Fernando Pinto: Driving steady growth at TAP Portugal

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In hindsight, Fernando Pinto made the right move in 2000 when he stepped down as president of Varig to assume the chief executive role at TAP Portugal. Varig, which was much larger than TAP at the time, has steadily declined over the past seven years. TAP, meanwhile, has grown by 66% in capacity terms since 2000, as Pinto has turned the relatively small European flag carrier into a leading European hub-and-spoke airline.

Pinto is now preparing TAP for further expansion as demand for its long-haul services, in particular to Africa and Brazil, continues to soar. “The growth of Brazil’s traffic has really made a difference,” he says.

TAP also has benefited from its membership in the Star Alliance, which Pinto says has in particular increased business-class demand in Germany and the USA. TAP is now helping Star fill the void left by Varig, which was Star’s only South American member until it dropped out of the alliance earlier this year, but Pinto says this is not driving a significant increase in traffic.

“Varig has really reduced its European services over the years,” says Pinto, adding it was down to seven weekly frequencies from 42. “The influence was felt but not much.”

New acquisition
Pinto says while Star helped drive TAP’s rapid ascent since it joined the alliance in 2003, future growth will be driven more by Portugalia, a smaller Portuguese carrier TAP is now in the process of acquiring.

“Portugalia will not add capacity directly because it will remain independent, but it will feed our system, which will allow us to add capacity and airplanes,” Pinto says.

“We’re counting on that for additional services to Brazil and Africa.”

Pinto is now negotiating to acquire three second-hand Airbus A330s, which will be delivered between June and December this year and expand TAP’s widebody fleet to 15 aircraft. The A330s may be used to launch flights to the Brazilian capital Brasilia, which would be TAP’s seventh destination in Brazil.

“We have some new routes to Africa and we’re thinking about flying to the Brazilian capital,” Pinto says.

“We’re trying to get at least three more aircraft. Otherwise we don’t have aircraft for growth and we have some growth opportunities for this year.”

TAP last year added three A330s, which joined its widebody fleet of five A310s and four A340s. These A330s drove a 16% capacity increase and were used mainly to launch thrice weekly non-stop services from Portugal’s second-largest city Porto to New York, Rio de Janeiro and Sao Paulo.

Pinto says the new long-haul services from Porto, where connections are available to several European cities, have been in high demand with an 80% average load factor. He says additional frequencies will be added after TAP takes delivery of more A330s but TAP will also expand its long-haul schedule from its main hub in Lisbon.

TAP also has acquired five new A330s for delivery in 2007 and 2008. Pinto says these will be used to replace TAP’s five A310s but additional A330s could still be acquired.

The entire A330/A340 fleet will eventually be replaced by A350 XWBs, with A350-800s replacing A330s and larger A350-900s replacing A340s. Pinto expects to sign a formal contract later this year with Airbus for 12 firm A350 XWBs, plus three options “which in principal will be firmed pretty quickly”.

Revised delivery schedule
When placing its initial order for 10 A350s and five options in 2005, TAP was anticipating phasing out its A330/A340 fleet between 2013 and 2015. Pinto says TAP will now have to wait until late 2014 or 2015 to receive its first A350 due to delivery delays caused by the redesign of the aircraft as the A350 XWB. TAP is now negotiating a revised A350 delivery schedule with Airbus but Pinto expects it will be about 2018 before its last A330 is retired. “The critical issue for us is we’re talking about a three-year delay to deliveries,” he says.

Pinto adds the delay will cost TAP because the A350 is significantly more economical than both the four-engine A340 and two-engine A330. Plus the A350 will open up new route opportunities. “Even with the A330 we’re losing a lot in total cost,” Pinto says.
TAP also is committed to acquiring four additional A320s over the next three years, which will expand its narrowbody fleet to about 40 aircraft. Pinto plans to keep Portugalia’s fleet of six Fokker 100s and eight Embraer ERJ-145s for at least two years, after which TAP will consider Fokker replacements. “We have to see the economics,” he says when asked about a potential Embraer 190 purchase. “The Fokker is still a very good aircraft.”

Portugalia operates to around 20 European cities, primarily in France and Spain. Pinto says Portugalia will start codesharing with TAP at the beginning of April, after Portugalia’s codeshare with Air France expires. Their schedules will eventually be coordinated but this cannot occur until competition authorities approve the €140 million ($178) million deal, which was signed in November after several years of off-and-on negotiations.

When asked when the deal will be completed, Pinto says: “If I knew I’d be a happy man. I hope it takes two months.”

He adds that when the deal is completed TAP will be able to reduce costs through joint purchasing and other synergies. On routes both carriers now operate, Pinto says schedules will be coordinated and excess capacity will be redeployed. But there is little overlap in their network with TAP and Portugalia now competing only on some trunk routes such as Lisbon to Barcelona, Madrid, Porto and Paris.

Most of the cities Portugalia serves are too small for TAP’s smallest aircraft, the A319. “We’re very interested in the cities they fly to,” Pinto says.

By adding Portugalia’s destinations to its network, TAP will be able to start competing against larger European flag carriers, in particular SkyTeam member Air France and oneworld member British Airways, on one-stop services from secondary European cities to Africa, Brazil, Venezuela and the USA. TAP has already increased its market share in other European countries with Europe excluding Portugal now accounting for 49% of total traffic compared to 37% in 2000. Pinto expects this figure will grow further.

TAP has focused on connecting traffic since Pinto took over in 2000. He quickly added three Brazilian destinations and boosted frequencies on existing long-haul routes. He also overhauled TAP’s businessclass product.

Looking forward, the A350s and a new airport for Lisbon will help drive further growth as TAP begins drafting a long-term plan for 2009 and beyond. Pinto says the new airport project has been approved and construction should start in about three years. As an interim solution, gates will be added in 2009, which will allow TAP to stop using remote parking spots for long-haul flights. While TAP is still able to add some capacity at Lisbon, the airport does not have room for significant expansion and there are often long delays for baggage delivery and security screening.

“It’s critical,” Pinto says of the new airport. “It will happen. It’s a project for 10 years.”

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