Both Air France-KLM and Lufthansa have submitted bids to Parpublica, the Portuguese state holding company, for a minority stake in TAP Air Portugal.
The Portuguese government intends to sell up to 49,9% of the shares, with a 5% tranche reserved for employees. The state formally retains control but has indicated its intention to sell the remaining 50,1% to the same buyer in the future.
The deadline for submitting non-binding bids was yesterday. IAG, the parent company of British Airways and Iberia, appears to be withdrawing from the process, as a minority stake does not align with its long-term strategy.
Massive historical debt
TAP has approximately 7,700 employees, including 1,200 pilots, and a fleet of about 100 aircraft. The medium-sized airline offers flights to an extensive network in Brazil, 14 African destinations – including Portuguese-speaking Africa (such as Angola, Mozambique, Cape Verde, Guinea-Bissau, and São Tomé and Principe) – and North Atlantic routes to the United States.
The airline carried more than 16,5 million passengers last year and reported operating revenue of 3,28 billion euros and a net profit of 55,2 million in the first nine months of the year.
But TAP is too small to compete with the major airlines on all fronts. Moreover, during the COVID-19 crisis, the Portuguese government injected 3,2 billion euros in taxpayer money into the company – money it wants returned. At the same time, EU state aid rules also require it to implement an exit strategy.
Air France-KLM is the favorite?
TAP fits into Air France-KLM’s “multi-hub strategy,” says Benjamin Smith, the Franco-Dutch group’s CEO. He aims to ramp up operations in Lisbon and further develop connectivity with other cities in the country. Another factor is that Air France-KLM does not yet have a Southern European hub.
Lufthansa, on the other hand, emphasizes that it is Europe’s largest airline group and is best positioned to develop TAP from both Lisbon and Porto, without diverting traffic to Frankfurt. Lufthansa CEO Carsten Spohr called Tap a “perfect match”, partly because of its strong networks to Brazil and Latin America.
According to experts, Air France-KLM appears to be the favorite. The group emphasizes its ability to preserve and grow brand identities, as it did with KLM. Lufthansa has faced criticism in the past for allegedly erasing the brand identities of acquired airlines.
The Lufthansa Group already includes a wide range of airlines, including Swiss and Austrian Airlines, as well as Brussels Airlines. It also holds a minority stake in the Italian airline ITA. That integration is still in full swing, and the group could expand that stake to 90% this year – meaning a significant amount of attention and capital is already being directed toward another major Southern European project.
Star Alliance versus SkyTeam
An important caveat, however, is the alliance switch. There are three global airline alliances. Star Alliance is the largest in the world with a market share of 17,4%, followed by SkyTeam with 13,7% and Oneworld with 11,9%.
If Air France-KLM wins, TAP would likely switch from Star Alliance to SkyTeam, which would significantly alter the competitive landscape and substantially strengthen SkyTeam’s coverage in South America and Africa – two of the fastest-growing aviation markets.
That is precisely why Lufthansa is so keen on TAP: TAP is already a member of the Star Alliance, just like Lufthansa. By adding TAP, Lufthansa can expand further via Lisbon onto long-haul Atlantic flights without affecting its core hubs in Frankfurt or Munich.
If Lufthansa wins, TAP will remain in Star Alliance, making the integration operationally simpler. If Air France-KLM wins, an alliance switch will follow that will have far-reaching consequences for millions of travelers – and certainly for all TAP travelers with Star Alliance status.
€1,5 to €2 billion
The Portuguese government has set a minimum price of 770 million euros for the 44,9% stake. In practice, bidders will likely offer more than that to make their bid more attractive.
It is estimated that the purchase price plus future investments – TAP has 21 aircraft on order – could easily reach 1,5 to 2 billion euros for the winning bidder.
Prime Minister Luis Montenegro and his government will now review the proposals and may subsequently begin negotiations with one or more candidates. A final decision is expected in the summer.
