Portuguese State Seeks Key Investor for TAP Air Portugal

It’s game on for another round of airline consolidation in Europe. The Portuguese Council of Ministers has approved the plan to privatize TAP Air Portugal and sell 51 percent. At least five percent will be reserved for the airline’s employees, the government announced on Thursday. The state currently is the sole shareholder. During a press conference, Minister of Finance Fernando Medina said that the privatization has five targets. The first is to ensure that TAP Air Portugal can continue to grow under a new minority owner. The second is that Lisbon can be developed and grow as the main hub beyond the 53 percent market share it has there now. TAP should also grow end-to-end operations and operate to what Media referred to as untapped capacity at domestic airports. The priority is Porto, where low-cost carriers like easyJet and Ryanair have gained market share. Together, this should safeguard jobs in the Portuguese aviation sector, while the proceeds of the privatization should benefit the national state. Since the start of the pandemic, the Portuguese state has committed to investing €2.544 billion in restructuring aid in TAP. The last tranche of €980 million consists of three parts, of which the first €294 million was paid in December 2022. Part two of €343 million will be paid this coming December and the last one of €343 million in December 2024. TAP Air Portugal received another €178.5 million in Covid aid. Privatization process Today’s announcement marks the launch of the privatization process, which the government expects to complete by early 2024. During the phase, it will select strategic, financial, and legal consultants to advise the state. Once this has been completed, the bidding can start. This will be a complex procedure, with the state still injecting more aid while at the same time trying to find a buyer for the minority share. Expect the European Commission to review this process carefully for anti-competitive elements. Medina said that the government has a clear profile of the prospective buyer: “We want large-scale investors from the aeronautical sector, alone or in consortia headed by them, that are aligned with our strategic goals. We do not seek to attract pure investments of a financial nature that are looking to get into TAP to then sell it or sell parts of it and we wish to reiterate TAP’s strategic contribution to the country ". Europe’s three main airline groups have all expressed an interest in TAP Air Portugal if conditions are right. Air France-KLM CEO Ben Smith was one of the first to show affection for the airline. His colleague Carsten Spohr at Lufthansa also confirmed that TAP would be an interesting asset, but he has his hands full with securing the partial takeover of ITA Airways. Luis Gallego, CEO of International Airlines Group (IAG), reaffirmed his interest in TAP on Wednesday during an interview at the World Aviation Festival in Lisbon. Like Spohr, Gallego first wants to conclude another takeover, in his case Air Europa. There could be other investors eying a share in TAP. A consortium that includes investment fund Certares and Delta Air Lines and shipping company MSC Group were initial bidders for ITA Airways. While Italy might be more interesting than Portugal, the Iberian peninsula is an important stepping stone from Europe to Latin America and could offer new business opportunities. Positive results In November last year, Prime Minister Antonio Costa said that the time for privatization was not right. Today, Minister of Infrastructure Joao Galamba said that now is the right moment to start the privatization, now that TAP Air Portugal has recovered well from the pandemic and is producing positive results. The carrier reported an €80 million net profit for Q2 this year and a recurring EBITDA of €242 million, up 54 percent year on year. Revenues were up by 29 percent to €1.070 billion. Liquidity stood at €900 million. For HY1, the net profit was only €23 million, but the recurring EBITDA improved to €362 million (plus 57 percent), and revenues to €1.906 billion. Unit revenues were clearly above 2019 and 2022 levels, yields were high, and load factors were stable. Revenues in all regions improved drastically year on year: with forty percent in Europe, thirty percent in South America, and twenty percent in North America. Yields grew the most in North America, with 32 percent. While the restructuring continues, the airline has already reduced structural costs and improved efficiency, thanks to new collective labor agreements and the renegotiation of supplier contracts. The airline said in August that one of these contracts is with Rolls-Royce for Trent 7000 engines. Debts have been restructured and reduced to €3.3 billion, while the airline is much leaner, having reduced the headcount from 9.000 to 6.900 employees in 2022. Lisbon importance In a presentation for a fleet financing roadshow just two weeks ago, the new CEO Luis Rodrigues showed how TAP Air Portugal has progressed – with ups and downs – during its history since 1945. A key part of the future strategy is the development of Lisbon Airport. TAP wants to capture further market share between Europe and Brazil, where it already has an almost thirty percent share. But also between Europe and North America West and South Africa, and Central and Southern Europe to North America. Rodrigues also said that TAP has to reduce the cost gap with the low-cost competition. Whoever becomes the new partner of TAP, it will find an airline with a young and efficient fleet of some 99 aircraft in 2025, of which 74 percent is of new-technology Airbus neo-aircraft. There will be 27 Airbus A320neo, thirteen A321LRs, nineteen A330-900s, eighteen A320ceo’s, three A330-200s, and nineteen Embraer regional aircraft in the fleet. With the roadshow, the airline is seeking funding for its 2024 deliveries, starting with three A320neo’s. TAP has 24 A320neo family aircraft in the backlog until 2028. The preferred financing is through JOLCO or Japanese call options, which have been used for three aircraft in the past.

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