The coming twelve months could be crucial for the consolidation of the airline industry in Southern Europe. Not just in Italy, where a final decision on the partial sale of ITA Airways is delayed as a new administration has entered office, but also in Portugal. Interest is gearing up for TAP Portugal, although the airline has some work to do to complete its strategic plan. TAP Portugal not ready for sale yet. That TAP Portugal could be up for sale, emerged again in late September. In a session in parliament, Prime Minister Antonio Costa said that he hoped that the sale of the state's share in TAP “is a possibility on the table for the next twelve months.” He hoped that the state would recoup more than the €3.2 billion that the state has invested in the airline. With that, he referred to the successful sale by the German state of its share in Lufthansa this summer. When he was asked about his interest in TAP Portugal in the Q3 earning call, Air France-KLM CEO Ben Smith confirmed that his airline would “definitely engage on a formal basis” once the Portuguese carrier will be offered for sale. Air France-KLM has always been interested in the Iberian market, Smith added, but so is Lufthansa Group and International Airlines Group (IAG), itself active in Spain through Iberia, Vueling, and indirectly in Air Europa too. Until 2020, TAP was partly-owned by a consortium led by David Neeleman. His role at the time was recently questioned in parliament, but Neeleman firmly rejected all accusations. In TAP’s own Q3 results presentation, CEO Christine Ourmieres-Widener said she was “happy and proud” that others are interested in the carrier, but she was quick to add that the decision is not hers to make but that of the government. State aid infuse But before TAP Portugal is ready for sale, the airline has some more work to do. Although it produced strong results in the third quarter, it is still in restructuring mode that followed after the outbreak of the pandemic two years ago. In December 2020, TAP initiated a restructuring plan that sought to reduce the airline’s size to restore profitability and efficiency, and save €1.4 billion in structural costs by 2024. The workforce has been reduced by 2.000 to 8.000 (and actually stood at 6.935 in June), the fleet capped at 96 aircraft this year and a maximum of 99 aircraft in 2025, and eighteen slots surrendered at its Lisbon hub. To make it work, TAP has been relying heavily on the state aid infuse, with a first €1.2 billion injections in restructuring aid in 2020, another €364 million in 2021, with the final €990 million due this Q4. This brings the total restructuring aid to €2.554 billion, or €3.2 billion if all capital injections are included, which have all been approved by the European Union. It gave the Directorate General of Treasury and Finance full control of TAP SA. The effects of the transformation are showing, helped by the strong recovery in traffic. Looking at the Q3 results, revenues surpassed 2019 levels at €1.119 billion and so did revenues per available seat kilometer, despite operating at twelve percent lower capacity versus 2019. Other key metrics like passenger carried and departures were still below pre-pandemic levels. Load factors recovered to 86 percent. The operating result/recurring EBITDA for Q3 was €280 million, a recurring EBIT of €153 million, and a net income of €111 million. Yields reached €8.47, up seventeen percent. For the 9M period, revenues were €2.440 billion, the recurring EBITDA €511 million, recurring EBIT €154 million, and the net income €-91 million. TAP ended September with €775 million in liquidity, slightly down on June’s €890 million which it attributes to seasonal patterns in cash flow. Total debt grew to €1.620 billion from €1.603 billion in June and €1.481 billion in December 2021 as it took on more aircraft leases and felt the effects of the higher US dollar. Ourmieres-Widener was happy to point out during the Q3 results presentation on November 2 that TAP is recovering quicker than its peers. In the first two quarters, capacity has been consistently higher than that of Air France-KLM, IAG, and Lufthansa. Only in Q3, Air France-KLM reached an identical level at 88 percent. The same happened with passenger revenues, but the Portuguese airline was ahead in traffic. Between January and September, the EBITDA margin was 20.6 percent or 6.1 percentage points up from the Franco-Dutch carrier, with IAG and Lufthansa trailing behind. TAP’s passenger revenues per available seat kilometer (RASK) were behind the three other airlines, but unit costs were the lowest as well. Milestones ahead What’s still on the ‘to-do list’ is four key things: labor contracts, operational performance, customer service, and deleveraging the balance sheet. In 2021, TAP and the unions signed emergency agreements that included a reduction in remuneration as of March 2021 and the protection of 750 jobs. These agreements mature at the end of 2024 and are not sustainable beyond that, said Ourmieres-Widener. Some contracts even originate from 2005-2006 and don’t reflect the current labor market situation. So renewing the collective labor agreements that focus on more productivity is a critical step. TAP recently reached agreements with pilot and cabin crew unions. The second objective is to improve its operational performance. The ramp-up of capacity this summer caused issues with almost all airlines, but TAP’s operational performance was particularly hurt by an air traffic systems update at Lisbon Airport. It affected punctuality and regularity, which slipped to 96.8 percent in Q3 and was behind most other airlines except Lufthansa and British Airways. TAP is also taking much effort to improve customer experience. It chose a new partner to run its call centers to improve response time, which was at 85 percent in October. The airline also sourced a different company to support the website and app, while opening new lounges for customers of its loyalty programs. Although steps have been made, more needs to be done, said its CEO, notably on disruptions management, and the training of front-line staff. And then there is the balance sheet. Chief Financial Officer Goncalo Pires noted that it is TAP’s intention (and a condition of the European Commission) to deleverage the balance sheet by attracting new equity on the capital markets. The airline has €575 million in bonds that mature in 2023 and 2024. But it is too soon to tell now how and when it will seek fresh equity. TAP will want to discuss its full-year 2022 results with potential investors first and check the situation on the markets before it commits to arranging new financing. TAP is also busy restructuring its fleet. As it is capped at 99 aircraft until 2024, it will grow only slowly. The only option to grow capacity is to upgauge and operate aircraft with more seats, which will benefit the financial performance, operational reliability, and customer experience. The medium-haul fleet will see three more Airbus A321LRs coming in while one A320ceo will be phased out. Its short-haul fleet will introduce four Embraer E190s and E195s, but their induction has been delayed. Three of the five ATRs will be transferred to a new external partner after TAP terminated the agreement with White Airways. One A330-200 will rejoin as a full freighter. No time to sell yet So yes, TAP Portugal is on the way up again from where it was in 2020-2021, with margins improving. But the airline’s transformation is still ongoing, with the final state aid yet to be received this quarter. The carrier is also not there on quality and customer experience where is wants to be. TAP will need more time and probably even a full year of solid and sustainable results until it could be offered up for sale. If Air France-KLM or another airline group is still interested by then, remains to be seen.
