with an average load factor in the 60s. It has been increasing steadily; we have been as high as 68 or 69 per cent, which is where we are running at the moment. However, year to date, I think we are in the low 60s. We have a pretty good margin there.

That compares favourably with even the other low-cost carriers out there. As a couple of examples, WestJet is sitting with a break-even load factor in the low 70s, around 72 or 73 per cent. On the U.S. side, Allegiant Air, which is considered one of the more efficient U.S. carriers, is sitting with a break-even load factor in or around that same amount. Then when you get to the legacy carriers, such as American Airlines, it would be around 82 per cent. Air Canada used to be in the 80s and is now down around 79 or 80 per cent. We have a huge advantage.

The size of our airplane is another factor. If we have 35 people on our aircraft on average, we are feeling very good about that. The flight I was on coming over this morning from Toronto had probably around 65 seats full. We are able to sustain that heavy competition.

I think we were most susceptible when we only had one or two routes. Now that we have 18, it is difficult for competitors to come at us on all 18 routes. They are not always clicking at one time, but there are always routes that are doing very well. It was a bit of a long-winded answer to your question.

Senator Mercer: The renovations and expansion of Billy Bishop Toronto City Airport just about at the time when you started was a good thing. The old airport was in pretty bad disrepair and the previous tenant did not pay much attention to customer comfort. Those repairs were paid for by the Toronto Port Authority, were they not?

Mr. Deluce: Some of them were paid for by the Toronto Port Authority. That included the ferry terminals on both sides of the channel and improvements to the ferry slips. The building and the putting in place of one new ferry initially and now two new ferries were expenditures made by the Toronto Port Authority. The new terminal, which was an expenditure in excess of $50 million, along with all the aircraft and anything else that was needed, was done by Porter.

We built the terminal. We did not think there was any way we were going to end up with a new terminal or even an improved terminal if we did not do it ourselves, so we negotiated the right to do that. We are happy that we were able to put that in place.

Senator Mercer: Now you are there, you have an established business and guess what? Who wants back in? The guy who was there before.

Mr. Deluce: Odd, is it not?

Senator Mercer: Surprise, surprise. They now have one route from Montreal to Toronto's city centre. I know they will want more — they want to get back into the Toronto-Ottawa business, et cetera — but who controls that aspect of the landing rights at Billy Bishop?

Mr. Deluce: It is controlled by the Toronto Port Authority. It is a slot-constrained airport, which means there are a finite number of slots that can be operated. Right now, that number is set at 202 slots — a slot representing either a landing or a takeoff.

Air Canada has acquired 30 slots. Continental was given 16 slots and chose not to use them. Porter now has 172 of the 202 slots. The Toronto Port Authority, to ensure they have a fair process, uses an international slot coordinator, ACL, from London, U.K., who does slot coordination around the world. They have come up with a process that generally is accepted worldwide as being a reasonable way of allocating slots, depending on demand and depending on criteria that they work with the port authority to establish.

Senator Boisvenu: I want to know how you describe your relationship with companies like Air Canada. It seems a bit odd. How would you describe your relationship with other companies?

Mr. Deluce: Are you thinking specifically about our relationship with Air Canada? It is highly competitive. Air Canada is a tenant at Toronto City Airport and is housed in a terminal owned by a related company. When they were preparing to come in, they were concerned about whether or not they would be treated fairly as a tenant and as an airline at that airport. I think the port authority went out of their way to ensure there was a fair process for slot allocation. In the case of Porter — through City Centre Terminal Corp. — we made sure from the beginning there were absolutely no issues that Air Canada could come back to us on, claiming we were not being fair to them. They got the number one gate, are allowed into the lounge and are using the shuttle bus. We provide them with high-quality baggage service. They do their own check-ins. It is increasingly competitive, but I think it is a more respectful relationship than initially existed. In the initial stages, they were sure they were going to come in and drive us out in short order. We get this anecdotally and second-hand, but they were surprised of the loyalty of the Porter customer base. We appreciate that loyalty because we worked hard at it over the last five years. We have worked particularly hard to distinguish ourselves from other carriers who were there.

We do not doubt that if they could knock us out of there, they would do it in a flash. Never for a moment do we put ourselves on autopilot, go to sleep or put our feet up in the hammock. We realize we are only as good as our last flight. We have to keep working at it and keep vigilant in terms of their strategy. Right now there is a high degree of competition on the triangle. Some of it is fed by competition between WestJet and Air Canada from Pearson, resulting in $45 fares. This is unheard of. We are being quite careful in terms of how we handle that relationship.

Senator Boisvenu: I am a rookie on the committee, so if my questions are too personal, you will have to excuse me.

The Chair: The chair will excuse you, too.

Senator Boisvenu: You seem to be a leader in decreasing ticket rates. The rate of decrease was very high at 60 per cent. Is that right?

Mr. Deluce: Typically, the moment we announce we are providing service in a new market, there are decreases in the lowest base fare by as much as 60 per cent, almost without exception. In the case of Sault Ste. Marie, the fare went from $296 down to $79, which is about a 73 per cent decrease in terms of ticket price. Suddenly, things get more competitive. It does not matter what place we go. We have announced service in Timmins commencing in the middle part of January. We were hearing reports from individuals that were being charged $1,250 each way for last-minute flights between Timmins and Toronto. I can guarantee you that once we are there, there will be no more $1,250 one- hour, one-way flights.

Senator Boisvenu: In 2009 you lost nearly $5 million. Is that right?

Mr. Deluce: In 2007 — less than a year after we commenced operation — we had a very high net income margin. We established profitability in less than a year, which is fairly unprecedented for an airline. From 2007 onward into 2008, 2009, even the mid-part of 2010, we were in arguably the worst economic downturn I have experienced. There was definitely a real downturn in business travel.

At the same time, we were committed to a high growth rate and taking a certain number of aircraft from Bombardier, which we continued to take. With the support of our board and loyal customers, we managed our growth. During the 2007 through to 2010 time period, we managed growth to ensure we had a presence at Toronto City Airport. We now occupy 85 per cent of the slots there. It was managed so when we got through that initial start-up period and came out of that downturn, we would not find ourselves being kneecapped by the major carriers — with them taking the balance of the slots that we had not used — and giving us the whopping of a lifetime. We were not managing for profit in 2008, 2009 and 2010. We were managing for growth. We were being careful to stay close to being break-even. In 2011, we slowed down our rate of increase from what was averaging almost 80 per cent compound annual growth to a very modest 25 per cent, which most people would consider quite high. It is very manageable and is resulting in an increase in load factors. For about four months in a row, we ran in or around that 68 per cent load factor with a break-even of 50. In 2011, we are highly profitable. In 2012 and beyond, we expect to be able to maintain that. We are through the vulnerable growth time period and have enough critical mass, particularly at Toronto City Airport. Our main competitor, Air Canada, cannot come along and seize the remainder of the slots, throw a bunch of Dash 8-100s at us and knock us out. Now we have to stay focused on maintaining the high level of customer service and expanding modestly into good markets that present opportunities, including Timmins, Burlington, Vermont and other destinations.

Senator Boisvenu: Having such fast decreases in rate, could it be considered dumping?

Mr. Deluce: No, I do not think so. Although we had a lot of excess capacity during the 2008 to 2010 time period, we were committed to a certain rollout and delivery stream of airplanes from Bombardier. We had to think carefully about whether we embarked on our growth path, especially given the economy and the downturn. We also knew the demand was there, and the motto was working. Even with all that additional capacity we put into the market during that time period, our average load factor only went down two or three points.

Since that time it has grown because we have slowed down the expansion. In fact, our RPMs, our revenue passenger miles, have far exceeded the additional ASMs, or available seat miles, that we have been adding, so the load factor has naturally come up.

We certainly were not doing any dumping. It was all part of a very well thought through business plan that was quite public, at least among the investment community and with those who were doing business with us five years prior to that actually happening. It was one of those steady-as-she-goes moves. There was a temptation to pull back and to slow down while that was all happening, but we stayed the course and we are glad we did.

Senator Boisvenu: Congratulations on your success.

Senator Merchant: I too want to congratulate you on your success. You have a big smile so I know that you are very happy.

First is a simple question: Do you own the island?

Mr. Deluce: No.

Senator Merchant: I come from Regina, and the airport is just across the highway from housing. They are developing a new subdivision right by the airport, and they claim that jets are now much quieter and that this is all right; this is how they got the permission to build.

You are right in the city of Toronto. Would you like to be able to fly jets out of the island? Your planes are a little noisy. I know WestJet, for instance, has planes that people find very comfortable, and sometimes their flights are very short also, maybe an hour.

Are there some smaller, quieter jets, and would you like to be able to fly jets in and out of the island? That is my first question.

Mr. Deluce: First, there is a tripartite agreement in place that prohibits jets flying from Toronto City Airport. It is an agreement between the federal government, the City of Toronto and the Toronto Port Authority. There is not any opportunity to be able to fly jets when that agreement is in place. That is not something on our radar screen.

We do like the Bombardier Q400. There are still lots of opportunities for expansion within our immediate regional area. When we cap out or when we top out at Toronto City Airport, we will focus more on other key cities, particularly Ottawa, Montreal and Halifax, in terms of developing more routes from those cities. I think we will remain focused on our present strategy of operating the very fuel-efficient, environmentally friendly, quiet Q400 and stay in those regional markets that are best served by a turboprop airplane.

Senator Merchant: Right now, there is a ferry that operates to bring passengers back and forth. Do you pay for that cost? Do you pay the master? That must be an extra expense. Who is responsible for paying for that service?

Mr. Deluce: Are you talking about the ferry itself?

Senator Merchant: Yes.

Mr. Deluce: Indirectly, we pay. The Toronto Port Authority is responsible for the expense, but the Toronto Port Authority recovers all of its costs plus, in two ways. The first is with an airport improvement fee that largely is in place to deal with infrastructure improvements, including those ferry improvements — the ferry terminals and some other equipment that they need. Those capital items are dealt with through a $20 improvement fee.

The second way in which they recover their costs, which relates to things like operating the ferry, is with the landing fees. It is a simple formula with them. They take their total expenses and the total number of flights by all the carriers that are there and they do the math; that is what drives the landing fees.

Particularly now with the critical mass we have, and with Air Canada also in there, they will always exceed their expenses. They just have to adjust their landing fees up or down. Indirectly, I guess the answer is that our passengers are paying for the ferry operation and for any of those capital improvements.

Senator Merchant: I suppose it would be the same if they were to build a bridge. There still would be costs and that would be passed on to the passengers. For the passengers, would that be a less expensive way to go in the long run?

Mr. Deluce: The bridge was considered carefully; it was approved, and then subsequently unapproved — we all know the story — back five-plus years ago. What is being considered right now, and which we are hopeful we will proceed with, is an under-channel, pedestrian-only tunnel with moving walkways in both directions and the ability to get across in a couple minutes or less. We are already collecting about $5; the airport improvement fee was $15 and it went to $20. About $5 of the $20 is going toward the tunnel, which we expect will commence construction in the early part of 2012. It is being paid for by passengers.

Senator Cochrane: You talked about the airport slots that you have. You have 172 and Air Canada has 30. Please explain to us how this whole process works. What considerations are looked at in awarding slots to various airlines?

Mr. Deluce: The international slot coordinator — in this case, ACL — acting under contract with the Toronto Port Authority, considers whether or not the carrier intends to use it for new routes, whether any additional slots that are awarded are being used for domestic or transborder, whether it is more capacity on top of already existing capacity, or whether it is to destinations that do not have service from downtown Toronto City Airport. All of those things are factored in.

They have set out sort of a priority in terms of how they want carriers to use those slots. You can go along with that or you can bid to use them in a different way. You can be innovative if you like, but they can award the slots based on the priorities that they have set.

I think that is primarily why we acquired all 16 of the slots that were given back by Continental. We indicated we were going to provide new service, both transborder and domestic, to locations that were not already served. I think that the fact that the other carrier did not get any new slots — and I am guessing here — probably means that they proposed to use the 16 slots to destinations that were already being very well served through Toronto City Airport. I think the airport and the airport slot coordinator have the ability to decide whether that is in the best long-term interests of the airport or not.

Senator Cochrane: So the 30 slots go to Air Canada —

Mr. Deluce: That gives them 15 return flights a day, which they are using totally on the Montreal-Toronto route.

Senator Cochrane: Is there another airline that has slots as well?

Mr. Deluce: Continental was given 16 and it gave them back. For some reason, they decided they would not operate; and it is those 16 slots that were given out, or effectively tendered through RFPs, which we more recently acquired and which we will use to introduce new services in the early part of 2012.

Senator Cochrane: Air Canada did not want them?

Mr. Deluce: I would not say that. I would think that they did want them, but my guess is that they probably wanted to use them on either New York or Ottawa routes that would be directly against us, despite the fact that they have heavy utilization of slots from Pearson to both of those destinations presently. They probably wanted to be able to service both of those destinations from Toronto City Airport, with the ongoing intention of knocking us out if they could, particularly if they could mount predatory pricing on more than one destination at a time from that airport.

Senator Cochrane: Is there much competition with the other airlines that are there in terms of pricing?

Mr. Deluce: It is highly competitive. Today, from Toronto City Airport, the lowest based pricing is hitting at in or around the $45 mark each direction, to either Ottawa or Montreal. That is pretty competitive. I certainly cannot remember those prices existing before we were in that marketplace.

Senator Cochrane: Is it the same for other destinations, longer destinations?

Mr. Deluce: There is some very attractive pricing out there. The fact that someone is not operating from Toronto City Airport, to us, does not make any difference. If they are operating from Pearson, we still find that the pricing is highly competitive to every one of the destinations that we fly to. No matter whether you are going to Moncton, St. John's, Thunder Bay, Sault Ste. Marie or Windsor, you are getting this sort of highly competitive pricing regime that exists on all those routes. The thing that puts us in good stead, I guess, is the fact that we operate a fairly efficient model and we have this very low break-even load factor and we have some pretty loyal customers who are contributing to an average load factor that is well above that break-even.

Senator Cochrane: Tell me about all the airport fees. Do you pay the exact same airport fees that Air Canada pays?

Mr. Deluce: Yes, we do.

Senator Cochrane: All of them the same?

Mr. Deluce: From every airport that we operate we are paying the same fees.

Senator Eaton: Mr. Deluce, welcome. We have heard a lot about labour costs in our study. Are your labour costs the same as Air Canada's?

Mr. Deluce: Probably not. With the exception of a group here in Ottawa, where we have about 50 station agents who are unionized or certified by CUPE, we would be totally non-unionized throughout now, which probably means that, in most circumstances, our base rates are the same or higher. We generally model ourselves off where Jazz is. Jazz is highly unionized. We try to pay a rate that is about 2 per cent higher than they pay. We probably have more flexibility in terms of some of the work rules and other things, and definitely have a more productive workforce, so that does give us an advantage; no question about that.

Senator Eaton: Do you have defined union pensions?

Mr. Deluce: No, we do not.

Senator Eaton: I should not say ``union.'' Do you have defined pensions in your benefit packages?

Mr. Deluce: No, we do not. What we have introduced progressively is a matching RRSP DPSP vehicle, where the individual will put 1, 2, 3, right up to 5 per cent of their earnings into a pension vehicle and we will match that number. That is our counterpart, if you will, to the defined pension program that others, including some parts of Air Canada, would use.

Senator Eaton: Yes. Other airlines, eat your heart out, with your labour relations.

How do you see Porter Airlines developing long term?

Mr. Deluce: We are at 24 airplanes today. In the next few weeks we take two more, which will take us to 26. We have a few short-term destinations that we have identified. We will probably add one or two more U.S. destinations in the spring. We are quite content, at this particular stage of our growth, to focus on the short-haul regional. I think, as we develop, we will be inclined toward ensuring we maximize the opportunity out of Toronto City Airport so we do not lose our slot advantage there.

Second, we will probably, in order of priority, add more frequency to existing routes any time we can justify that additional frequency. Then we will add additional routes beyond that.

As a third or fourth priority, we will take places like Ottawa and Montreal and start to double-back into New York, Boston and perhaps Washington, once we are accessing that from Toronto as well. That will probably be a logical thing.

That takes us out there a fair piece. We will stay with the Q400. It is a great aircraft with some Canadian technology, and within the foreseeable future it will serve us well.

We are concentrated in the northeast of Canada and the United States. It is not to say we will not wander beyond that at some point in time but, at this early stage, I think we are best to stay as focused as possible and not be too led astray by all the other opportunities that present themselves. You can easily go offside with an airline, and we intend to stay focused.

[Translation]

Senator Verner: Welcome. My questions pertain more to regional air transportation.

Last year, I read in a Quebec City area newspaper that a study published for the Quebec Department of Transport pertaining to transportation in the area east of Quebec and, by extension, a little bit of the Maritimes as well, found that the biggest complaint was poor scheduling and fares that were too high.

If you had to make suggestions or identify measures or factors that the committee could study in order to, at the very least, support the expansion of regional transportation as a development driver for local communities, what factors or possibilities would you have us examine more closely to help smaller communities benefit from the economic driver of air transportation?

[English]

Mr. Deluce: Thank you for the question. I do not think that the situation would be a lot different in some of the smaller communities within Quebec than they are within places such as in Northern Ontario: the Timmins and Sault Ste. Maries and Sudburys. I think that largely, if the environment is such that there is an opportunity for competition, if the community wants there to be another carrier and is encouraging that carrier to come in, they all have their own ways of doing that. Sometimes they will contribute toward an early promotional sort of campaign or something along that line. It is not unusual.

If they want someone to come in and they are tired of only having one carrier, then it really is up to the community to make that known and identify someone they think has the wherewithal, expertise and right sort of equipment to be able to service that community.

We are finding that the communities themselves are being very proactive these days. There was a point in time when no one wanted to venture forth and try to bring in another carrier for fear of losing the existing carrier. The fact of the matter, though, is that in all of those communities that we have gone into, Air Canada has not decreased their level of service one bit.

They are still providing the same number of frequencies; and in many cases, as a result of the fares coming down and it being a more competitive product, the stimulation in that marketplace has been as much as 80 per cent. A good example of that would be Sault Ste. Marie or Windsor, which already had a carrier there with five or six return flights a day. Porter comes in, offers three or four flights with a slightly bigger airplane — a 70-seater versus a 37-seat airplane — and the overall number of passengers increases.

The city is further ahead and everyone is a winner in that sort of situation. You need that competitive environment and you need the community to reach out and look for another carrier. We have one example in Ontario where we probably would not mind serving North Bay, but we have had no real indication from North Bay that they want another carrier there other than Air Canada.

If that is their view on it, and there are no early indications that we might get some ridership, there is no point in our going in there. However, if a community is feeling like they have been abused from an economic point of view, and wants someone else there and they reach out, then I think there are carriers out there — Porter for sure and others — who are happy to take the opportunity in a measured and controlled way.

We have probably 35 communities right now that have reached out to us. We will not get to them all and we certainly will not be able to cover too many at a time, but we will get to a fair number of those places over time if the situation is right.

I cannot offer any other stimulative sorts of suggestions because I think free enterprise needs to do what free enterprise is best at doing. However, I think the individual airports can contribute a lot toward it happening in the communities themselves if they want it to happen.

Senator MacDonald: Mr. Deluce, I received your package in the mail as a frequent flyer, so thank you and congratulations on your five-year anniversary.

I have a couple of questions. First, you were talking about your participation being encouraged by regional airports. I am a frequent flyer into Sydney Airport in Halifax. Air Canada Jazz has about seven flights a day, four one way and three the other. There is also one flight a day to Toronto on WestJet. The flights on the Dash 8s are very expensive for a short, 45-minute run. If you are going there late and need a ticket, you are looking at $700 or $800 one way.

Has that airport expressed any interest to Porter of setting up service? If so, I would like to know about it.

Also, understanding that it is always difficult for people to run other people's businesses and think they know better, I cannot understand why Porter would not see an opportunity there with the high rates that are presently there, and you fly into St. John's, Halifax and Moncton. I am curious why that is not on your route.

Mr. Deluce: We do not normally comment about which airports have approached us, but in the case of Sydney, they have been public about the fact that they have spoken with us. Yes, we have had discussion with them and yes, we are interested. I think it is well served from a frequency point of view, but I think where it falls apart is that the rates are way higher than they would normally be on a route that is really 45 minutes or less.

Will we get there? There is a pretty good chance. When? I cannot tell you at this point. We know what our delivery stream is and what our financial capabilities are. We know these are all $30-million-plus airplanes, so we can only afford to get so many at a time.

With the next two that we will take in November, that will be six airplanes in this year. This is a year that we have slowed down our growth, but it is still a good number of aircraft. So far, they have all been deployed to destinations where we perceived the opportunity to be better from an economic point of view. However, we are still very interested in Sydney and we have told them that for sure.

Senator MacDonald: I guess that begs the question: In terms of the federal impediments to what you are trying to do out there in terms of market share and growth, the areas that the federal government has control over, how does it affect your evolution and your growth in terms of expansion? Are we that good?

Mr. Deluce: We do not have any major issues. Approximately half of our flights go from a secondary airport, in the form of Toronto City Airport. That was deliberate and strategic on our part. We wanted to be able to emphasize the speed, convenience and service aspects, and we have been able to bring that about by concentrating on that airport.

On the other hand, we are into a good number of fair-sized airports — Ottawa, Montreal, Halifax, Thunder Bay and elsewhere, and a few on the U.S. side. We are aware of the higher costs associated with operating from those centres versus some of the smaller centres that we operate from. If anything could be done there that ultimately would bring some of those higher operating costs down, would it have an effect on a carrier's ability to operate from there? Probably. Would it have an effect on us? Yes. That is one thing I would comment on.

We do not get leakage to the Niagaras and the Buffalos and the areas south of Montreal or anything like that. We do not particularly get leakage there, so that is not a real issue. I do not have any other specific suggestions.

There are a lot of different charges that are assessed. Particularly given the fact that we operate a transborder into the U.S., our passengers note that it costs a lot more to fly to New York from Toronto than it does to fly from New York to Toronto, primarily because when you apply the charges from one end versus the charges from the other end onto our base fare, there is quite a difference in the price.

That is sort of a fact of life, I guess. Can anything be done there? I do not have a good feel for that. I do not think I am in a position to influence that one.

On the other hand, it is also a factor of when those charges are being collected, are they being applied to aviation- related reinvestment? I would like to think that they are. I am not entirely convinced that all the dollars that are collected go back into the aviation pool. If they are not all going back in, it probably would be an improvement if they were being fed back into the system that they come from versus being shared in a wider pool.

Beyond those suggestions, I am not sure that I can offer anything very constructive.

Senator Zimmer: Sir, I always wanted to meet you because I consider you a pioneer adventurer with vision, and really Canada's version of Sir Richard Branson.

I want to continue the discussion a little further. Senators opposite had asked about your future plans, and I see that Air Canada has cancelled some plans to go from Thunder Bay to Ottawa, and London to Calgary. In the 1800s, they used to say, ``Go west, young man, go west.''

Beyond what you have answered now, do you have any plans to go to the west? I know you will have to change your equipment and aircraft, but in your long-term vision, are you planning on going further west?

Mr. Deluce: We are very focused on the regional short-haul destinations that are within easy reach of the Q400. Definitely our first priority is Toronto City Airport, for the reasons I have mentioned. I think anchoring it down and ensuring that we did not get knocked out of there by someone else who came along and sort of gobbled up any of the slots that became available there, that has been key to our being able to have a good, solid base from which to operate.

When we look beyond that, I think the focus cities of Ottawa, Montreal and Halifax are where our best opportunities lie.

Having said that, on our initial business plan we originally contemplated operating from Toronto to another 16 or 17 destinations. We are actually beyond that now, because we are offering service to 18. In our original business plan, we never did have Halifax, St. John's or Moncton.

We have been able to take advantage of some opportunities that have come along. In the case of Atlantic Canada, what precipitated our focusing more intently there was the fact that CanJet, in fact, decided to withdraw their scheduled services and to concentrate on the charter market. That gave us the opportunity to move into Halifax and then subsequently into St. John's and Moncton.

The airplane we presently have is capable of going to Winnipeg and Halifax non-stop. We do that at certain times of the year, at least in the case of Halifax. Could we get to Winnipeg and beyond? Yes. Do we have enough on our plate right now to stay gainfully employed and focused? I think probably we are best to do that with a close watch on that bottom line and ensuring that we stay in a highly profitable mode. When I say ``highly profitable,'' I mean definitely a profitable mode, because without that we would not continue to exist. We are very focused on being sustainable long term.

I will not rule out the possibility of expansion out of Northeastern Ontario and beyond Q400s at some point in time, but I would say that in the shorter term we will stay quite focused on the bread and butter that we have developed here in that niche market, which seems to be working well.

Senator Zimmer: Just make it to Winnipeg. I am from Winnipeg.

Mr. Deluce: You have a nice, new terminal. It is not unknown that we have talked to Winnipeg before. Again, I would not normally divulge where we have our conversations, but the Winnipeg airport has spoken with us previously. Winnipeg is a place where we previously have had some involvement, so it does appeal to us, and it is not that far beyond Thunder Bay.

Senator Zimmer: In 2003 you tried to build a bridge and city council cancelled it. You talk about building a tunnel. The complaint from the residents was the noise, pollution and safety. Would you not have the same problem in building a tunnel? The second part to that question: Is building a tunnel comparable to the cost of building a bridge?

Mr. Deluce: The environmental assessment on the tunnel was completed by the Toronto Port Authority, and in fact any of the issues or concerns have been addressed or dealt with, so I do not think there is any real difficulty from that point of view.

In some respects it is a bit of an elegant solution, because if there were some on the waterfront — including some boaters and whatnot, but definitely residents on the waterfront — who were opposed to a structure being built on the waterfront, then having one that is out of sight and underneath the water is a bit of an elegant way of dealing with it. It is hard to complain about something that you cannot even see. I think that the way in which that is going right now is a good solution.

As to the second part of your question, a firm contract had been given out for the bridge. It was to be a $22 million expenditure back in 2003. I am not a betting individual by any means, but if I was, I would be thinking that that tunnel is probably two and a half or three times what the bridge was going to be.

The fact that there are as many passengers now using the airport as there are presently, and the fact that a modest AIF, or airport improvement fee, will actually pay for it means that even with upwards to a $60 million tunnel, that it is very viable, given the amount of traffic that is now using the airport. I think it is quite doable.

Senator Zimmer: The water containers that you have on your craft are very practical. You see ones nowadays that are floppy. If you ever market that in the industry, I will buy 10 cases a month.

Senator Greene: Thank you very much for coming. As you know, the purpose of this committee is to make recommendations for changes in aviation policy in Canada. We have heard from Jazz, Air Canada and WestJet, and they all want changes; they all came with a long list. You have not really come forward with anything, and it occurs to me that you must be very happy about the current policy, and that maybe the reason for that is because your business model is perfect for the current aviation system we have, and maybe we really should have four or five Porters around the country.

You fly into the U.S. a lot, which has a vastly different aviation system than we have, so you have an opportunity to experience that. Could you comment on whether you are as happy as you appear to be with aviation policy? Are there changes? If there are, could you comment on the American model versus what we do here?

Mr. Deluce: I think I offered a couple of suggestions, maybe not too strongly. First, are we happy with the way things are going? Absolutely. We believe that our model is right, and the expectation level on the part of passengers today supports something that offers a higher level of service than perhaps others have been used to.

They say that imitation is a form of flattery. In the case of Air Canada and WestJet, particularly on the triangle, they are offering passengers today what many refer to as ``Porter perks.'' Some of these Porter perks cost nothing. Whether it is leather seats, a little extra legroom, water, a little premium snack, or access to a lounge, those things, in the total scheme of things, are not large items. However, being treated as if you actually count and you are wanted within a system is what really is making quite a difference. It probably accounts for the very loyal customer base that we have been developing.

I do not really have too many suggestions. I think you need to be mindful that some of the larger airports do not get carried away and build Taj Mahals or anything that will be too expensive. Even though you might not directly control that, places like Pearson and elsewhere need to be watched.

The one other thing is the difference in costs between the U.S. and Canada. I think you need to keep track of what those charges are that are different when you go one direction versus when you are coming the other direction.

We are very committed to our transborder network. I do not find doing business in the U.S. much different than Canada. It is a bit tougher in a place like Newark, which is quite a huge airport. They have things like slot controls. As much as we would like to be providing 14 or 15 return flights a day to Newark from Toronto City Airport, presently we are only able to provide 11 return flights. However, we will work through that eventually. We recognize that New York is a very congested area and there are some constraints there we do not run into elsewhere.

On the Canadian side, once we got through that initial incubation period where everyone was waiting for us to disappear and was betting that we would not last longer than a few months or a year, I think we have been treated quite respectfully and enthusiastically in terms of what we have been offering. I think we have been well received anywhere we have gone. We would hope that would continue and we will keep working at that one airport at a time.

Senator Martin: I have been making a list of Porter advantages from your answers. You talked about your fuel- efficient jets, which then leads to the break-even load factor of approximately 50 per cent; and that you do pay your employees a competitive rate, but there is an efficient model in place. You talk about the Porter perks — making everyone feel like they are welcomed and that they are special.

In addition to the list that I made here, is there anything else that you want to add to this Porter advantage?

I think it is a great model. On the question of going west, I am from Vancouver, so I have not flown Porter often, but I did fly a few times into Toronto. The concept of a Porter West, that you would be located or anchored somewhere in the West and just replicate this model to be able to service other parts of Canada, is that something that you are seriously considering for the future?

Mr. Deluce: In terms of other advantages, you have hit most of them quite well. The lounges are popular. We have them in Ottawa and two in Toronto, to serve both domestic and transborder destinations. The lounges are well received; and the fact that you can access the lounges no matter what class of ticket you have is particularly well received.

At least at the Toronto end, that shuttle bus service was not well used in the initial stages. Now we probably need more buses, and maybe even bigger ones; it is well utilized.

Regarding the on-board service, we know that pretty much everybody, at least on the routes where they are directly competing with us, are offering those Porter perks as well. That is sort of a form of flattery, for sure, but I do not know that we have a big advantage there.

In terms of whether we could go west, we are very concentrated on the north-eastern part of Canada and the United States. Is there an opportunity out west to do something similar? I think there probably is. There are certainly enough bigger centres there that could take a 70-seat airline. Moving from Winnipeg on further west, right to Vancouver and Victoria and some of the places that are north from those areas, there is an opportunity. It is just a question of what you can do reasonably, given your resources and the desire to always stay in a profitable mode.

Senator Martin: My final question is sort of connected to what you just answered, that we are looking at Porter today but if we look at the whole industry and we want Canada to be more competitive, especially with our U.S. competitors and looking at the North American market and what could develop there, what role do you see for Canadian airlines to come together? What would you see as being important to transition to the future in order to be more competitive?

One of the things I was thinking, although it is at a cost of $30 million, is going to more fuel-efficient jets; that is a key for Porter. However, as a whole Canadian market, do you see a role for the Canadian airlines and companies like yours and the role that you may play in helping Canada become more competitive over all?

Mr. Deluce: I think utilizing the technology as it becomes available is important. The Q400 is state of the art. Initially we committed to 10 firm and 10 option aircraft. When we got to the 20, we ordered another 10. We will have taken delivery of 26 of those by the third week in November. There are four options left and we are likely to add more. I think companies have to embrace technology to stay competitive, whether that is with jets or with turboprops, whatever is the best aircraft for their routes.

As far as Canadian carriers go, they do still rank fairly well on an international basis. I think there are opportunities for them there. I am not particularly suggesting that Porter would be looking internationally. We have a good amount of room for expansion transborder and domestically. That is where we are focused.

The Chair: I have three senators who want to go for a second round. I would ask them to ask their questions and Mr. Deluce could answer their questions at the end, if everyone agrees.

[Translation]

Senator Boisvenu: From 2005 to 2010, surprising things happened: service quality steadily declined, passenger space became more and more limited — one feels as though they are in an ant hill —, meals and alcohol are no longer served, additional fees have to be paid for extra bags, and fares have gone up.

How is it that your model is not being copied? On the contrary, other companies are doing the opposite. You are reducing fares and maintaining quality service; I am surprised that other airlines are not following your business model.

[English]

Senator Merchant: I am asking you this question because during our study I think the thing that has gripped us is that the user-pay system seems to be out of control. You are astute and a proven success in the industry. What we have here is taxation without responsibility. I am talking about what we pay on top of the basic fare that you charge. You talk about $45 fares, but by the time the traveller pays it is not $45.

In any other circumstance I think people would be marching down to city hall or government buildings to protest the high taxes without any responsibility by the airport authorities, because they really are not answerable to anyone. I am wondering what your thoughts are on that.

Senator Mercer: Both Senator Zimmer and Senator Martin have talked about Porter moving west. One of the questions that perhaps need to be asked is what the range is of the Q400.

Second, as you already fly to Myrtle Beach, it is not a stretch to think that maybe, since you are staying on the east coast mainly, that Florida is not too far away, and that is a favourite destination of Canadians in the wintertime. Is that in your future?

The Chair: Mr. Deluce, this will be your opportunity to answer the three questions, and maybe with a concluding statement.

Mr. Deluce: I will just try to do them in the order that I heard them, starting with Senator Boisvenu.

The question is why there are not others. I do not really have an answer on that. It is not an easy thing today to go and convince the investment community that the airline industry is a good bet. If you have the good fortune of having been in the industry for a bit and having had a good track record, and if your plan is sound, I think you have at least a couple of things going for you.

In our particular instance, when we went to the private investment market back in 2005, we were fortunate enough to have more appetite than we actually could bring on board. Part of it was our reputation, part of it was a plan, part of it was the new technology and part of it was the unique environment. I cannot really comment on why others are not doing what we are.

Senator Boisvenu: It is a tricky question.

Mr. Deluce: It is one of those things where, you know the saying, there are all kinds of them out there, it is not for the faint of heart, and how do you make $1 million in the airline business? You start off with $10 million, or whatever.

It is a bit of a tricky business, and you certainly need a good plan. At the same time, however, you need to have some flexibility built in so if parameters change or other opportunities come along, such as the Halifax, the St. John's and the Moncton, which were never part of the original plan, that you have the ability to shift gears a bit and still take advantage of it.

Even though we did not want all that time to plan, we were ready to go in 2003, when the bridge was going ahead, and we were given another couple of years of forced planning time to rethink what we were doing and to bring on board new investors and a new management team. We probably had a little more time for planning than most would have when deciding to go into the business. Maybe that has been helpful in the long run.

Just moving to Senator Merchant's question on cost containment, it is a good question, and one I am not sure that I have again a definitive answer on. Today we are running this fifth birthday, 50 per cent off sale. We have only had a 50 per cent off sale on one other occasion, but we ran one this time because it was the right time, it was stimulative and it was a special occasion. In a controlled way we are doing it without it being detrimental to our other revenue.

There are a good number of passengers who are highly cognizant of the fact that we can take them from Ottawa to Toronto or from Montreal to Toronto for $45. This is one way. However, the actual taxes, charges and other fees amount to more than our base fare. They question how that could ever be. Even if we gave it to them for $1, those same charges would still be there. When you get to a certain level of charge, the actual extras still do not decrease. They are there, and that does bring out questions from customers as to how that could possibly be.

There is, as I mentioned, a difference if you are going from Toronto to Boston as opposed to going from Boston to Toronto. The way the ticket pricing and the way it is displayed is laid out, passengers are quite cognizant of the fact that there are heavier charges in one direction than the other.

I do not have the answer in terms of how you contain those or what you do or how you redirect the funds. Canada is a vastly different country than the U.S. with a much smaller travelling public. I think it does take a little bit of an effort all the way around to make that formula balanced and workable. Again, I am not too good with the suggestions. We sort of concentrate on what we are doing and try to do our job there, but I do not propose to know the answers in other areas.

The last remaining question really pertains to the range of the aircraft and how far you can go. The aircraft actually is capable of flying to most destinations in Florida, and could do a Winnipeg or a Halifax. We certainly do, without any difficulty, the Myrtle Beach, so we could be doing an Atlanta. Again, it is what do you do first, where is the largest demand, could you sustain that service year round and is it complementary to what we are already doing? We could do a Burlington, Vermont, on a seasonal basis, and it is quite complementary to other services we have. Could we mount a fairly heavy Florida program, would that take away from something else? Those are some of the considerations.

My guess is at some point in time there will be an opportunity to serve some places a little further out than the Myrtle Beaches and the Halifaxes and the Thunder Bays and Chicagos, but I do not think we are quite there yet. The airplane will go to Florida, there is no question. We have done charters of some distance. We quoted, not long ago, on a Tampa charter. I suspect on a charter basis we will do some of those flights before we progress to doing anything on a scheduled basis.

The Chair: Mr. Deluce, I want to thank you very much. I remind members that on Wednesday night we are receiving Air Transat at 6:45. I would like the steering committee, if we can, to meet and see if we can go through our agenda.

Again, Mr. Deluce, thank you very much.

Mr. Deluce: Thank you very much for the opportunity to be here.

(The committee adjourned.)