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Turn off the TAP

Doug Cameron.

For years TAP has had a public face only a mother could love. 'SAir didn't sign an alliance agreement with us because of our beautiful eyes,' admits Manuel Ferreira Lima, the airline's chairman. The challenge he faces is to convince the market that the changes he has pushed through run more than skin deep.

TAP has suffered from being placed alongside the perceived basketcases of Europe's state-owned airline sector - Alitalia, Air France and Olympic Airways. The airline believes that the completion of its EU-imposed restructuring plan and a wide-ranging alliance with the SAir Group will end its isolation and prove there is a place for a small flag carrier run on a commercial basis. 'It was fair to put TAP in the same basket [as these airlines] in 1992 when we were technically bankrupt,' says Joïo Marques da Cruz, general director for corporate planning. 'But it is wrong not to see the difference between the early 1990s and now,' he adds. 'What we have not done is succeed in transmitting the new image.'

The difference is that TAP is no longer alone and expects to exceed its forecast net profit of $7.4 million in 1997 after an accumulated loss of PTE132 billion ($732 million) from 1990-6. Other evidence of TAP's improved status is the fine terms on which it has financed its fleet renewal. It was able to use fierce bidding between Boeing and Airbus to order 16 A319s at around $28 million per aircraft. Funding, through a mixture of export credits and finance leases, is coming in around 30 basis points over Libor. TAP argues that the terms reflect renewed confidence in the carrier. Privately, however, some bankers wonder whether it has turned the corner enough to merit such aggressive terms.

TAP's transformation comes at the end of the four-year restructuring plan agreed with the European Commission in 1994 in exchange for a PTE180 billion ($998.7 million) injection of state aid in four tranches in the form of debt write-offs and tax exemptions. The last tranche has been received and the exemption from corporation tax ends next year.

Productivity goals

TAP has met most of the targets set by the Commission including a 5 per cent cut in system capacity, a fleet reduction from 38 to 31 aircraft and a series of productivity goals.

The carrier's annual losses have steadily declined since 1993 and a small profit is forecast for 1997 after last year's PTE10.7 billion deficit. Sales have climbed modestly over the past five years, reflecting the capacity cuts, with a 5.4 per cent rise to PTE180.6 billion in 1996 forecast to be followed by a 3.7 per cent rise in 1997. The result has been a recovery in TAP's equity, which was in deficit throughout the early 1990s before climbing to PTE17.5 billion last year and an estimated PTE57.7 billion by the end of this year. Long-term debt has fallen with the state aid to around PTE150 billion.

Ferreira Lima is clearly enthusiastic about the proposed deal with the SAir Group, signed in September, which he argues will end TAP's isolation. As well as codesharing, schedule co-ordination and merged FFPs, the deal spans the activities of both groups to include maintenance, IT and systems support, catering and marketing. 'Our strategy is to work with the SAir Group across all the areas of the company,' he says.

Ferreira Lima says there were at least three options: Swissair, another European carrier and 'another more theoretical possibility'. He is adamant that TAP wanted to keep out of any Mediterranean grouping: 'We prefer to mix our soft genes with North European genes,' he says.

The repositioning of the airline within the European market is also likely to lead to a change of image. 'It's necessary to have the courage to drop "TAP" and develop 'Air Portugal' as the brand,' says Ferreira Lima. TAP is better known as a brand in the domestic market but he feels there will be little effect from a change overseas. Two aircraft repainted to advertise the Algarve tourist authority have already dropped the 'TAP' moniker.

TAP's principal assets are its hold on its home market - where it commands 51 per cent of international traffic - and its links with former colonies in Africa and Latin America. 'Africa is important because our European and North American partners see us as an active specialist there and in South America,' he says. 'Our role in the alliance is to control Africa.'

The African network is modest with services to eight points including Maputo, Luanda, Kinshasa and Abidjan, accounting for 5.2 per cent of total passengers last year. 'The African routes are profitable, but not as profitable as the African airlines argue,' says Marques da Cruz. TAP already codeshares with LAM Mozambique, TAAG Angola and Air Afrique, and its aim to maintain its African position explains its participation in one of three bidding groups for a 51 per cent stake in LAM. Ferreira Lima admits this is more of a defensive move and concedes it would be a distraction from TAP's core operations.

African feed

While the SAir link offers benefits across a range of services, in traffic terms its success hinges on the feed to Africa from the whole group. The alliance is to be extended to incorporate codeshares with Swissair partners Sabena and Austrian Airlines, and TAP's existing pact with Delta will be extended with the aim of joining the US carrier's Atlantic Excellence grouping. Delta and TAP already codeshare on TAP's daily service to Newark and New York/JFK (and onward to Boston), and TAP wants to add five more onward US points.

The catch is that TAP aims to seek US anti-trust immunity for the deal before agreeing to open skies, testing the US policy of linkage. 'We need an open [minded] approach from the US regarding fifth freedom rights to Africa through Lisbon,' he says, suggesting a one-to-two year betrothing space before open skies. 'It's a very difficult task, but it's possible, and we aim to be part of Atlantic Excellence by summer 1999.'

Portugal's historic legacy in Latin America means it operates to four points in Brazil, as well as Caracas and Curaçao, and has already forged a codeshare agreement with Transbrasil, Delta's Brazilian partner, which Ferreira Lima believes could lead to an equity exchange. TAP also holds a 30 per cent founding stake in Air Macau.

The most pervasive influence of the state can be found in its requirement for TAP to maintain services to Macau, the former colony due to return to Chinese control in 1999. The twice-weekly A340 service, which now operates via Bangkok instead of Brussels, bleeds money and Ferreira Lima badly wants to replace one of these with a codeshare flight with Swissair via Hong Kong.

Public service tender

The alliances will have little effect on two other threats to TAP's recovery. Its monopoly on services to Madeira and the Azores expires at the end of next year and it faces competition for the first time in a market estimated to have earned it $50 million last year.

The island routes were placed under a public service tender in 1994, with imposed schedules and fares, and last year they accounted for 28 per cent of total passengers.The end of the monopoly is played down by Marques da Cruz, who argues there will be little effect as new entrants boost traffic growth. However, the expected entry of Portugalia, which already claims a dominant share of the smaller mainland domestic market (see box), threatens to make a larger dent.

Another other legacy of TAP's past is continuing poor relations with its unions which culminated in a pilots' strike earlier this year. In September TAP finally signed agreements with all of its unions for the first time, achieving some gains in flexibility and productivity. The bad news is that the accord only runs until the end of the year. 'The validity of this deal is that we achieve a base. It was not what we wanted but we can achieve the AEA average, if not the best practice,' says Ferreira Lima.

The desire of employees to share in the airline's recovery is understandable in the light of the cuts in staffing, from a high of 10,902 in 1992 to 7,736 at the end of last year. Another 200 jobs are scheduled to go by the end of the year. The restructuring has brought unit costs down by 7.3 per cent from 1993 levels with a system average of 51.2 US cents/ATK last year.

Productivity climbed by 48 per cent between 1993 and 1997 to 210,900 ATKs per employee. Ferreira Lima concedes that this growth cannot be maintained and the target for this year is a more modest 7 per cent. Yields continue to be soft and slipped back to 8.7 cents per RPK in the first half of this year.

The first of 16 A319s on order was due to arrive in December to join the six existing A320s and start a process which will see the 17 leased Boeing 737s (six -200s and 11 -300s) replaced by mid-2000. Two -200s are due to leave at the end of the year and the last of three L.1011s has been sold. The long-haul fleet will remain at four A340s and five A310s, though Ferreira Lima says the smaller aircraft may be replaced in 2000. The A340s achieved 11.85 hours a day last year while the A320s achieved 8.84 hours.

The final stone of TAP's staged renaissance is its planned privatisation. Portugal's privatisation programme has been one of the most successful in Europe. The government's plan calls for the sale of up to 49 per cent of TAP next year or, more likely, in 1999. Joïo Cravinho, Portugal's minister for planning and public works, says the government will remain 'an important reference shareholder' retaining a 10-15 per cent stake.

'It is not possible to expect that SAir will take 49 per cent as it did with Sabena, but we do hope that the alliance family will take some shares,' says Ferreira Lima. He predicts the new ownership structure will involve two or three overseas shareholders as well as a stake reserved for employees and domestic institutional investors. A stock exchange listing could follow as early as 1999, he adds.

Portuguese boom

Portugal's economic boom has taken the country to the brink of entry in the first wave of European monetary union (EMU). GDP growth reached 2.9 per cent last year and 3.3 per cent is forecast for 1997, while inflation has fallen below 2 per cent and the government's budget deficit is under 3 per cent. Ferreira Lima says it is very important for TAP that Portugal be in the first wave of monetary union. Foreign exchange exposure affects nearly 60 per cent of revenue and 60 per cent of that is in European currencies, so EMU offers a big benefit.

The chairman took up his post in February 1996 and has three more years to run on his contract. Lisbon's hosting of the Expo '98 trade fair next year is expected to give a 4 per cent boost to traffic and give TAP the opportunity to demonstrate that it has really changed.

'The position of TAP in the future must parallel that of Portugal in the European and global markets,' summarises Ferreira Lima. 'This is a little country and this is a little company which would like to maintain a high degree of independence.'

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