27-Feb-2014 3:00 PM

TAP Portugal further strengthens position in Brazil with new destinations and Gol partnership

Analysis

TAP Portugual is cementing its leading position in the Europe-Brazil market with two new Brazilian destinations and a new codeshare partnership with Gol. The growth in the Brazilian market is part of an ambitious expansion plan for TAP in 2014 which also includes new destinations in other South American countries and in Europe.

The carrier was profitable for the fifth consecutive year in 2013, giving it the confidence to expand despite continued uncertainty over its future ownership. The Portuguese government has repeatedly delayed privatisation since agreeing to sell TAP as part of a condition to its 2011 bailout agreement with the EU.

Avianca Brazil parent Synergy remains interested in acquiring TAP despite its failed attempt from late 2012, attracted to the carrier's strong position in the Brazil-Europe market. But the government does not seem to be in a hurry and prefers waiting for other bids while supporting expansion at TAP until market conditions for a potential sale improve. Meanwhile TAP's pursuit of a partnership with Avianca Brazil rival Gol could end up irritating the Synergy camp.

Summary

TAP Portugal is expanding its presence in the Europe-Brazil market with new Brazilian destinations and a codeshare partnership with Gol.
The carrier was profitable for the fifth consecutive year in 2013, giving it the confidence to expand despite uncertainty over its future ownership.
TAP plans to add four A320 family aircraft and two A330s to its fleet, marking its first expansion in several years.
The carrier aims to add four new long-haul destinations and six new short-haul destinations by the end of 2014.
TAP's expansion is expected to lead to passenger growth in 2014, surpassing the 5% growth recorded in previous years.
TAP is in talks with Copa and Avianca for codeshare partnerships, with Copa likely to materialize first.

Hear from Teresa S. Lopes, Finance Director, TAP Portugal, at the CAPA Airline Fleet & Finance Summit 2014!

TAP expands long-haul haul fleet for first time in several years

TAP is in expansion mode in 2014, with plans to add four A320 family aircraft and two A330s - its first additional widebodies in six years. The carrier earlier unveiled plans to add four destinations to its long-haul network in mid-2014 - Bogota in Colombia, Panama City in Panama and Belem and Manus in Brazil - giving it 12 destinations in Brazil and 15 in South America.

TAP's short-haul network will also grow by six destinations by the end of July as Belgrade, Gothenburg, Hannover, Nantes, Saint Petersburg and Tallin are added. TAP will have nearly 50 destinations in Europe by year-end. Capacity expansion to existing destinations, including in Africa, is also expected.

TAP network summary: as of 27-Feb-2014

Total non-stop passenger destinations	76
Domestic	8
Africa	14
Asia Pacific	0
Schengen Europe	33
Other Europe	8
Latin America	11
Middle East	0
North America	2

The expansion should lead to passenger growth in 2014, surpassing the 5% growth recorded in both 2012 and 2013. TAP managed to grow its passenger traffic last year by 5% to 10.7 million despite not increasing its fleet or capacity as its load factor improved 2.6pts to 79.4%. Europe and Africa were the carrier's fastest growing regions, recording passenger growth of 7% and 8% respectively.

TAP was again in the black in 2013

TAP has not yet reported financial figures for 2013 but expects to record a net profit of about EUR25 million, representing a slight improvement over the EUR21 million profit for 2012. TAP, as an airline, has been in the black every year since 2009. (At the group level, which also includes maintenance and support services subsidiaries, TAP has been in the red in recent years.)

The carrier's continued profitability despite challenging market conditions in Europe gives it the confidence to resume capacity expansion. Additional widebodies were previously not in the carrier's fleet plan until 2017, when the first of 12 A350s on order are slated for delivery. TAP currently operates 12 A330-200s and four A340-300s, with the last aircraft (an A330-200) being received in 2008, according to the CAPA Fleet Database.

TAP Portugal Fleet Summary: as of 27-Feb-2014

Aircraft	In Service	On Order*
Total:	55	12
Airbus A319-100	19	0
Airbus A320-200	17	0
Airbus A321-200	3	0
Airbus A330-200	12	0
Airbus A340-300	4	0
Airbus A350-900XWB	0	12

TAP in 2013 adjusted its fleet plan and decided to pursue the lease of two additional A330-200s which became available after they were returned by Brazil's TAM. The first aircraft was handed over to TAP's maintenance division in Dec-2013 and is currently being refurbished while TAP expects the second aircraft to be handed over in Mar-2014. Both aircraft are slated to enter service in late 2Q2014 ahead of the launch of Bogota, Panama City, Belem and Manaus.

TAP to serve four new South American destinations on two triangle routings

Belem and Manaus will be served on a Lisbon-Manaus-Belem-Lisbon triangle routing with three weekly flights from 3-Jun-2014. Both are growing secondary cities in northern Brazil which TAP previously served via domestic connections from its existing Brazilian gateways. Opening up a direct option will free up capacity on some of TAP's 10 other existing Brazilian routes.

Initial sales for Belem and Manaus are above expectations, giving the carrier confidence the route will succeed. The carrier will likely look to add frequencies and potentially decouple the destinations as they mature. TAP has been looking at serving both Belem and Manaus for some time but until now lacked the capacity as it has been unable to expand its widebody fleet in recent years.

TAP also plans to serve Colombia and Panama on a triangle routing. Four weekly flights on a Lisbon-Bogota-Panama City-Lisbon routing will commence on 1-Jul-2014. While TAP may later add frequencies on the route it will not be able to decouple these two cities as it is unable to operate non-stop from Bogota to Lisbon without payload restrictions.

It is too early to provide guidance on Bogota and Panama City sales as TAP is still waiting for authorisation to sell the new service in Colombia and Panama. TAP has only been able to sell these destinations on the European side since announcing the route in Dec-2013. For Belem and Manaus, TAP has already been selling tickets in both Brazil and Europe for nearly five months.

As CAPA reported in Dec-2013, the Bogota and Panama City route is strategically important for TAP as it diversifies the carrier's Latin American network, which now consists of only one online destination outside Brazil - Caracas in Venezuela. Bogota and Panama City are also both Star Alliance hubs, which TAP plans to leverage with codeshares.

TAP to codeshare with Copa and later Avianca

TAP is currently in partnership talks with both Panama's Copa and Colombian carrier Avianca. The Copa codeshare will likely materialise first as Avianca, while interested in working with TAP in Bogota, is currently focusing on preparing Avianca Brazil for Star.

TAP will need to at least initially rely on interlining with Avianca for Bogota feed when TAP begins serving Colombia at the beginning of July. A codeshare is expected to materialise later. Avianca is the largest domestic carrier in Colombia and also will be able to provide offline connections to other destinations in eastern South America.

Copa should be able to move faster in implementing a codeshare with TAP, which could give the group an advantage in providing the Portuguese carrier with offline access to other destinations in Colombia and elsewhere in Latin America. In addition to serving over 50 destinations in Latin America from Panama City, Copa has a Colombian subsidiary that operates domestic trunk routes and a small number of international services from Bogota.

Copa has been keen for some time to attract a Star European member to Panama City, which has emerged as the largest hub for intra-Latin America travel. Currently the only long-haul carriers serving Panama City are SkyTeam members Air France and KLM and oneworld member Iberia.

Avianca Brazil is ready to work with Star carriers but TAP sees more value in Gol

Avianca Brazil is now preparing to enter Star later this year, following an accelerated ascension timeline necessitated by TAM's shift from Star to oneworld. To enable connectivity with Star members, Avianca Brazil is now in the process of upgrading its IT plafrom, transitioning to a solution from Amadeus.

Avianca Brazil plans to rapidly forge and implement interlines and codeshares with Star members once it turns on its new IT system on 30-Mar-2014, which will give it the infrastructure to support partnerships. While Avianca Brazil will be able to start working with Star carriers on an informal basis as soon as TAM leaves Star it is not expected to formally enter the alliance until late 2014.

TAP sees Avianca Brazil as an attractive partner but not sufficient by itself to cover its needs for feed in Brazil. Avianca Brazil currently has an all-domestic network consisting of 24 destinations and in 2013 accounted for a 7% share of domestic RPKs in Brazil.

Gol captured a 35% share of Brazilian domestic traffic in 2013, just below the leading 39% share from TAM. Gol also has a much larger network than Avianca Brazil, consisting of over 50 domestic destinations and 12 regional international destinations within Latin America, according to OAG data.

While Avianca Brazil has a presence on most of the main domestic trunk routes from the two main international gateways, Sao Paulo Guarulhos and Rio de Janeiro Galeao, the carrier does not have the network TAP needs at its other Brazilian gateways. TAP has successfully used its smaller Brazilian gateways to connect with TAM to offline destinations throughout Brazil. This provides in many cases a less circuitous and quicker option because Brazilian cities such as Belo Horizonte, Brasilia, Fortaleza and Salvador are closer to Portugal than Sao Paulo or Rio de Janeiro. It also enables TAP to focus its slots at Guarulhos and Galeao on local traffic, alleviating the congestion in Sao Paulo and Rio de Janeiro.

Air France-Gol 'exclusive' partnership has carve out for TAP

TAP will be the only European Star member that is able to use Gol to fill the void left by TAM. Gol on 19-Feb-2014 signed an expanded partnership with Air France-KLM, which at the same time purchased a 1.5% stake in the Brazilian low-cost carrier.

The partnership makes the two airline groups "exclusive" partners in the Brazil-Europe market but Air France-KLM has agreed to a carve-out for TAP. While Gol and TAP have not yet announced a codeshare, the two carriers are close to completing an agreement.

For Gol, giving up the ability to potentially codeshare with European carriers other than TAP is not too big of a compromise as Air France, KLM and TAP are all among the leading carriers in the Brazil-Europe market. TAP currently accounts for a leading 23% share of seat capacity between Brazil and Europe, which will increase to 27% in Jul-2014 as the carrier expands its Brazilian network by another two destinations.

Air France is the second largest European carrier in Brazil and currently accounts for a 14% share of capacity in the Brazil-Europe market. When also factoring in KLM's 6% share, Gol's partners will have a combined 47% of the Brazil-Europe market.

Brazil to Europe capacity by carrier (one-way seats per week): 19-Sep-2011 to 17-Aug-2014

Iberia only accounts for a 8% share of seat capacity between Brazil and Europe (while sister carrier British Airways accounts for a 6% share and new oneworld member TAM accounts for about 20%). Iberia has been Gol's other European codeshare partner since 2010, one year after Gol started codesharing with Air France-KLM. But Iberia is expected to turn off its codeshare with Gol in favour of a new relationship with TAM. Gol will meanwhile expand its current codeshare with Air France and KLM to include additional destinations while also implementing its anticipated codeshare with TAP.

Other Star carriers serving Brazil will rely mainly on Avianca Brazil

Lufthansa and Swiss are the only other European Star members serving Brazil, although Air China and Singapore Airlines also serve the Europe-Brazil market as part of flights that originate in Asia and stop in Spain. While Gol will not be able to codeshare with any of these carriers due to the exclusivity of its deal with Air France-KLM it will still able to maintain and add interline relationships. Gol currently has over 50 interline partners, including with several Star members. Gol also already has a codeshare with one Star member, Copa.

The need for Star members other than TAP and Copa to work with Gol is less critical as other Star carriers only serve Sao Paulo and Rio de Janeiro. At these main gateways Avianca Brazil is able to provide sufficient access. Avianca Brazil currently has 12 domestic routes from Sao Paulo Guarulhos and eight domestic routes from Rio de Janeiro Galeao, according to OAG data. Avianca Brazil is now working on further improving its network and schedule at Guarulhos and Galeao ahead of its ascension into Star.

Some Star members may also have the opportunity to supplement Avianca Brazil by partnering with Azul, which has the largest regional network in Brazil. Azul captured a 13% share of domestic RPKs in Brazil in 2013 and has an all-domestic network of about 100 destinations. As CAPA reported in Oct-2013, Star has been talking to Azul about a potential LCC platform which would allow the Brazilian carrier and select LCCs in other countries to work with Star members without becoming a member. These discussions have been controversial, especially for Avianca Brazil.

Does Avianca Brazil/Synergy still have a chance at taking over TAP?

TAP's decision to pursue a codeshare with Gol also could potentially sour the Portuguese carrier's relationship with Avianca Brazil and its sister carriers, which operate in Colombia, Ecuador, Peru and Central America under the Avianca Holdings umbrella and with the exception of Ecuador has been in Star since mid-2012. (Privately-held Avianca Brazil is not part of publicly-traded Avianca Holdlings but Avianca Brazil's parent Synergy Aerospace is the largest single shareholder of Avianca Holdings.)

Synergy in 2012 attempted to acquire TAP but its bid was controversially rejected in Dec-2012 by the Portuguese government because of concerns over financial guarantees. The Portuguese government has since repeatedly delayed the re-start of the privatisation process.

Portugal is required to eventually sell TAP as a condition of its 2011 bailout by the EU and IMF. But the government does not seem in a hurry and is now supporting TAP's expansion while the issue of future ownership remains unresolved. TAP expects the government to wait for better economic conditions and for the emergence of a larger pool of interested parties.

Synergy remains interested in submitting a new bid should the privatisation process be restarted and is still a logical suitor given TAP's strong position in the Brazilian market. But there also seems to be a strong desire to have new bidders and the Portuguese government is willing to wait until it has multiple options.

TAP also continues to expand in Europe and Africa

As TAP continues to expand and flourish, the carrier is more likely to attract interest. While its network in Africa and Brazil is its forte, the carrier also has performed well in Europe despite challenging market conditions. TAP plans to expand further in Europe in 2014 as it has decided to lease four additional A320 family aircraft, lifting its narrowbody fleet to 43 aircraft by end-2014.

TAP has been able to continue growing its European traffic despite the eurozone crisis and sagging sales in Portugal by promoting connections throughout Europe to Africa and South America. Germany has been a particularly strong market, with traffic growth of 18% in 2013 to 679,000 passengers.

TAP is increasing capacity to Germany by 22% as it launches four weekly flights to Hannover in Jul-2014 while adding frequencies across its current network of five German destinations. Germany currently accounts for about 8% of TAP's international seat capacity.

TAP Portugal international capacity share (% of seats) by country: 24-Feb-2014 to 2-Mar-2014

TAP is also planning to grow seat capacity to Spain in 2014 by 15%. The carrier's traffic to and from Spain increased by 5% in 2013 to 994,000 passengers despite Spain's challenging economic conditions. This is another reflection of TAP's ability to offer a unique network, particularly to Brazil as Madrid only has non-stop links to two Brazilian destinations compared to 10 (soon 12) from Lisbon.

TAP is also planning to add capacity to Africa in 2014, where it has 14 destinations. TAP is adding capacity to Sao Tome as it replaces its current schedule of one weekly flight to the island, which uses a chartered A310, to a new schedule of three weekly flights via Accra that will be operated with its A320 fleet.

The carrier at the same time plans to expand in Accra, which it currently serves with five weekly A320 frequencies. TAP expects to start using Accra as its main hub for offline African connections under a new partnership with Ethiopian Airlines subsidiary ASKY, which is currently based in Togo but is planning to establish up a new base in Ghana.

Partnerships are an important component to the successful TAP formula

TAP currently only has two African codeshare partners, South African Airways and LAM Mozambique. Adding ASKY and three partners in Latin America will enable the carrier to grow its presence significantly in strategic markets. While the two additional A330s allow for the resumption of some organic long-haul growth, TAP is still a relatively small niche carrier that needs to rely heavily on partnerships.

Its ability to replace TAM with Gol is a major coup for the carrier as Gol is mainly forging ties with SkyTeam carriers, led by Delta and now Air France-KLM (both of which now have equity stakes in Gol). Getting a carve out from Gol's new otherwise exclusive relationship with Air France-KLM is a shrewd move that will pay dividends as other European Star members will have to settle for working with much smaller Avianca Brazil.

TAM was a critical partner in TAP's most important market, Brazil. Gol is a virtually even substitution, allowing TAP to maintain the wide array of domestic connections that are critical to its successful and growing Brazilian operation. While Gol does not serve Europe this is moot as TAP did not work closely with TAM between Europe and Brazil or in Europe. TAP has its own strong point of sale presence in Brazil and purely needs Gol for domestic feed.

Even with its long-term ownership situation still unsettled, TAP has a bright outlook. Its success at carving out successful niches in Latin America and Africa while securing the right partnerships puts the relatively small European carrier in a solid position. In a constantly changing alliance market, each step TAP takes to enhance its attractiveness will improve its prospects of finding suitable buyers.