TAP Into the Future

TAP PORTUGAL TURNED 65 LAST MONTH, AND ALTHOUGH THE Portuguese flag carrier did not throw itself a major party as it did five years ago when it marked its 60th birthday with entry into Star Alliance and a new corporate brand, it has plenty of reasons to celebrate. Not only will the airline unit report a healthy profit for 2009, in sharp contrast to most other European network carriers (and despite competition from some 22 LCCs), it is doing so as a standalone carrier. "In the past ten years we have proven that TAP can survive as an independent niche player," Executive Chairman and CEO Fernando Pinto insists. "We've been dedicated to making it a viable airline."

TAP operates more than 1,850 weekly flights on a network spanning 65 destinations in 30 countries, mostly in Europe, Brazil and Africa, with a fleet of 72 aircraft, which compares to 38 scheduled destinations and 34 aircraft in 2000. The mainline deploys 56 Airbus planes with an average age of 9.1 years: 40 A320 family types, 12 A330-200s and four A340s. Close to 70% of the fleet is owned. It has firm orders for eight A350-800s and four A350-900s that are scheduled to be delivered from 2014 onward, plus three options.

The group's regional subsidiary PGA Portugalia operates 16 aircraft: Six F100s, eight ERJ-145s and two Beech 1900Ds. TAP acquired its former competitor in 2007. PGA is fully integrated into TAP although it has its own CEO and management and maintains its own AOC. The PGA brand is still used, but all flights are sourced by TAP under an exclusive wet-lease contract and carry the TP flight code. PGA operates on regional and thin routes, mainly to Spain, Italy and France.

After a very difficult 2008 in which parent company Grupo TAP had a €285.5 million net loss on revenue of €2.37 billion, 2009 "was a lot better," Pinto comments. Grupo TAP is expected to report a near breakeven result for last year while TAP M&E Brazil (the former VEM) and the Groundforce handling unit also saw improvements between the years. The big story, however, was the airline's performance. After losing €209 million in 2008 despite a 12.8% increase in operating revenue to €2.16 billion, TAP S.A. is expected to show a net profit of €56.1 million for 2009 on turnover of €1.92 billion. If realized, this would surpass its previous earnings record set in 2007 of €54.1 million on a similar amount of sales. Boardings on scheduled flights reached 8.4 million, only 3.4% down on 2008 and more than 2 points better than the 5.8% average drop reported by the Assn. of European Airlines. "2009 [was] our second-best year in terms of passengers carried," notes the former Varig president and CEO, while admitting that for 2010 he would like to equal the record 8.7 million passengers carried in 2008.

Why Merge?

Pinto also would like to match 2009's record profit in 2010, though he concedes this "might not be that easy," citing uncertainty over fuel prices and a possible six-day strike by its pilots, which at presstime was called for the end of March. "Some analysts forecast a sharp increase in the price of oil. So far this has not materialized, but if it does it will affect the airline's financial performance," he says, stressing that the poor financial result in 2008 was owing solely to spiraling kerosene prices and TAP's inability to hedge because of the company's limited equity. "It was like a tsunami," he recalls. "It happens, you try to defy [it] but there is nothing to do about it."

The carrier's limited equity base in relation to its size is "an old problem" as well as a "great concern," he agrees. Yet a quick fix is not apparent. The EU has very strict rules with respect to the capitalization of state-owned airlines and the Portuguese government that took office at the end of October has not presented TAP with any concrete plans on how or when it will privatize the carrier. The government passed the necessary laws to allow privatization back in 1998 and opened its shareholding to SAirGroup in 2000.

Maybe the Swiss debacle injected TAP with a renewed sense of independence, but Pinto is convinced that it can grow and prosper on its own. Its annual report notes that a study by a British investment bank identified it as one of nine European airlines that could survive without merging. "Of course one should never keep the door closed, but for now I do not see TAP consolidating with a larger group," he says, emphasizing that it has proven over the past decade that it can survive on a standalone basis as a niche player. "We already did our consolidation. We bought PGA and this is working very well for both of us. PGA was losing a lot of money before we worked together and created synergies. PGA is now close to breakeven, while it contributes a lot to the TAP [mainline] network."

Pinto says he does not feel threatened by the imminent combination of neighbor Iberia with British Airways. "It's an important merger, but they belong to another alliance," he reasons, confirming TAP pulls quite a bit of traffic out of Spain to feed its routes to Brazil. It operates 192 weekly flights between the two Iberian countries, linking Lisbon with eight destinations in Spain and Porto with two.

"We have a lot of good help from Star; Star brings us a lot of passengers, a lot of revenue," he counters. "We don't believe that in the niche we operate we would need an additional consolidation within the peninsula," he concludes, confessing also that the Spanish domestic market is so competitive that "it is very, very hard to survive there" whereas he does not see further consolidation in Portugal as being possible.

Market Leader to Brazil

TAP grew capacity by 126% between 2000 and 2009, although it reduced network capacity 5.9% last year to 30.79 billion ASKs in the face of the downturn. This ended a consecutive annual growth streak dating back to 2000, including a 21.2% hike in 2008 over 2007. Rather than parking aircraft, last year's capacity cut was achieved by lowering frequencies on a number of routes. Traffic, meanwhile, rose 113% over the 10 years, with a 3.8% decline in 2009 being the only negative year of the decade. Passenger load factor gained 1 point last year to 68%.

"Despite the crisis, we introduced four new routes: To Moscow Domodedovo, Warsaw, Valencia and Helsinki," a pleased Pinto says. Expansion is planned for this year too, raising the network to more than 65 destinations. The carrier is slowly restoring lift, with summer capacity on par with the 2008 summer schedule.

TAP pursues a dedicated niche strategy for its network, linking Europe with a growing number of destinations in Africa and South Americamainly though not solely former coloniesover its hub in Lisbon. In terms of RPKs, the South Atlantic exceeded the size of its European network for the first time in 2008, with a 38.5% share against 36.9% for Europe (excluding domestic, Madeira and the Azores). It is the largest European carrier to Brazil, both in passengers (1.2 million in 2009) and destinations served, a total of eight: Rio de Janeiro, Sao Paulo, Brasilia, Salvador, Natal, Recife, Fortaleza and Belo Horizonte. It will add a thrice-weekly service to Viracopos/Campinas International in June, lifting its weekly offer to the country to 70 flights.

It currently operates 11 weekly flights from LIS and two weekly flights from OPO aboard A330/A340 equipment to Sao Paulo Guarulhos International with "90% load factor. We need a second destination in same region that serves a different area," Pinto explains, pointing out that demand, especially premium demand, on the Brazilian routes grew "very strongly" over the past 4-5 months. According to provisional figures, premium traffic rose 22.1% in December and 27.6% in January compared to the respective year-earlier months, whereas total traffic growth on routes to/from Brazil exceeded 30% in February.

The route to Newark also shows a good recovery of premium traffic, he says. Premium traffic fell about 15% on TAP's network last year, encompassing a 12% drop on its long-haul routes and an average 17% decline on medium-haul segments, which was below the 25.1% average loss on intra-European routes for all airlines based on the "IATA Premium Traffic Monitor." Most of the premium traffic on the European network consists of sixth-freedom passengers, with just a minimal amount of bookings for point-to-point. Transfer passengers declined 8% last year to 1.3 million (equating to about 15% of total passengers) following three consecutive years of growth.

Africa has been the airline's fastest-growing market over the past 10 years in passengers, with boardings up 143% since 1999 compared to a 118% increase for Brazil. It also was the only part of the network to record growth in 2009, showing an increase of 6.4% to 541,000 passengers. TAP operates to nine destinations on the continent, with Algiers and Marrakech coming online in June.

"Most people don't know about our growing footprint in Africa," Pinto remarks as he dismisses the suggestion that perhaps too many Star Alliance carriers are seeking to expand to Africa. "Yes, everybody seems to be looking at Africa," he laughs. "But our Africa is different than their Africa [Brussels Airlines, EgyptAir Airlines and Turkish Airlines]. Our Africa is mostly Portuguese Africa, like Luanda in Angola, Bissau, Sal and Praia in Cape Verde, Johannesburg which has a large Portuguese population, Maputo, Sao Tome. I believe this is good for us because it gives us a stronger total offer to Africa with different connecting points. Together we compete better against Air France and SkyTeam."

Low Costs

In terms of passengers (not RPKs) and destinations, the weight of TAP's network still lies in Europe despite its small home market of only around 10.7 million and inroads made by nearly all of Europe's low-cost carriers. For example, Ryanair has a base at OPO with 24 routes and just opened a second at Faro with six aircraft supporting 200 weekly flights. EasyJet is more dedicated to LIS with 14 routes.

"We are getting them all. In total, 22 LCCs fly to Portugal," Pinto sighs, adding stoically: "We are able to cope with that." TAP boarded 4.9 million passengers on its intra-European network last year, down 3.4% compared to 5.1 million passengers in 2008 but well above 4.5 million in 2007. Moreover, it has been able to retain its market share at LIS owing to its acquisition of PGA, he claims. "We have been growing together. TAP now has a 60% market share [of passenger throughput] at Lisbon. Before PGA we had about 50%."

In response to increasing competition and changed market realities, which AEA describes as a "paradigm shift," TAP in 2008 launched a new networkwide commercial model: "One Flight, Five Ways of Travel." The concept is based on product segmentation with one business and four economy class products and is intended to enable the airline to meet the LCCs head-on at the bottom of the market while still appealing to the higher-end business travelers, which it woos with a recently upgraded business class product, Premium Customer Centre and a new, very attractive lounge in Lisbon. "This has been working very well," Pinto confirms to ATW. "This really has been one of the things that helped us fill the aircraft during the downturn. In the lowest segment, we have finally managed to show our customers that we are also very competitive in terms of price, while offering a better product."

Pinto, who joined TAP in 2000 and whose term has been prolonged for another three years through 2012, agrees that "there is some unbundling going on" in the new model, yet he insists TAP remains a full-service carrier. All economy class passengers receive a complimentary meal and drinks, and this will continue. "We're an airline dedicated to providing the best service," he states, pointing out that it was one of the first in Europe to install fully flat seat-beds in its widebody business class (2003) and to trial Mobile OnAir on an A319 (July 2008). "Excellent maintenance, operational efficiency and quality service are the three pillars of TAP's strategy, and all this at a cost that is adequate," the 60-year-old mechanical engineer says.

The carrier does not release unit cost, but according to AEA data obtained by this magazine the mainline has a unit cost of around 6 euro cents per ASK excluding fuel, which is higher than Turkish but lower than Iberia and BA. "We keep on reducing costs. We just launched a new initiative calling for more than €100 million in cost reductions by 2012," Pinto affirms. He steers away from putting a number on the targeted CASK but his message is clear: "As low as is necessary for survival."