TAPing the Breaks

Jason Clampet
July 5th, 2020 at 12:32 PM EDT

  • As was true for many of the world’s airlines, 2020 started out promisingly for TAP Air Portugal. In January and February, traffic volumes rose 13% y/y on 15% more ASK capacity, load factors increased by two percentage points, unit revenues rose 7% (stage adjusted), unit costs shrank 4%, and total revenues increased 19%. Operating results for the two months were still deeply negative, to be clear—it’s the dead of winter, after all. Operating margin was negative 13%, to be precise. But a year earlier, TAP’s January and February operating margin was negative 25%. Even so, it ended 2019 with a positive full-year operating margin, if only 2%. The point is, TAP was indeed seeing better prospects, on its way to a solid year, as long as normal spring and summer traffic trends prevailed. Obviously, nothing normal prevailed after Covid struck Europe with a vengeance in March. During the traumatic month, TAP’s traffic volumes plummeted 55% y/y on 34% less ASK capacity. In the end, TAP dragged itself from the first quarter bloodied and wounded, scarred by a $439m net loss, or $189m excluding hedge- and forex-related special items. Operating margin for the quarter was a nauseating negative 27%. That’s too big a blow to take, leaving TAP on death’s doorstep. Fortunately, Lisbon came through with a $1.3b emergency loan, approved by the E.U. But the airline is running through that money fast. So Lisbon is going one step further and taking back ownership control. In 2015, it sold control to a group led by Azul founder David Neeleman and his Portuguese partner Humberto Pedrosa. It quickly clawed back some of its stake but left Neeleman and his team in charge. The relationship became nasty though, with frequent arguments about topics like executive bonuses. That said, Neeleman’s group pumped lots of much-needed capital into TAP, growing its fleet with the latest and greatest Airbus planes. The airline also expanded aggressively, most notably to the U.S. Holding it back, however, was distress in the critical Brazilian market, where TAP allocates a large portion of its long-haul capacity. It faced problems in Portuguese-speaking Africa as well. So now, Portugal’s government will take a nearly 73% ownership stake, up from 50% currently. Pedrosa will keep nearly 23% but Neeleman will depart. Employees will hang on to their 5% stake. Through bonds with conversion rights to equity, Brazil’s Azul held an indirect 6% stake in TAP—it just sold those to the Portuguese government for about $15m. But Azul still holds a bond, collateralized by TAP’s loyalty plan, paying 7.5% annual interest. It was thus in Azul’s best interest to keep TAP alive, even if it meant surrendering potential equity. Back to TAP’s business, the carrier is now flying within Europe again, after a period of dormancy. It says 60% of its costs are variable. It will look for a new CEO. It’s telling transatlantic travelers they can book with confidence, offering free rebooking for all new tickets booked in the first half of July, for travel through October. This will help support the reintroduction of flights this month to Newark, Boston, Miami and Toronto from Lisbon. It’s starting a new Montreal route from Lisbon as well, along with new nonstops from the Azores to Boston and Toronto.  
  • Israel’s El Al faces an existential crisis as its planes sit idle. During the painful first quarter, operating margin was negative 29% as revenues dropped by a quarter y/y on 17% less ASK capacity. Operating costs declined just 14%. Things might have been less awful had El Al not hedged its fuel—fuel outlays before hedging effects were down 29%. The priority now is securing some form of government aid, with two alternatives currently in play. Both involve a mix of loans and share sales. In the meantime, the airline is holding on by flying more cargo, renegotiating leases and other contracts, cutting executive pay, and conducting aircraft sale-leasebacks. Most of its workers are on unpaid leave. El Al won’t restart flying until August at the earliest, with Israel still keeping its borders closed. Covid-19 infections in the country, after moderating for a while, are now spiking again. Israel is not, incidentally, on Europe’s new list of countries welcomed to send visitors. Prior to the crisis, El Al was on a path toward modernizing its fleet with B787s and B737 MAXs. But that required taking on lots of new debt.
Jason Clampet
July 5th, 2020 at 12:32 PM EDT

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