The Portuguese government intends to privatize TAP fairly quickly and once again, as in the case of ITA, we will probably see a confrontation between Air France-KLM and Lufthansa.
Facing major financial difficulties, the Portuguese company was nationalized in 2020 to allow it to clear its accounts before a future sale. And already at that time there was talk of Lufthansa. Air France-KLM had also shown interest, but the conditions for granting COVID aid by the States, in order to be validated by Europe, quickly forbade them to invest in another company as long as this aid had not been repaid.
This is now the case for Lufthansa, but not yet for Air France, although the airline is energetically working on the subject.
What about TAP?
The airline is a member of the Star Alliance and has a long-haul network focused on the American continent and Africa.
From a financial point of view, although it has implemented a restructuring plan, it is still losing money, whereas the recovery has allowed many airlines to return to profit.
It has a hub in Lisbon which does not seem to us to be very efficient. Its limited size leads to a multiplication of embarkations / disembarkations by bus and the management of luggage would be random.
As for the level of service, based on the flights we have taken on TAP (and those whose reviews have not yet been published) our opinion is very mixed:
On board a very correct service in long haul and good in medium haul. For medium-haul flights, we are talking about business class, as economy is “buy on board”, and we recognize that there is no comparison with our national airline in terms of service
As for the rest, the airline is operationally dysfunctional: from the website to the customer service to the boarding management, everything seems to be cobbled together, held together by bits of string and organized despite common sense. TAP is the first airline we consider balacklistering for our travels at Travelguys…that’s how much they managed to worry us.
What future for TAP?
Initially, the restructuring plan was to end in 2024, but it seems that the Portuguese government is not against the idea of selling half of the capital at the beginning of 2024.
Unlike the sale of ITA, which involved a competitive bidding process, here the government would discuss informally with interested parties. Namely Air France KLM and Lufthansa.
Lufthansa the historical partner
If in the ITA case the long-standing partnership between Air France-KLM and Alitalia, renewed with ITA, made the Franco-Dutch group an obvious solution, here it is more on the side of Lufthansa that the balance would lean.
The two airlines have never had a partnership as extensive as that between Air France-KLM and Alitalia/ITA, but both are members the Star Alliance and therefore already practice code sharing.
For Lufthansa, TAP would represent what it lacks and what it missed in the ITA case: a presence in southern Europe that it lacks as much as Star Alliance.
Still to the advantage of the German group its history in the integration and recovery of airlines in difficulty: Brussels Airlines, Swiss, Austrian to name a few.
Another thing that can be well seen from the public authorities: Lufthansa is used to preserving and developing the hubs of the airlines it buys, while in Italy there were fears that if Air France were to buy ITA, it would only use Rome as a regional hub to supply its long-haul hubs in Amsterdam and especially Paris, to the detriment of ITA’s long-haul development.
Finally, Lufthansa, which has repaid its COVID aid, has a completely free hand, which is not the case for Air France-KLM.
However, two dark areas exist.
The first is cultural. We didn’t really talk about this for ITA but it already existed. Lufthansa has succeeded with Germanic or related airlines, it remains to be seen if their way of doing things is soluble in a Latin culture.
The second is that Lufthansa, when it buys an airline, wants to have free hands and clear governance with as little or no government presence as possible. There is no indication that the Portuguese government wants to fully exit TAP even in the medium term.
Air France- KLM the challenger
In the absence of a history with TAP, Air France-KLM is clearly an outsider in the case. Indeed, in this kind of business, we should not only think in terms of airlines but also in terms of alliances and their footprint on a given geography.
In principle, it is starting from further back, but as we saw in the ITA case, where it declared itself late and presented an offer that was less interesting at the industrial level than Lufthansa, it ended up winning for what we see as political reasons.
As for Lufthansa, the TAP dossier is important for Air France and Skyteam in terms of presence in the region. Iberia belongs to IAG and Air Europa, a member of Skyteam and partner of Air France, is also in the process of coming under the IAG flag, albeit more slowly than expected. TAP would therefore be an excellent way to regain a foothold in the region.
The advantage for Air France-KLM is that the ITA case has shown that the group is not demanding in terms of governance and can live with a cumbersome state presence (unlike Lufthansa and IAG, this is already part of its daily life). If the group says “yes” to almost all the demands of the Portuguese government, even if it means making the airline ungovernable and difficult to integrate, this may please the government in relation to a public opinion that would not want to see the airline carved up. But nationalist impulses seem to be much less strong in Portugal than in Italy.
But Air France-KLM also has its handicaps.
The first and not the least is that not having repaid its COVID debts, it cannot take more than 10% of another airline. We can say that this problem will no longer exist in 2023 but you never know. In this case, it would have to find another “vehicle”, i.e. a financial partner who would carry the operation, with the Group holding a minority stake in the new shareholding.
Another worrying sign is that, while there is no doubt that Air France-KLM has the capacity to cope with a Latin culture that is superior to that of Lufthansa, not everything is rosy on this side. When we see the multiple clashes between the French and the Dutch that have marked the history of the group since its creation, we can wonder how things would work with TAP, especially since with ITA it would create a small Latin pole within the business. Perhaps the new CEO of KLM is more consensual than her predecessor but her public opinion is vigilant.
In addition, Air France-KLM has never proven its ability to turn around and integrate an airline. 20 years after the takeover of KLM, the marriage is still not really consummated, and if things seem to be moving in the right direction since the arrival of Ben Smith at the helm, we are far from the levels of synergy and integration that we see at IAG or Lufthansa Group.
As for turning things around… Air France has never yet proven its ability to reform itself, so doing it for others… Again this seems to change since Ben Smith but it is new and fragile.
One last thing: we don’t really know Air France’s strategy regarding the Lisbon Hub. Does it want to undress part of TAP’s long haul to feed its own?
Factors to consider
On the vendor side, it is not clear what the government expects. Does he want to sell everything? Continue to weigh? In the second case, this would put Lufthansa out of the game as we saw with ITA, even though its offer was better. We don’t even know if he is testing the waters but is willing to wait until 2024 or if he really wants to accelerate the process
On the other hand, we had proof, again on ITA, that Air France-KLM is ready to make many more concessions to the point that we had the impression that there was no strategy other than “prevent Lufthansa from growing, and then we’ll see what we do with the airline. An absence of a clear industrial strategy is a cause for concern, unlike that of the Germans.
On the other hand, we do not see Lufthansa engaging in a takeover at any price. Even if it means letting Air France-KLM take over both ITA and TAP, either LH Group will have free hands or will withdraw from the dossier.
Then we must think in terms of alliances. Yes, Air France-KLM and Lufthansa have their own strategies, but the one that “loses” TAP loses the peninsula. Less serious for Skyteam, which still has ITA in the Mediterranean region, but Star Alliance would be totally absent from the region. This may be an incentive to make some effort.
TAP a beautiful bride?
If the Alitalia legacy makes us fear a lot about the effort to make ITA a successful airline, TAP is at least as worrisome. Maybe less complicated politically but not at all operationally and with crews who often give us the impression of having given up and suffering their fate in silence.
Whoever buys the airline will have a lot of work to do, and making TAP a successful and profitable airline will require considerable effort. Maybe too much for Air France-KLM which already has ITA on its hands, maybe culturally impossible for Lufthansa despite its know-how.
Is it possible to turn around both ITA and TAP at the same time? This seems complicated to us, especially for Air France-KLM. Can Lufthansa and Star Alliance accept to have no presence in the Mediterranean area? We’ll see.
We did not talk about IAG, but it is said that they would look at the file from a distance. Credible?
From our point of view and given the way the Air Europa dossier is dragging on, they have other things to worry about. And to see 100% of the airlines on the Iberian Peninsula in the hands of IAG (TAP, Iberia, Air Europa, Vueling…) would risk displeasing the competition authorities.
Unless they abandon the purchase of Air Europa?
But who knows.
The Portuguese government is considering accelerating the privatization of TAP and the two most credible candidates are Air France-KLM and Lufthansa.
But regardless of the comparative advantages of each, our opinion is that this case will end up like the ITA one. If the government makes a political choice, TAP will end up with Air France-KLM, if it is an industrial and economic choice it will be Lufthansa.