Will the Porter IPO fly?
Porter Aviation Holding is a niche airline that flies out of Toronto’s island airport. Founded in late 2006, it has turned an operating profit in one quarter to date. At the very least the company is gutsy. It flew out of the island airport despite fierce opposition from the city and, recent market turmoil be damned, it is moving ahead with its initial public offering, albeit at a lower share offering of $5.50 from the original $6-$7 range. Trading is set to start June 1.
The company’s largest operating advantage is that it is the sole airline to fly commercial flights out of the island airport. Air Canada and Continental Airlines have applied to fly routes out of the same airport. It has a load factor (the average number of passengers per flight) of 47% which is 2% lower than its break-even. Its revenue is growing but it continues to post a loss (although reducing the loss is seen as a victory for the airline). In other words, its barrier to entry may be eroded and its not exactly an efficient operation.
So why move ahead? IPO’s are liquidity events. In plain English, they are exits for early investors, lenders and the insiders who took the risk of starting up a business. This is an often over-loaded fact of IPO’s. One of the reasons for an IPO is for certain people to cash out. Where the underwriter is also the lender (like in Porter’s case), if the proceeds of the IPO is to pay out or pay down loans, it is an elegant way to transfer risk off the financial institution’s books to the general public (another one of those walking conflict of interests that are a facet of large financial institutions).
There is nothing inherently wrong with this. Risk takers who have innovated, created jobs or made other people money should be rewarded. The question becomes whether the general public should assume some of the risk by investing. Is Porter worth the risk? As the saying goes, “how do you become a millionaire? Start a billionaire and buy an airline.”