TAP turns a profit as British Airways owners become possible buyers

“Acquisition of TAP important for connections to South America”: IAG CEO

From the depths of perceived disorganisation to a sudden plateau of new possibilities – Portugal’s flagship airline TAP has at last turned a cool €111.3 million profit in the last quarter, and is being eyed up for purchase by IAG, the Anglo-Spanish aviation group which owns British Airways and Iberia.

Following another exceptionally challenging last few months – and repeatedly vilified in the press for the billions of euros in public money ploughed into it (on the way to €3.2 billion) – TAP has this week announced “a historic record of operational revenue” which reached €1.1 billion between July and September this year, “exceeding pre-crisis levels by 7.5%” and allowing the airline to achieve “an unprecedented financial performance”.

The third quarter “positive liquid result” registered with the Securities and Markets Commission (CMVM) on Wednesday came in at €111.3 million.

In the note published by TAP, the company said this outcome was also driven by the “positive effects of the implementation of a currency hedging policy” which “reduced the foreign exchange impact of the previous quarters of 2022.”

What makes the 3rd quarter profit even more impressive is that it came at a time when fuel costs for the sector “more than tripled”. 

According to TAP CEO Christine Ourmières-Widenener this simply confirms the strength of the airline’s performance “with all financial metrics above pre-crisis levels”.

On this basis it probably isn’t ‘surprising’ that the company so pilloried in the national press is actually showing some allure to foreign airlines planning for the future.

Prime Minister António Costa has made no bones about the government’s decision to sell TAP –  if possible before the end of next year. He mentioned at the time potential interest from Air France/ KLM and Lufthansa. Now IAG has come into the mix – a development not completely welcomed by syndicates, but significant nonetheless.

We see opportunities to be stronger. We are a group that wants to consolidate the industry”

News of the interest of IAG (standing for International Airlines Group) broke here on Tuesday evening. 

In the UK, the Times reported the group is actually thinking of buying TAP and EasyJet (Portugal’s top market leaders in first and second places at Lisbon airport). 

CEO Luis Gallego told the paper:We are a platform for consolidation. We will only do what makes sense, but we see that there are opportunities to be stronger. We are a group that wants to consolidate the industry.” 

Air France-KLM’s CEO, Ben Smith has already said his group will ‘definitely engage on a formal basis’. “If the right circumstances are in place, we’re interested. Consolidation is key for us, especially in Europe,” he told ‘Simple Flying’ last week.

TAP’s ‘bonus’ is its trans-Atlantic (namely Brazilian) connections. 

Says ‘traveltomorrow.com’: “IAG, which is experiencing a moment of financial health, is looking to move towards consolidation in the civil aviation sector and the acquisition of TAP would be important, particularly for its connections to South America, with special attention to the Brazilian market.

Lufthansa, however, is still seen as having the ‘upper hand’ in negotiations, essentially due to its size. It is a fellow member of Star Alliance, the world’s largest global airline group, serving 195 airports with nearly 20,000 flights a day.

But looking at the situation from TAP’s point of view, suddenly the complicated panorama seems a great deal more rosy. 

Or does it?

“Visibility for next year is limited”

Demand for the final quarter of 2022 has stayed strong, “supporting (TAP’s) expectations for a good accumulated result by the end of the year” BUT 2023 cannot be said in any way, shape or form to be ‘in the bag’.

“Visibility for the next year is still limited and, bearing in mind the uncertainties of the current environment, it is increasingly crucial that we maintain focus on our strategic plan, which has so far proven to be effective”, says the airline. 

In the words of Ms Ourmières-Widener: “The next decisive steps to take are: conducting productive discussions with our labour partners for the creation of more modern Collective Bargaining Agreements, improving our operations and the quality of our service with the involvement of all ‘stakeholders’, the constant negotiation of all our contracts with third parties and the careful preparation of the coming year.” 

And this is where things start to wobble again. The next two months are likely to see at least 400 flight cancellations, with pilots syndicate SPAC already complaining TAP management is trying to blame this on the absence of around 40 pilots taking ‘parental leave’.

The essence of the argument is that TAP is “preparing public opinion to make plausible the cancellation of more than 400 flights between November and December”, when the reason it doesn’t have enough available pilots is because it sacked both pilots and cabin crew in the recent past “in a tragic process that is still dragging on”.

SPAC also claims TAP “chose” to sell aircraft “that are so badly needed today”.

In other words, ‘good results on balance sheets’ have not carried over into the workforce – and now employees are having to prepare for another potential new owner when they are already deeply-bruised.

SPAC’s spokesperson Tiago Faria Lopes has reacted to the news of IAG’s interest, suggesting this will be even less welcome to his members than the prospect, for example, of purchase by Lufthansa. 

The reason, he explained, is that IAG’s Spanish hub in Madrid would almost certainly lead to TAP’s ‘hub’ in Lisbon becoming obsolete. A group would not have two hubs so geographically close – meaning TAP would become the ‘TAP-ezinha’ (little TAP) that politicians have always pledged it wouldn’t. And a little TAP would translate into less routes, less employees, less ‘service to Portuguese’ who have, to all intents and purposes, carried this airline for decades.

Final tranche of State aid coming by end of year

The final tranche of State money injected into TAP will thus be paid just as the airline cancels these 400+ winter flights.

Says Público: “By the end of the year, the airline will be receiving another €990 million of the €3.2 billion in State aid”.

After that, it will be presumably fit and ready to be sold ‘to the highest bidder’.

The ‘elephant in the room’ will be the price. 

Back in September, prime minister António Costa said it would be “irresponsible” to have a deal where the State would lose money. 

There are legions who will say it was irresponsible for the State to have wrestled TAP out of private hands six years ago – considering the billions that have had to be funneled into it, and the endless trials and tribulations that have hogged the headlines almost ever since.

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