I have family in Canada, and so often find myself flying from Boston to Toronto. There are two ways to fly: you can take Air Canada from Logan to Toronto’s International Airport a couple of times a day. Or, for the past 10 years, you can fly on a small turboprop operated by Porter Airlines from Logan to a small municipal airport located on an island in Toronto’s harbor.
Since it started flying in 2010, I’ve always preferred Porter because it’s a scrappy little airline that successfully disrupted the big guys by offering great service, friendly staff and easy airports. To me, the airline was always a textbook example of how small entrepreneurial companies that have a relentless focus on the customer can win.
Unfortunately, time hasn’t been kind to Porter. Porter’s an example of how easy it is for great companies to revert to the mean. Those of us in disruptive healthcare, which is a similarly service-focused business, should pay attention.
Porter’s story starts in 2006: Robert DeLuce, the current CEO of Porter, came up with a plan to begin regular flights to several Canadian (and later US) destinations. DeLuce is an airline guy, with experience working as an executive for several traditional Canadian airlines.
DeLuce raised C$125M in venture funding from Edgestone Capital Partners, from the investment arm of the provincial worker’s retirement fund, GE Asset Management and others.
Soon after, Porter purchased the assets of Toronto’s failing Island Airport. He wasted no time evicting Air Canada, which was running a limited service to Montreal, and then put real money into building a stylish new terminal.
Despite running less comfortable and slower aircraft than competitors (Porter is prohibited from flying jets to the downtown airport) it rapidly gained a cult following. Passengers loved the 50’s uniforms that the flight attendants wore. Employees smiled–a lot– and seemed to be delighted to be working at a scrappy airline that was doing things the right way.
The little airline earned a 4-star rating from Skytrax, and was rated the best small airline in the world by Conde Nast. They flew to more and more destinations. It was an extraordinary rise.
And, then, things began to come apart. The company tried to file an IPO in 2010, but after twice delaying the final deadline for the offering, and lowering its share price from between $6 and $7 per share to $5.50, Porter cancelled the IPO, claiming that market conditions were too poor. Investors were spooked because the airline was fighting on several fronts: it wanted to offer jet flights from the airport but was blocked by multiple municipal and interest groups. The federal government refused to expand the airport. In 2013 ground crews went on strike to protest conditions.
There was open speculation about the company’s burn rate: Wikipedia notes:
The media had openly speculated on the profitability of Porter as being a money-losing operation, as would be typical of a start-up. CEO Deluce had been asked by the media to provide information on the financial status of Porter, but declined. In its prospectus, the company outlined a loss of $4.6 million on revenues of $151 million for 2009. To be profitable, the airline needs to be filling 49.3% of its seats with paying customers. In 2009, the airline filled 41% of its seats, and in the first quarter of 2010, it filled 47%.
Canada’s Globe and Mail wrote:
Insiders have told The Globe and Mail that Porter is looking for a buyer as its original investors look for a way to cash out. The company, whose attempt at an initial public offering failed in 2010, has denied that it is up for sale. But with its high-stakes growth plan quashed, the airline is now much less attractive to any buyer. Porter’s expansion at its home base remains limited by the ban on jets and the caps placed on noise levels at Billy Bishop in a 1983 “tripartite agreement” between the city, the port authority that runs the airport and the federal government.
The real business pressures quickly became apparent to customers. Cost savings on infrastructure and revenue grabs became apparent.
First, the little things went away: free checked bags disappeared in 2013. Then the gap between Air Canada’s sophisticated online tools and Porter’s became clear (the entire ticketing system failed on an earlier trip I took, leaving me stranded in Toronto for 24 hours). Colleagues on foreign passports still can’t check in online, and have to wait in long lines to check in.
The airline staff soon became bag fascists, weighing every check-on bag to ensure it is under 19lb, and imposing a $20 fine if your bag is found to be too heavy at the gate. Through it all, staff smiles all but disappeared. Yesterday, I stood in a line of 50 people, all of us waiting to drop bags and check in. Here is what the check in looked like. If you look closely, you’ll see that there are exactly two desks open to serve roughly 50 people waiting to drop bags and check in. Seven desks were completely unstaffed.
45 minutes later, when we finally made it to the desk, I asked the agent what had happened. Why so few employees? What happened to the airline that used to care more? She shrugged. It’s busy Sundays and we had people “call out.” “It’ll be $75 for the bags…”
The lesson for those of us in investor backed disruptive service-focused businesses is clear:
1) No matter how fabulous your offering, if you can’t fill your business with customers, then you’re going to have a hard time covering the high fixed costs inherent to a service business.
2) There are particular dangers inherent to starting a disruptive business in a heavily regulated industry, or one that requires significant political good will.
3) If you your fundamental business model is unsustainable (ongoing losses, no viable growth) then your business is serious trouble. Investors are going want to get paid.
4) The cost-cutting and nickel-and-diming that you need to do to boost margins even a little as you try to “fix” your underlying business fundamentals destroys the customer experience. In a disruptive service business, the culture, people and little goodies are the entire brand. Once your employees are shrugging at your customers you’ve reached the point where your value to customers is no greater than that of the incumbents (and probably worse given the better resources available to the big guys).
It’s a great example of regression to the mean and a warning to all of us in the innovation economy.