You may not think about it when you fly, but real estate can be as valuable to airlines as the aircraft themselves. At the most popular airports, there are only so many gates and so many runways, meaning not every airline that wants in can operate flights.
Among the hottest pieces of airline real estate right now is the Billy Bishop Toronto City Airport because of its small size and proximity to the city of Toronto. But will plans from Porter Aviation Holdings, parent company of Porter Airlines, mean new opportunities for other carriers, or something else entirely?
The Canadian air travel market is dominated by two major players: Air Canada (TSX:AC.B) and WestJet Airlines (TSX:WJA) (OTC:WJAFF). But that hasn't stopped other carriers from trying to break into the market.
Porter Airlines is one of these carriers. Since its founding in 2006, Porter has remained significantly smaller than Air Canada and WestJet and has been looking for ways to expand. To do this, Porter is looking to raise capital, but after scrapping a planned initial public offering in 2010, citing market conditions, this start-up airline is looking at a new way to fund its growth.
Sell a passenger terminal?
Porter's latest approach to raising capital is somewhat unusual but not entirely unheard of. When companies with valuable real estate assets are looking to raise cash, sometimes they opt to sell the property and lease it back.
In Porter's case, its valuable asset is its passenger terminal at Billy Bishop Toronto City Airport. While the Toronto Port Authority owns the actual airport, Porter constructed and owns the passenger terminal.
Although specific figures have yet to be released, some people familiar with the matter are valuing the deal at around $500 million. Currently, RBC Capital Markets and Barclays Capital Canada are being tapped to lead up the potential sale leaseback deal.
Can new competitors break in?
Normally, having such a valuable aviation asset up for sale would bring a rush of airlines looking to buy. But Porter is probably looking for a different type of agreement whereby it can keep its dominant presence at Billy Bishop Airport, where it controls about 85% of the slots.
Since the slots at the airport were allocated by the Toronto Port Authority, Porter should be able to hold on to its position even if it sells the passenger terminal to raise capital. In discussing the terminal sale, Porter noted that it would not affect current operations. By saying that, the airline seems to be supporting the view that no flights will be canceled and hence no flight or slot reductions.
This should make it tougher for other airlines to grow their presences at this slot-restricted airport. Air Canada and WestJet have both pushed for more slots in the past, but Air Canada has been held to a small minority of slots and WestJet has been unable to get any slots.
In 2011, shortly after the merger between United Airlines and Continental Airlines that formed United Continental Holdings (NASDAQ:UAL), the U.S.-based airline voluntarily gave up 16 slots at Billy Bishop Airport, when the airline decided not to launch a new transborder venture. Although the air travel market has improved significantly since 2011, U.S.-based airlines have not aggressively pushed for slots at Billy Bishop, like their Canadian counterparts.
Instead of selling slots that would probably appeal to Air Canada and WestJet, Porter is executing a financial maneuver to raise capital and is looking for large fund investors who are interested. So the terminal is less likely to be purchased by another airline and more likely to be acquired by an investment fund.
The bottom line
For an airline, Porter is looking to raise capital through unconventional means. Instead of pursuing an IPO, the airline is likely to sell and lease back its passenger terminal at Toronto's Billy Bishop Airport.
But by holding on to the slots, Porter should be able to maintain its presence at the airport while raising a significant amount of money to fund future growth. Even though it's not publicly traded, Porter Airlines is an interesting company to watch and could grow to play a greater role in the Canadian and transborder aviation markets.