Portugal’s TAP Airline is Growing, Although Still in the Red

RIO DE JANEIRO, BRAZIL – Many new planes, new routes, significantly more passengers – Portugal’s formerly fully state-owned TAP airline has had a private management team for the past four years, under whose leadership it is growing faster than ever before.

This success story is not only disrupted by frequent flight delays, but also by red figures. The losses, in particular, are feeding discomfort among the government and the TAP holding’s private shareholders.

According to the national media, the search for new partners for the airline, which was founded in 1945 and is a member of the Star Alliance, is already underway.

The State owns one half

Its management is now in the hands of the Atlantic Gateway consortium. Its owners are the American David Neeleman, founder of airlines Jet Blue in the USA and Azul in Brazil, and Humberto Pedroso of the Portuguese group Barraqueiro. This group primarily organizes bus transports.

In 2015, this consortium acquired a 61 percent stake in TAP. A year later, it reduced its stake to 45 percent under pressure from the then new left-wing government. This allowed the state to increase its stake to 50 percent; the remainder of five percent was transferred to employees.

TAP’s growth is impressive. Capacity measured in the number of seat kilometers has increased by 28 percent since 2015. There are now 93 destinations served. Of these, ten are in Brazil, where TAP has a 26 percent share of the European market. A cooperation agreement with Neeleman’s Azul is in place.

Outside Europe, TAP also flies to 17 destinations in Africa and eight in North America, including Washington, Chicago, and San Francisco. Since 2015, the annual passenger volume has increased by 47 percent to 16.6 million passengers.

During this time, the fleet was modernized and expanded from 77 to 108 aircraft. TAP now operates Airbus 330, 321 and 320 aircraft in new versions on long- and medium-haul routes. The highly obsolete regional fleet was completely renewed with Embraer and ATR aircraft. Since the end of 2016, the number of employees has risen from 7200 to almost 9000.

However, the TAP holding company suffered losses of €118 million (US$130 million) in 2018. A loss of €58 million in air traffic was mainly due to one-off effects. The company, which had been in deficit for many years and has since closed for maintenance in Brazil, lost a further €52 million.

TAP alone, the company in charge of air traffic, reported a loss of €111 million for the first nine months of the current year, mainly due to exchange rate fluctuations.

Rating at junk level

Net debt increased in the first nine months from €552 million to €786 million. To refinance maturing debt, TAP placed a five-year €375 million bond a few days after announcing its quarterly results. The 5.6 percent interest rate reflects the poor credit rating.

Standard & Poor’s rated the bond as “BB-“, three levels below the line separating investment grade from junk. S&P notes a particular weakness in Brazil as the currency is very volatile due to political instability.

In the offering document, TAP also mentions under “risk factors” the potential for changes in the shareholder structure of the Group. David Neeleman already considered reducing his position by means of an IPO (Initial public offering) in 2019, but the government allegedly blocked it.

National media recently reported that Neeleman could reduce or relinquish his position in the coming months. He is said to have approached Lufthansa, Air France, British Airways and United Airlines in search of buyers.

In a statement, Neeleman reacted by drawing a positive balance of recent years and conceding that, despite growth, the turnaround in earnings had not occurred as quickly as had hoped. He said that speculation was not helpful and that he was “increasingly enthusiastic” about the future of TAP.