TAP Portugal has been totally transformed since Fernando Pinto took over as chief eight years ago. Can Pinto now lead TAP into private hands?
Fernando Pinto has just about done everything since he took over the reins of TAP Portugal in October 2000. Under Pinto, TAP has overhauled its network, renewed its fleet, reduced its cost structure, doubled its revenues without growing head count, steadily improved its profitability, joined a global alliance and acquired its local rival. The turnaround culminated last year with TAP generating a record €33 million ($51 million) profit. At the end of 2007 it seemed TAP, which incurred a €122 million loss in 2000 but has turned net profits in four of the last five years, was finally ready for what Pinto was brought to Lisbon to do - privatise the once floundering flag carrier.
© Photographs: Etienne De Malglaive
But Pinto may now have to wait a few years before the Portuguese government is finally able to place TAP into private hands. Pinto says it is up to the government to decide whether to proceed with plans to privatise the carrier in 2008 but acknowledges current market conditions could again delay the sale.
"We are doing our part, which is improving the airline every year," Pinto said in an interview at TAP's outdated head office at Lisbon's bustling airport, which is slated to be replaced in 2017. "Last year we had very good results. If you look at return on investment we were at 7%, which is very good in terms of the industry. It was the best in TAP's history."
But like nearly every other airline chief executive, Pinto is now struggling to find ways to offset skyrocketing oil prices and stay in the black. "Our preview for the cost of fuel this year was €500 million out of €2 billion total revenues. If it continues to be like this it will be €750 million."
Pinto adds his team is trying to make up the €250 million difference through higher fares and load factors but "right now all the calculations we've made doesn't reach even close to that. We are trying. If we stay profitable this year we passed our test."
Despite the new challenges Pinto, who just turned 59, seems to be enjoying himself in Portugal. He has no desire to leave TAP and is in no hurry to complete his mission, which he says is "nearly complete", with privatisation the only remaining hurdle.
It is not surprising that Pinto, who grew up in Brazil and before joining TAP spent four years as chief executive of Varig, hasn't found adjusting to life in Portugal difficult. The two countries have tremendous cultural and historical ties, which Pinto has fully exploited in turning around TAP. Pinto has steadily grown TAP's Brazilian network over the last eight years from 17 to 67 weekly flights. Last year TAP flew more than one million passengers to and from Brazil and Pinto says all 10 of its Brazilian routes are profitable except Lisbon-Belo Horizonte, which only launched in February and "is growing well".
"In terms of Brazil we dominate the market definitely," Pinto says. "We have such a great link with Brazil. It was not explored before."
Fernando Pinto started his career in the aviation industry in 1972, initially working as an engineer at Brazil's Varig after earning a degree in mechanical engineering at Rio de Janeiro's Federal University.
He gradually rose through the ranks at Varig, becoming technical director of its regional subsidiary Rio-Sul in 1988 and chief executive of Rio-Sul in 1992. In 1996, Pinto was appointed chief executive of Varig but was ousted in May 2000 after a disagreement with shareholders over corporate reform at the flag carrier. Five months later he joined TAP.
Over the years he has become more and more active at the industry level, serving as president of the Association of European Airlines in 2005 and as chairman of IATA from June 2007 to June 2008.
Pinto is married and has two children. He spends his weekends flying gliders and ultra light aircraft near his home in Sintra, a famous town west of Lisbon.
TAP now has almost as many flights to Brazil as all the major European carriers combined. It has been able to outsell seven larger European carriers, which fly to only one or two cities in Brazil compared to TAP's eight, by offering more convenient connections and more Europe-Brazil city pairs.
With the demise of Varig, TAM is the only carrier that comes close to matching TAP in the Europe-Brazil market and the two carriers are now partners, having signed a comprehensive codeshare pact last year. TAM, which operates 49 weekly flights to five European cities but does not serve Portugal, now places its code on all of TAP's flights to Brazil. In exchange, TAM carries about 10-15% of TAP's Brazil passengers beyond the eight gateways it now serves. "We are helping a lot the air traffic system in Brazil. Instead of putting everybody in one or two airports and distributing from there, we are spreading it around Brazil," Pinto says.
Pinto also has made sure TAP exploits Portugal's links with its former African colonies including Angola, Cape Verde, Guinea-Bissau, Mozambique and Sao Tome. It now serves eight African destinations, including six in Portuguese Africa plus Dakar and Johannesburg. TAP now has 35 weekly flights to Africa, compared to only 15 in 2000. TAP's long-haul network also includes Newark, and Caracas in Venezuela.
Overall TAP has tripled its long-haul business under Pinto as the carrier has expanded its widebody fleet from nine to 16 aircraft. Capacity also has been added through significant improvement in aircraft utilisation and replacing 188-seat Airbus A310s with 268-seat A330s. TAP has just retired its last A310.
Growth in the long-haul operation in turn has helped TAP grow its short-haul European network. TAP carried 6 million passengers last year on European routes, with 800,000 connecting to its long-haul flights. Since 2000 TAP has expanded its European network from 15 destinations and 272 weekly flights to 31 destinations and 714 weekly flights. This has been achieved by improving utilisation of its A320 fleet to over 12 hours per day and acquiring regional carrier Portugalia.
Under Pinto, TAP has also nearly doubled its revenues and traffic, from €1.1 billion and five million passengers in 2000 to €1.9 billion and 8 million passengers in 2007. Through the first four months of 2008 TAP had grown passenger numbers by another 21% compared to 2007. Pinto says growth on Brazilian routes, made possible by the expansion of its A330 fleet, accounted for about half of the 21% increase. Growth on European routes made possible by TAP's acquisition of Portugalia accounted for the other half.
TAP agreed in late 2006 to acquire Portugalia from its private owners for €140 million after years of on-off negotiations. The deal was completed in June 2007 after it was approved by Portuguese competition authorities. TAP immediately began integrating Portugalia into its network and in just a few months turned around the carrier, which had been incurring losses of about €5 million per month.
Pinto says Portugalia only lost €3 million during the last six months of 2007, the first period it was incorporated within TAP's financials. He says turning around Portugalia was relatively easy compared with turning around TAP, which took years to restructure. At Portugalia, the restructuring was done almost overnight as headcount was reduced from 800 to 450 with all back office functions transferred to existing TAP staff. "It was not so hard," Pinto says. "The structural costs went to almost zero because now TAP people are providing service for the back office. The sales are also being provided by TAP completely. So all these structures Portugalia doesn't have anymore. They only fly the airplane."
Unit costs were further reduced by increasing utilisation of Portugalia's fleet of eight Embraer ERJ-145s and six Fokker 100s by 20% to almost 12 hours per day. Sales also increased as feed from TAP and Star Alliance members provided an almost instant improvement in Portugalia's load factor from 50% to 65%. "We increased sales enormously," Pinto says. "All Portugalia flights also have TAP flight numbers so we are selling all around the TAP system including Star Alliance."
Portugalia, which continues to operate under its own name and brand, has also helped to boost sales on TAP-operated flights. Pinto says in the last six months of 2007 Portugalia brought €18 million into the TAP system: "That was revenue we were not catching. It has to do with passengers brought into the TAP system. It's feed - that's the most important part. It's bringing passengers into the long-haul routes."
Pinto says Portugalia has particularly helped TAP in Porto, where TAP began long-haul flights to Newark, Rio de Janeiro and São Paulo in 2006 as part of an effort to avoid relying too much on Lisbon, where expansion is limited to about 10% until a new airport opens in 2017. "One of the reasons we bought Portugalia was to increase the feed at Porto. They were very active in Porto [with direct flights to several European cities]. That helped a lot to feed the international flights we have."
The acquisition has also allowed TAP to better match capacity with demand on routes within Portugal and to France, Italy and Spain. Portugalia's smaller aircraft are used on secondary routes and during off-peak hours on some primary routes. This has ensured a better load factor on routes the carriers used to compete on and has freed up aircraft to launch new routes, including Seville and Hamburg from Lisbon and Rome and Brussels from Porto.
"The network had to be completely redone," Pinto says. "Most of the cities Portugalia used to fly to it continues to fly to, but we did a completely different schedule, reinforced some of the destinations and reduce others. We changed a lot."
Pinto's Rising Star
Fernando Pinto credits the Star Alliance as playing a key role in TAP Portugal's turnaround and says Star will help TAP stay independent as other medium-sized European carriers look towards consolidation to survive in today's difficult market.
TAP joined Star in 2005 and Pinto says the alliance last year generated an additional €40 million per year in revenues for the carrier. "By now we've shown it's possible to grow in a niche market," Pinto says. "We are doing OK. Together with Star we have shown it's possible" to remain independent.
TAP now codeshares with almost every other Star member and also has codeshares with several non-aligned carriers, including Greece's Aegean Airlines, Italy's Air One, Mozambique's LAM, Cape Verde's TACV, Brazil's TAM, Ukraine International Airlines and SATA of Portugal's Azores Islands. Pinto says TAP may have more codeshares than any other carrier in the world: "It's part of our strategy. It's a very important way of growing without investing."
While TAP acquired Portugalia last year and looked at buying Varig in 2006, Pinto says the carrier is currently not interested in buying stakes in other carriers. He says it is looking to offload its 15% stake in Air Macau and reduce its 90% stake in former Varig maintenance unit VEM to about 45%. But TAP's Lisbon-based maintenance business, which last year generated €302 million in revenues, will remain 100% owned. "We think it's very important for it to be with the airline," Pinto says, adding that there are no plans to spin it off if TAP is privatised.
Pinto is now looking at possibly renewing Portugalia's fleet with more fuel efficient aircraft and using Portugalia to open new routes to North Africa. "We don't have anything to North Africa. The most north in Africa we go now is Senegal. There are some closer countries here we can use the Portugalia fleet for. We've been analysing it."
Pinto says TAP is also now analysing potential new gateways in the USA, in particular Chicago and Washington, both of which are hubs for Star partner United Airlines. "That's a study gong on - what to do in the United States so we can have better connections with Star."
In addition, TAP is looking at resuming services to Asia, but Pinto says this is a more long-term ambition that could be made possible after the first of at least 12 new Airbus A350s are delivered in 2015. TAP's easternmost destination is now Budapest and it last served Asia in 1999, when it pulled out of Macau. "With the A350 we can think of Asia. Of course we'll think about China. Japan is also a possibility. There's a good link between these two countries."
In the medium-term TAP is more likely to further build up its Latin American network. Pinto says TAP has looked at Buenos Aires and other cities in South America but will probably first add more cities in Brazil. He points out that Brazil rotations can be completed within 24 hours, which has helped TAP achieve an exceptionally high utilisation rate of nearly 17 hours for its widebody fleet, while a daily service to destinations deeper into South America would require two aircraft.
"We get a lot of offers from the Brazilian governors. They would all like TAP to fly there," Pinto says. "We continue to analyse two or three cities there. But with current fuel prices we have to make sure that the investment of the ones we have today is really paying off before we start going to others."
TAP is currently not committed to taking any additional widebodies until 2015 and Pinto says given the high price of fuel it is now unlikely to add long-haul capacity in the short-term. Instead he is focused on further improving the load factor at TAP and Portugalia in a bid to offset rising fuel costs: "Now we are trying to grow our seat load factor. It was at 70% last year and we want it to grow to 75%."
Pinto says a higher load factor is crucial for TAP to stay in the black because for every extra euro TAP has to pay for oil it is only able to recover 30 to 35 cents through higher fares or fuel surcharges. Frustratingly for Pinto, high fuel prices are now wiping out years of efficiency gains he has worked so hard to secure. While doubling revenues, Pinto has cut the size of TAP's workforce from over 9,000 to 8,400, including the 2,000 employees which transferred in 2004 to a new joint venture handling firm. TAP now has lower seat mile costs and a higher passenger per employee count than most European network carriers.
"In the seven years I've been here we actually reduced headcount by 10% and grew the airline two-fold. We're now very efficient here. We have to be because the ticket prices here are very low. This is survival. That's the only way," Pinto says. "In Portugal a lot of the traffic has always been tourists. Some time ago we didn't even consider low-cost. Nowadays there are 22 low-cost carriers flying into Portugal from 70 destinations. They are very strong."
Low-cost carriers initially built up a strong presence in the Portuguese Mediterranean city of Faro, where TAP only has a few domestic flights, but in recent years they have rapidly expanded at TAP's Lisbon base. Low-cost carriers now have a 25% share of the Lisbon market compared to about 60% for TAP.
TAP has responded to the changing competitive landscape by cutting costs and changing its fare structure. Under a new five-tier fare structure, passengers flying on the lowest bucket still receive free food and drinks but cannot choose a seat in advance and can only receive frequent flyer credit for 10% of actual miles flown. For economy passengers on higher fares, not only will full miles and advanced seat selection be offered but TAP is opening a dedicated check-in area and fast track security lane using the ex-Portugalia area of Lisbon airport. "We are really changing the way we take care of the higher yield passengers. They will feel the difference," Pinto says. "The others will feel the price."