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University of Waterloo

Practical Business Skills Lynn Gazzola ARBUS300

Practical Business Skills Lynn Gazzola

ARBUS300 University of Waterloo

Table of Contents Porter Airlines...................................................................................................................................5 Chipotle: Mexican Grill, Inc.: Food with Integrity.............................................................................19 Trader Joe's....................................................................................................................................33 Decorative Interiors Inc...................................................................................................................51 Russian River Brewing Company in 2016: Positioning Pliny the Younger Craft Beer for Growth.61

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PORTER AIRLINES1

Sabrina Pavri and Professor Sayan Chatterjee wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2010, Richard Ivey School of Business Foundation

Version: (A) 2010-05-14

Since its inception, Porter Airlines had successfully navigated the first 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, traffic 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 500-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 27 kilometres (km) northwest of downtown Toronto. It was accessible by car, taxi/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 1.5 hours in rush-hour traffic). It was Canada’s busiest airport, handling 32.3 million passengers in 2008 (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 11,120 feet in length, and could therefore accommodate all types of turboprop and jet planes

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This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Porter Airlines or any of its employees.

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For use only in the course Practical Business Skills at University of Waterloo taught by Lynn Gazzola from September 08, 2020 to December 31, 2020. Use outside these parameters is a copyright violation.

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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 off but became a partner through a capacity purchase agreement whereby Air Canada was responsible for sales and marketing and contracted Jazz for flight operations). Founded in 1936 as the Commonwealth’s flag carrier, Air Canada was, with a fleet 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 Dash-8 turboprop planes. Together, the airline and its subsidiaries operated more than 1,370 flights per day to 171 destinations worldwide. Following deregulation of the airline industry in the early 1980s, Air Canada had suffered from low profitability despite growth of operations and the takeover of multiple smaller Canadian airlines. Operating losses grew due to debt incurred during the modernization of its fleet, 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.3 Lack of competition had kept prices high for Canadian travelers (e.g. an unrestricted Y-class fare roundtrip from Toronto to New York on Air Canada cost more than Cdn$1,2004), and Air Canada and other fullservice carriers dominated the short-haul 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 long-standing 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 flood the market with excess seat capacity, both of which it had used in the past to sabotage competitors. Its predatory practices, used against smaller competitors without sustainable competitive advantages, had proved to be extremely successful in driving other competition from the market.6 The Toronto City Centre Airport (TCCA), renamed the Billy Bishop Toronto City Airport in February of 2010, was a small airport located on the Toronto Islands three kilometres south of downtown Toronto in Lake Ontario. Originally opened to aviation in 1939, it was originally used for Air Force training and was opened to civil aviation in 1984. The Toronto Island 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 of the 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 check-in and security was about half what it was at Pearson, averaging about 20 minutes. The Island Airport was a short (five minute) ferry ride from a pier located approximately 10 minutes from downtown Toronto (King Street and Bay Street), and five minutes from Union train station, and ferry service was complimentary for passengers. It had three runways ranging from 2,780 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 2

www.gtaa.com/en/home, www.ctv.ca/servlet/ArticleNews/story/CTVNews/20051115/pearson_fees_051115/20051115?hub=TopStories, accessed May 9, 2010. 3 www.fundinguniverse.com/company-histories/Air-Canada-Company-History.html, accessed November 19, 2009. 4 www.aircanada.com/en/us/home.html, accessed November 19, 2009. 5 www.aircanada.com/en/travelinfo/airport/codeshare.html, accessed November 19, 2009. 6 www.bureaudelaconcurrence.gc.ca/eic/site/cb-bc.nsf/eng/00589.html, accessed November 19, 2009.

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For use only in the course Practical Business Skills at University of Waterloo taught by Lynn Gazzola from September 08, 2020 to December 31, 2020. Use outside these parameters is a copyright violation.

regardless of size and weight. Due to terminal renovations that had been in progress since the late 1990s, the landing rights at Pearson in 2010 were purported to be the most expensive in the world.2

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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).7 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.8 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.9 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. 7

www.torontoport.com/airport.asp, accessed November 19, 2009. Shirley Won, “City Express starts daily Montreal-Toronto flights,” The Montreal Gazette, September 12, 1985, http://news.google.com/newspapers?nid=1946&dat=19850912&id=hn8xAAAAIBAJ&sjid=3qUFAAAAIBAJ&pg=4280,101128 8, accessed November 19, 2009. 9 Sandra Arnoult, “Big Fish, Small Pond — Toronto-based Porter Airlines thrives in its niche,” Toronto Air Transport World, October 2008, p.67, www.atwonline.com/magazine/article.html?articleID=2494, accessed November 19, 2009. 8

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— his own company).10 The amount of equity raised from the initial investors — estimated at approximately $125 million — was enough to see the company through its first 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.11 Armed with a significant amount of venture capital funding, a strong proposal and an experienced management team, Deluce pitched his idea to the TPA. With the TCCA facing bankruptcy,12 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 competitors13 — a key piece of strategy to protect the fledgling airline from Air Canada’s predatory practices. In an ultimately successful run for mayor in 2003, 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.14 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 efficiency. 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 (FBO) at the TCCA provided:14     

Esso Service Centre for refueling — Jet A1 and AvGas Computerized flight planning and meteorology station De-icing facilities Access to a wide variety of on-site aviation services (including on-site maintenance) Secure and economical hangarage and ramp availability

The suit was eventually settled for an estimated $35 million,15 and Porter Airlines began operations out of the TCCA alongside Air Canada Jazz in October 2006.

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“Airline Veteran Forming New Canadian Regional Carrier,” February 20, 2006, www.aviationtoday.com/regions/canada/4159.html, accessed November 19, 2009. 11 Arnoult, “Big Fish, Small Pond — Toronto-based Porter Airlines thrives in its niche,” October 2008, p.67. 12 Susan Pigg, Toronto Star, October 5, 2002, p. E1. 13 Arnoult, “Big Fish, Small Pond — Toronto-based Porter Airlines thrives in its niche,” October 2008, p.67. 14 James Cowan, “Airline suing Toronto for $505M over bridge,” The National Post, July 6, 2004, p. A7; CTV.ca, “Protests as Porter Airlines takes flight,” October 23, 2006, http://toronto.ctv.ca/servlet/an/local/CTVNews/20061023/island_airport_061023/20061023?hub=TorontoHome; CBC News, “Porter Airlines takes off despite protest,” October 23, 2006, www.cbc.ca/canada/ottawa/story/2006/10/23/porter-flight.html, accessed November 19, 2009. 14 www.flyporter.com/en/porter_fbo.aspx; www.flyporter.com/en/porter_fbo_services.aspx, accessed November 19, 2009. 15 Jennifer Lewington, “Ottawa pays $35-million to abort bridge,” The Globe and Mail, May 4, 2005, p. A1.

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Shortly after, Air Canada allowed its long-term lease on its terminal buildings to lapse, and continued its operations on a month-to-month lease. In February 2007, 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 flying out of the TCCA. PORTER MISSION

With a customer value proposition based on “convenience, speed and service,” Porter Airlines defined 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. Whether 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 check-in lines and unpredictable security lines. Gone are the things that stand in the way of a great flight. We’ve put years of research, planning and effort towards one goal: to become North America’s premium short-haul carrier. The result is an airline — and a travel experience — like no other.16 CITIES SERVED17

Starting off by offering daily flights to Ottawa, Porter gradually expanded both its flight schedule and destinations served, testing its model by expanding first within Canada (to include Montreal, Quebec 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 year-round service. Potential destinations were limited to cities within a 500-nm radius of Toronto (s...