Consolidation of European airlines and takeover of TAP: beware of panic buys

As expected, the European sky is consolidating, and the European majors seem to be in a buying frenzy. Even if it means getting into mischief?

ITA before yesterday, SAS yesterday, TAP tomorrow and who knows what the day after? We knew European skies would consolidate and this movement, which began with IAG’s takeover of Air Europa, was interrupted during COVID and resumed with Lufthansa Group’s holdup on ITA under the nose of Air France-KLM, saw a new development with Air France-KLM’s surprise acquisition of a stake in SAS will continue with the sale of TAP while waiting for other opportunities that we don’t yet know about, but will inevitably come up.

What’s at stake is, of course, if not supremacy in the European sky in any case, for the three majors to maintain their dominance of LH Group, and for IAG and Air France-KLM not to be left behind, or even to close the gap.

But by jumping at everything that comes their way, don’t they risk overpaying for an airline that isn’t worth it, just to keep it from joining a competitor?

Yesterday I was told “SAS, TAP….Ben Smith is in panic buy mode”. I don’t believe it in the slightest, at least not for SAS, but for TAP or others the question arises, and not just for Air France-KLM.

Panic Buy ?

The expression panic buy comes from the world of professional sport and describes a situation where, seeing the end of the transfer period approaching, a club buys any player at any price, even if it doesn’t need him, even if it overpays him, rather than not spending its transfer envelope.

In our case, this amounts to any of the three majors buying up any one at any price, with the sole aim of preventing a competitor from getting their hands on them.

So, is SAS a panic buy for Air France? We don’t think so. The opportunity arose, and Air France-KLM seized it by forming a consortium, enabling it to initiate a commercial partnership at a low cost, and to take control of the airline at a later stage.

SAS: Air France pays (little) to see

To be clear, we don’t really see what Air France-KLM stands to gain, but for the amount invested it’s a great opportunity to “pay to see”.

Of course, a unique footprint on the Scandinavian market. Of course, the fact of being able to feed its Roissy and Amsterdam hubs with this clientele, but when you consider that Sweden’s population barely equals that of the Paris region, and that Norway and Denmark each account for half, is no reason to get over-excited either. By the way, Ben Smith spoke of commercial partnerships, not synergies.

Of course, there’s the oversized and underused Copenhagen hub, which could compensate for Schiphol’s decline. But how? By making SAS bigger? By transferring KLM aircraft? By operating Air France or KLM from Copenhagen as Finnair does from Stockholm…Possible, not extremely probable.

Of course, there’s the matter of annoying Lufthansa in an area that seemed to belong to them, and after the ITA affair that must count for a bit.

As for SAS, it has gained its survival, but don’t expect the slightest investment from Air France-KLM in the airline’s development, and a hub like Stockholm risks losing out to Copenhagen, Paris and Amsterdam.

Air France-KLM has taken over an airline that is doing well, but with high costs and recurring losses, and is going to leave it to reform on its own, and in two years’ time will see whether it’s worth going further, staying there, or getting out. Bear in mind that if SAS had been integrated into Air France-KLM’s 2022 results, its losses would have absorbed almost all the Group’s profits (€728m vs. -€680m), and that if things continue as they are, we can well see AFKL leaving the ship in two years’ time.

Let’s just say that, like in poker, it paid $144.5m to see, thinking that if it didn’t do it, Lufthansa would do it one day.

Panic Buy ? We’d have said so in the case of a takeover, but this was a great opportunity to test the waters at a lower cost, or rather a lesson in opportunism: “we’ll see what happens, and in the meantime we’ll block Lufthansa for cheap”..

We just hope the Scandinavians don’t expect too much from the operation…

But now that the sale of TAP is approaching, we’re a little more worried.

TAP will be the key to Europe’s new air leadership

Until then, our feeling was that in the battle between IAG, Air France-KLM and Lufthansa Group, the first two would take a few risks to avoid letting the third widen the gap in terms of size and European footprint. As for the third, which already has the takeover of ITA to deal with, it was going to participate without wanting to overpay, preferring to save cash for SAS or another airline if the price its competitors were prepared to pay for TAP became unreasonable.

Of course, the fact that Air France-KLM is in pole position for SAS changes the whole picture, because if we include their current and potential future acquisitions (SAS, Air Europa, ITA), they now find themselves on an almost equal footing, and the acquisition of TAP could change everything in terms of European leadership.

For Air France-KLM, adding TAP to its airlines would make it the European leader: SAS + TAP would mean 31M passengers in 2022 for a group that carried 83M, and €6M in revenue for a group that made 26M. Not bad, and nobody would have dared hope for that a year ago.

For IAG, which has just seen Air France-KLM drastically close the gap, it’s all about securing a second place in Europe, which may now be slipping away, even with the addition of Air Europa.

The Lufthansa Group has a leadership role to maintain, and we’re convinced that while they were very happy with the blow to Air France-KLM over ITA, the SAS deal must be a painful one.

So all of a sudden, there’s no reason for anyone to take a wait-and-see attitude – quite the opposite, in fact. Even if it means buying TAP at all costs?

TAP has all the makings of a panic buy

On the face of it, TAP is a prime target, notably because of its South American network and the fact that it serves a highly touristic country.

Anyone who digs a little deeper will see a much less rosy picture.

Our in-flight experience with TAP: correct in long-haul regardless of travel class, as well as medium-haul in economy, while medium-haul in business class is excellent.

It’s before and after the flight that things get messy: this airline is organizationally dysfunctional, catastrophic in its operations and customer relationship, so much so that we suspect they’re intentionally trying to fleece the customer. We never thought we’d have to take an airline to court, and with TAP we potentially have 3 cases that deserve it. But beyond that, almost every one of our flights with them gives rise to an operational irregularity, or even a fault on their part, and the airline refuses to respond. When it happens once, it’s bad luck; when it’s systematic, it’s structural and therefore more worrying.

When we fly TAP, we don’t worry about eating badly or being late. For example, if our checked luggage is stolen and the airline refuses to compensate us. Or it issues a voucher that doesn’t work and no longer responds to our requests. That’s the reality of TAP.

And when it comes to the Lisbon hub that everyone’s eyeing, it’s one of the most dysfunctional we know of, and it’s saturated.

Put another way: whoever buys TAP will have to carry out a profound reorganization and transformation. Organizationally and culturally. And it’s going to take time and cost a lot of money (remember that TAP barely made a profit in 2022). And that’s just the airline: the airport is a lost cause, while plans to build a new one have been abandoned.

Yes, a transformed TAP would be an excellent asset for any of the majors. But getting there will take time and heavy investment, and you can expect a long period without much return.

It’s the kind of airline you don’t overpay for any more than an apartment where you know you’ll have to redo everything if you’re rational. But the context we’ve just described gives us reason to fear excitement and a little less rationality.

Even if it means paying a high price for an airline that’s nothing but a nest of problems and that you’re not sure you’re going to do anything with?

As I read on a forum, TAP is a bit like “Alitalia 2.0”. That says it all. We are convinced that the future buyer will face many problems, and that the price to be paid must take this into account. But if the takeover of the Portuguese airline is no longer an industrial issue, and buying TAP means more than just buying TAP but buying leadership at any price, the future owner risks overpaying for something he could have obtained otherwise.

What’s next?

Because TAP isn’t the only thing in life. No airline is unsellable, and opportunities will arise or can be provoked, as Air France-KLM did with SAS. Airlines that will be paid for at their true value, knowing what is being bought, and not bought for the wrong reasons.

Bottom line

Air France’s acquisition of a stake in SAS unexpectedly reshuffles the cards, making the sale of TAP an issue of European supremacy. Enough to make people hot-tempered and overpay for an airline that isn’t worth it? We’ll see.

Image : A330Neo TAP Air Portugal by Markus Mainka via Shutterstock