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Why Are Airlines so Eager for a Piece of TAP Air Portugal?

Edward Russell
September 19th, 2023 at 4:45 PM EDT

TAP and Eurowings Planes

TAP Air Portugal is seemingly the apple of every European airline group’s eye these days. That’s because the state-owned airline in the southwestern corner of Europe is about to come up for sale in what is set to be the next big airline consolidation story.

The terms of the planned privatization are set to be approved at a cabinet meeting during the week of September 25, Portuguese Prime Minister Antonio Costa said Tuesday. That would potentially lead the government to open bidding for TAP in October — and that bidding is expected to be fierce.

Air France-KLM, International Airlines Group, and the Lufthansa Group have all expressed interest in TAP. And other potential bidders have yet to emerge but one cannot count out non-airline offers, for example from private equity firm Certares, which lost its bid for Italy’s ITA Airways to Lufthansa last year.

How much the government wants for TAP is unclear. The airline received more than €2 billion ($2.1 billion) in state aid during the pandemic. And, in the first half of the year, it generated €1.9 billion in revenues and a €124 million operating profit. Those numbers represent a 32% increase in revenue and a reversal from an €85 million operating loss in 2019.

And, as a condition of the state aid TAP received, it divested 18 slots in Lisbon. Those went to EasyJet, which is focused on expanding its presence in Southern Europe. The UK-based discounter is now the second largest at the Lisbon airport operating 11% of the flights and 12% of seats in September, according to Cirium Diio schedules.

So why the hots for TAP? Hint, it’s not Portugal’s popularity among digital nomads.

The “geographical position of Lisbon on the periphery of Europe, [is] ideal for transatlantic hub connections — offering the shortest and most cost-efficient transfers from Europe,” TAP said in a presentation to potential lenders on September 15. The airline can serve many of those transatlantic routes with cost-efficient narrowbody aircraft, particularly the Airbus A321LR that can fly as far as Belem in Brazil and Washington Dulles in the U.S. nonstop from Lisbon. And, if TAP orders the longer-range A321XLR, it could fly narrowbodies further onto both continents and unlock nonstops between more secondary cities and Europe.

A map of the A321LR’s range from Lisbon in green. (TAP Air Portugal)

TAP operated 12 A321LRs at the end of June, according to its latest fleet plan. They were part of a 96-aircraft strong fleet that also includes 21 A320neo- and 19 A330neo-family aircraft. TAP has 24 A320neo-family planes on order with deliveries through 2028.

The three big European airline groups have made clear they want TAP’s geographic reach. Only IAG, owner of British Airways and Iberia, has a hub on the Iberian peninsula in Madrid. That serves as an ideal gateway for the group to Spanish-speaking Latin America; the addition of a Lisbon hub would give it unparalleled strength to all of the region, including Portuguese-speaking Brazil.

TAP was the third largest airline by seats between Europe and Latin America with a nearly 10% share during the first nine months of the year, Cirium Diio schedule data show. Iberia was the largest with a 15% share and Air France second with an 11% share. Lufthansa was sixth among European airlines with a nearly 5% share.

TAP also flies to North America. However, Lisbon loses its geographic connectivity advantage in the market vis-à-vis other European hubs like Amsterdam and London. Over the same nine-month period, TAP is 17th in terms of seats between Europe and North America with a 1.5% share, according to Cirium Diio.

Air France-KLM: ‘Accretive’

“TAP has a very strong position geographically at the southernmost point in Europe towards South America, and they do have a very strong network to Brazil with 11 cities online nonstop out of Lisbon,” Air France-KLM CEO Ben Smith said in May. “So it’s very interesting, and could be potentially eventually accretive to our bottom line performance.”

From a network standpoint, adding Lisbon to Air France-KLM’s Amsterdam and Paris hub would add significant geographic diversity to its map. It would be similarly advantageous for Lufthansa. But those geographic gains would be less for IAG given its Madrid gateway.

Air France-KLM’s share of Europe-Latin America seats including TAP would be 29% for the January-to-September period, according to Diio Cirium schedule data.

The group also missed an opportunity to bring ITA into the group. It was a non-equity partner, along with Delta Air Lines, in Certares’ failed bid. One reason for that was the group’s inability to put its own capital into the deal owing to the restrictions placed on it by a pandemic aid package from the French government.

Those strings were lifted in April when Air France-KLM repaid the last of its state aid package.

IAG: ‘Analyzing’

A TAP deal would give IAG clear dominance on the Iberian peninsula given its Madrid and Barcelona hubs. The former is a base for Iberia and the latter the group’s budget airline, Vueling.

TAP “is something that we are analyzing, but we need to wait until the privatization process will start,” IAG CEO Luis Gallego said in July. “At that point, we will determine if it’s something interesting for the Group or not.”

IAG is in the midst of a second takeover attempt of Madrid-based Air Europa. The €400 million deal, the first of which was rejected by European regulators, would allow it to expand Madrid into a “365-degree hub” better able to compete with Air France’s Paris and Lufthansa’s Frankfurt hubs.

However, given regulators’ reservations with IAG’s Air Europa deal and the high concentration the group would have on the Iberian peninsula with TAP added to the mix, the risk of antitrust objections appears high for an IAG takeover of TAP.

Air Europa, British Airways, and Iberia combined would give IAG a 28% share of Europe-Latin America seats, Cirium Diio data show. That number rises to 38% if TAP is added to the mix.

Lufthansa Group: ‘ITA First’

The Lufthansa Group will look at a potential bid for TAP, CEO Carsten Spohr said in June calling any speculation “premature” at the time. However, he was clear what the group’s priority is: Getting its €325 million deal for ITA over the line.

“Our focus [is] on ITA first,” he said.

Lufthansa needs European antitrust approval to close an initial purchase of a 41% stake in the Italian airline that it later plans to bring under its full control. Spohr has previously outlined the group’s plans to leverage ITA’s Rome Fiumicino hub to expand links to Africa and Latin America.

The group, which also includes Austrian Airlines, Brussels Airlines, Discover, and Swiss Air, had a combined 7% share of seats between Europe and Latin America during the first nine months of the year, Cirium Diio data show. Adding ITA nudges that up to nearly 9%, while adding both ITA and TAP would more than double its share to 18%.

Spohr, like his counterpart at IAG, has sounded less eager about TAP than Smith at Air France-KLM. Of course, that could just be his and Gallego’s public personas and not their views behind closed doors. Regardless, more than one group is expected to bid on TAP when the government opens the privatization process this fall.

“You always have the same airlines looking at every target,” Spohr quipped in June.

Edward Russell
September 19th, 2023 at 4:45 PM EDT

Tags: Europe

Photo credit: A TAP Air Portugal Airbus plane taxis in Hamburg past Eurowings, Ryanair, and TUI aircraft. Flickr / Kevin Hackert

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