TAP Portugal’s privatisation enters final stage, with Avianca-TACA parent emerging as only bidder

TAP will likely need to find a new Brazilian partner regardless as TAM is expected to leave Star and join new sister carrier LAN in the oneworld alliance. A TAP-Synergy combination would be a positive outcome for Star as it would ensure the Portuguese carrier and its valuable Europe-Brazil network stays in Star.

There was previously a risk that TAP could end up in oneworld (if acquired by Iberia and British Airways parent IAG) or SkyTeam (if acquired by Air France-KLM). The loss of both TAM and TAP would have significantly weakened Star's presence in Brazil, which is by far the most important market in Latin America, and particularly in the fast-growing Europe-Latin America market.

TAP-Synergy combination could lead to new long-haul flights from Lisbon to Colombia

A TAP-Synergy combination will also open opportunities for TAP into other Latin American countries, particularly Colombia, where Avianca has a strong presence, accounting for a 63% share of the domestic market (based on passenger data from Colombia's CAA for the first seven months of 2012). Avianca and other Avianca-TACA subsidiaries during the same period accounted for a 50% share of international passenger traffic in Colombia.

To tap into the strong domestic and international network Avianca-TACA has built up at Bogota, TAP and/or Avianca would likely launch Lisbon-Bogota services. Avianca's long-haul network currently only includes Madrid and Barcelona in Spain while TAP's only destination in South America outside Brazil is Caracas in Venezuela.

A Lisbon-Lima and Lisbon-San Salvador route from TAP or an Avianca-TACA carrier would also be a possibility to link TACA's two largest hubs with TAP's hub. TACA currently does not operate widebody aircraft but Avianca-TACA has been looking at assigning some of its future widebodies to TACA to open flights to Madrid, which would be the biggest single origin and destination market.

Lisbon could be an attractive alternative, or could supplement a potential TACA service to Madrid, as a tie-up with TAP would provide the beyond connections in Europe, including several destinations in the key Spanish market. San Salvador is a relatively small market but TACA would be able to offer passengers heading to or from Europe connections throughout Central America and the Caribbean. At Lima, connections would be available throughout South America. (TACA has a third hub in San Jose, Costa Rica but this is a much smaller hub and as it is more focused on flights to the US would not offer many potential connections within Latin America.)

No European bidder for TAP

Despite initial interest from several European companies, including International Airlines Group (IAG) and Lufthansa, not one European airline firmed up intentions to acquire their Portuguese counterpart. On 18-Oct-2012, the Portuguese government said it had shortlisted Synergy Aerospace, the South American aviation and industrial conglomerate founded and owned by the Efromovich family (led by the Bolivian-born Brazilian-Colombian entrepreneur German Efromovich) as the sole potential buyer of its national carrier TAP.

"Just one offer was accepted for the second phase of privatisation ... The retained investor is Synergy Aerospace," State Secretary for Transport and Public Works Sergio Monteiro said during a press conference in Lisbon.

Mr Monteiro said Portugal would now work on a binding bid with Synergy but he emphasised the country, which owns 100% of the TAP Group, has the right to suspend the negotiations if the offer by Synergy Aerospace does not meet specifications approved by the government. The specifications were outlined in a decree published only on 19-Sep-2012, according to a source close to the privatisation process.

Mr Monteiro confirmed 10 companies had initially showed interest in the privatisation of TAP, but he declined to name them. The financial daily Diário Económico reported that only three groups did submit a formal though non-binding bid, including Synergy, Abu Dhabi's Etihad Airways and an unidentified Asian carrier.

Previously, IAG, Lufthansa and Portugal's EuroAtlantic Airways had publicly expressed interest while companies such as Turkish Airlines and new LAN and TAM parent company LATAM Airlines Group also earlier told CAPA they were considering a bid for TAP.

See related articles:

• TAP Portugal's privatisation is moving slowly while interest is well publicized but not definite
• With its eyes set on LOT and TAP, Turkish Airlines aims to become Europe's most European airline

IAG was natural fit for TAP but backed out some months ago

TAP CEO Fernando Pinto has repeatedly stated that TAP's privatisation was generating "great interest" but the final round of non-binding bids is showing different results and reflects the not so glorious present state of the European airline industry, with all three major airline groups - Air France-KLM, Lufthansa and IAG - concentrating efforts on restructuring their own operations and increase shareholder value rather than swelling in size through consolidation.

Adding a fellow airline with a negative equity and almost EUR1.2 billion in debt, is not an attractive proposition in the current fragile state of the European airline industry, in spite of TAP's appealing niche network in Brazil and Africa. (Mr Pinto, a Brazilian citizen and former CEO of Varig, has focused on building TAP's Brazilian and African networks since joining the Portuguese carrier in 2000. TAP's niche network in Brazil and Africa has led to rapid growth for the carrier and Lisbon as a transit hub. Under Mr Pinto, TAP has nearly doubled its network from 40 destinations in 2000, has more than doubled its traffic at Lisbon to over 8 million passengers annually and has increased its Europe-South America transit traffic by nearly 500%. The carrier was also profitable in 2011, a notable achievement given the difficult operating environemnt in Europe, although at a group level TAP remained in the red.)

IAG has been seen as the most likely potential European buyer for TAP and the group had repeatedly expressed its desire to buy the Portuguese state-owned carrier until recently when it suggested its interest had waned. The group reportedly had hired JP Morgan as its advisor. "Our interest in TAP largely related to the network that it had in Brazil. But things are developing, the merger of LAN and TAM, [and] our acquisition of slots through the acquisition of bmi at Heathrow gives us opportunities that look more interesting to us. So our interest in TAP is significantly less today than it would have been 12 months ago," IAG CEO Willie Walsh said during the presentation of IAG's 1Q2012 results to analysts.

Mr Walsh said in May-2012 he "can't see Air France, KLM doing anything in relation to TAP. I can't see Lufthansa doing anything. And quite honestly I can't see LAN or TAM, LATAM doing anything. So I think the interest in TAP will be very weak and that you should include us in that list."

See related article: IAG first quarter operating loss doubles on shabby Iberia performance and pilot strikes

A bid from Lufthansa or Air France-KLM would likely have been more of a defensive manoeuvre as neither is currently in the mood to buy another European carrier. But the prospect of having IAG dominate the Iberian peninsula could have forced both groups to submit a bid if IAG did not end up pulling out. Lufthansa may have also been persuaded to submit a bid if it was not for Synergy's participation, which would be a relief to Lufthansa as it should ensure that TAP stays in Star.

Long-delayed TAP privatisation nears end

The sale of TAP is part of a disposal of state assets required under Portugal's EUR78 billion bailout package by the European Council, European Central Bank and the International Monetary Fund (IMF) agreed to in 2011. The country's comprehensive privatisation programme includes the energy and insurance sectors, media industries and transport. The latter comprises Aeroportos de Portugal (ANA), Portugal's airports operator, and TAP.

The government in May-2012 selected Credit Suisse Group, Barclays PLC, Citigroup and Banco Espirito Santo Investment to run the airline sale. The four banks have also been retained to oversee the separate privatisation of ANA. TAP is valued at approximately EUR1.2 billion, based on a multiple of eight times EBITDA (earnings before interest, taxes, depreciation, and amortisation) in 2011, while Aeroportos de Portugal SA is valued at EUR1.6 billion (using the same calculation), but could achieve an enterprise value of EUR2 billion.

See related article: Portugal Airport privatisation moving forward

Plans to re-privatise TAP date back to 1990, and the Portuguese government took initial steps in 1991 - when the flag carrier was reorganised as a Sociedade Anónima, or a public limited company with the Portuguese state holding most of the shares. The necessary laws to allow the privatisation of TAP were passed in 1998 and in Feb-2000 the government concluded an agreement with SAirGroup to sell an initial 34% shareholding.

However, in Feb-2001, SAirGroup withdrew from the agreement and one year later the Swiss airline conglomerate filed for bankruptcy. TAP's privatisation plans have been lingering on the Portuguese political agenda since the SAirGroup debacle, but they have now been firmed up under pressure of the Troika.

New owners must retain Lisbon as a hub

Over the last year the Portuguese government changed the timeline of TAP's present privatisation efforts several times. But the Council of Ministers in Aug-2012 decided they would proceed with the sale and on 19-Sep-2012 the government published the decree-law approving TAP's privatisation procedure and laying out the general conditions of the company's privatisation.

According to the document, the future shareholders in the Portuguese airline must safeguard Lisbon Airport as a hub because it is of "strategic importance as a key link in the relations between Europe, Africa and Latin America". TAP currently serves nine domestic airports and has scheduled passenger flights to 44 European gateways, 11 airports in Latin America, two in North America and 13 in Africa, according to Innovata data.

TAP has a market leading position at Lisbon Airport with a near 60% capacity share in terms of system seats produced to/from the airport, a 67% share of ASKs and 64% of frequencies, according to schedules in Innovata for the week of 22-Oct-2012 to 28-Oct-2012.

Lisbon Airport capacity (% of seats) by carrier: 22-Oct-2012 to 28-Oct-2012

Source: CAPA - Centre for Aviation & Innovata

The winning bidder is defined as having "technical and management experience in the aviation sector, reputation and financial capacity" and the sale of TAP will be realised in two phases. The first phase provides for a capital increase of TAP SGPS (TAP Group) subscribed by "one or more investors".

In a second phase, TAP employees will be able to acquire 5% of the group's share capital. The main investors will not be allowed to sell their shares for a period of 10 years and employees for a period of five years.

Ownership issues

In particular, the decree-law stipulates that non-European investors will be restricted to taking up a majority stake of maximum 49.9%, designed to preserve TAP's designation as a European Union operator.

The planned sale of the TAP Group - which inclues its regional subsidiary Portugalia (which was an independent carrier until it was acquired by TAP in 2006) and its MRO subsidiary (which in addition to its shops in Lisbon has a Brazilian subsidiary which was acquired from the assets of Varig in 2005) - will possibly cause nationality concerns. But the Synergy Group and its subsidiary Synergy Aerospace can easily set up a European entity - alone or in a JV with a European strategic or financial investor - to address the issue.

Also, Mr Efromovich is from Polish descent and he reportedly still holds a Polish/EU passport. This could address the control and ownership provisions of TAP as an EU airline.

The protection of extra-EU traffic rights has been a challenge in cross-border mergers between EU airlines and this has been addressed by safeguarding the "nationality" and traffic rights of the airlines in foundations controlled by the respective governments. In a recent draft communication (The EU's External Aviation Policy - Addressing Future Challenges), the European Commission admits that the difficulties encountered as a result of current ownership and control provisions are significant and require negotiations with partner countries and highly complex governance structures which, it says, "inevitably mean that the full benefits of consolidation cannot be achieved". In the paper, the EC argues that the EU's external policy needs a major and rapid transformation and it is suggesting liberalising airline ownership and control rules with like-minded countries.

"The EU should take a much stronger lead in assessing how the concerns related to the current ownership and control clauses can be catered for, particularly with like-minded countries, whilst also addressing the need for airlines to access capital funding and enhancing the attractiveness of airlines in the financial markets," the EC said in its communication.

Synergy Aerospace could be a test case for allowing foreign investment in EU airlines. The EU and Brazil already initialled a comprehensive air transport agreement (Open Skies) in Mar-2011 albeit with signature by Brazil still pending.

Synergy aims to finally become a player in Brazil-Europe market

Mr Efromovich was born in Bolivia but grew up in Chile and Brazil. His Brazilian citizenship made possible his first airline acquisition, OceanAir, which in 2010 was rebranded Avianca Brazil. Synergy subsequently acquired Avianca in 2004 and in early 2010 Avianca completed its merger with Central American consortium Grupo TACA. Unlike in Brazil, there are no restrictions on foreign ownership of airlines in Colombia or Central America although Mr Efromovich following Synergy's purchase of Avianca was given honorary Colombian citizenship.

Following the collapse of Varig in 2006, Efromovich looked to fill the void by quickly expanding OceanAir into the long-haul market. Boeing 767s were acquired in 2007 and flights were launched to Mexico with several additional long-haul routes, including to Africa, planned. Synergy was so optimistic about its prospects in the Brazilian long-haul market it placed an order for 10 Airbus A350s in 2008. (These aircraft were initially intended for OceanAir although Synergy also has the option of sending them to Avianca, which has 10 Boeing 787s on order.)

The long-haul operation at OceanAir quickly failed and the carrier retreated back to its core domestic market in 2008, leaving TAM as Brazil's only long-haul carrier. But Mr Efromovich always had bigger ambitions for Brazil including a long-haul network prior to the 2014 FIFA World Cup. This ambition can become reality through the proposed acquisition of TAP as TAP is the largest carrier in the Brazil-Europe market.

TAP now has about 75 weekly frequencies to 11 South American airports, 10 of which are in Brazil. The carrier increased RPKs to South America by 42% in 2011 and passengers carried by 16%. Traffic to/from Latin America accounted for 23% of its passenger revenues in 2011 and is the second largest revenue contributor after Europe, which represents 36% of passenger revenues. Latin America accounted for 53% of TAP's transfer traffic at its Lisbon hub in 2011.

TAP is the current market leader between Brazil and Europe. TAP accounts for roughly 25% of all seats in the market based on schedules in Innovata for the week of 21-Oct-2012 to 27-Oct-2012.

Brazil to western Europe capacity by carrier (seats per week, one way): 19-Sep-2011 to 14-Apr-2013

Source: CAPA - Centre for Aviation & Innovata

TAP's Star partner TAM is the second largest carrier between Brazil and western Europe, accounting for 19% of the seats in the market. TAM and TAP have a close relationship and do not overlap as TAM does not serve Portugal and instead focuses on Spain, Italy, France, Germany and the UK.

A successful purchase of TAP by Synergy would ultimately ensure that Star keeps its lead in the Brazil-Europe market after TAM exits Star. (TAM is required to leave Star within the next two years as part of a requirement from Chile's anti-trust court, which in approving the LAN-TAM merger stipulated that the group cannot be in two alliances and cannot be in the same alliance as Avianca-TACA. TAM's options are either to join new sister carrier LAN in oneworld or become non-aligned.)

See related article: Avianca-TACA and Copa put Star on top in Latin America but the victory will be short-lived

Star also needs to find a new solution for the domestic Brazilian market as several of its members now rely on TAM to provide connections from Sao Paulo and Rio de Janeiro to destinations throughout Brazil. Avianca Brazil, which is not yet a member of Star, is poised to take over this role.

When Avianca-TACA was formally invited to join Star in 2010, Avianca Brazil was excluded from the offer after TAM expressed its preference that only one Brazilian carrier should be allowed to participate in the alliance. At the time it was logical to exclude Avianca-Brazil, which had a much smaller network than TAM.

Avianca Brazil is a relatively small carrier but has been expanding, has a presence on most major trunk routes and has a large domestic operation from Sao Paulo Guarulhos, which is the country's main international gateway and is served by over 10 Star carriers. Guarulhos is Avianca Brazil's largest base. It also has a large presence in the major markets of Rio de Janeiro, Salvador, Brasilia, Recife and Fortaleza (all of which are gateways for TAP).

See related article: Avianca Brazil accelerates expansion as ex-Lan A318s and new A320s are added to fleet

Avianca Brazil top 10 hubs/bases/stations by capacity (seats): 22-Oct-2012 to 28-Oct-2012

Source: CAPA - Centre for Aviation & Innovata

Brazil's top 10 cities by arrival capacity (seats): 22-Oct-2012 to 28-Oct-2012

Source: CAPA - Centre for Aviation & Innovata

Avianca Brazil embarked on a major domestic expansion plan following its rebranding in 2010, ending a period of two years in which it shrunk and ceded market share. Avianca Brazil accounted for 5% of the Brazilian domestic passenger traffic in the first eight months of 2012, up from 3% in the first eight months of 2011 (based on RPK data from Brazi's ANAC). At the same time TAM's share has been slipping as both it and Brazil's second largest carrier Gol have slashed capacity throughout 2012 and plan to continue to decrease supply into 2013 as slowing economy has triggered softening demand in the domestic market place.

See related article: TAM to slash domestic capacity in 2013 in an attempt to rationalise the Brazilian market

Avianca Brazil has maintained that its capacity growth, which jumped by 63% year-over-year in Aug-2012, has been part of an effort to further increase its market share from a smaller base. The carrier appears to be holding its own with respect to load factor, tying with LCC Azul for the highest load factor in Brazil's domestic market during Aug-2012 at 75%.

TAP would be important addition to Synergy's family of airlines

Synergy's lock-in on acquiring TAP and the timing of TAM's exit from Star Alliance serve as major springboards for Avianca Brazil to bolster its passenger base with the feed from TAP. Avianca Brazil obviously is eager to join Star in order to gain the additional domestic passengers from partnering with TAP and other Star members. If Synergy acquires Portugal's flag carrier then the Brazilian airline is all but assured to become part of the group in order to deliver on the network connectivity promised by Star.

(LATAM told CAPA in Jun-2012 that it planned to make an alliance decision in six to 12 months. oneworld CEO Bruce Ashby recently told CAPA that while he understands it is a complicated scenario that LATAM has to work through, the alliance was hopeful a decision would be reached within the next few months. He explained oneworld was not in a burning hurry for LATAM to make a decision by a set date, noting the group understands that if there needs to be due process conducted, "we are fine with that".)

Technically, Avianca Brazil is not part of Avianca-TACA Holding. Synergy still owns 100% of Avianca Brazil, with German Efromovich's brother Jose Efromovich serving as president (both brothers are on the board of Avianca-TACA). Synergy owned 100% of Avianca before completing the merger with Grupo TACA in early 2010. Initially Synergy retained a 67% stake in Avianca-TACA Holding while the Kriete family, which owned all of TACA prior to the merger, held a 33% stake. Both stakes were reduced but only slightly in Apr-2011, when Avianca-TACA completed an initial public offering on the Bogota Stock Exchange.

See related article: Oversubscribed Avianca-TACA IPO provides another indication of buoyant Latin American industry

Avianca-TACA Holding now includes 10 airlines (nine passenger carriers and Tampa Cargo) in nine countries. So far four of these carriers - Avianca, TACA, LACSA (also known TACA Costa Rica) and TACA Peru have joined Star. Ecuador's AeroGal is planning to join Star later along with Aviateca (also known as TACA Regional Guatemala). Small TACA regional affiliates Sansa (Costa Rica), La Costena (Nicaragua) and Islena (Honduras) are not expected to join Star.

In addition to Avianca Brazil, Synergy also own Brazilian cargo carrier Variglog. At least initially TAP would fall under Synergy rather than Avianca-TACA. But all the Synergy carriers could later be moved to Avianca-TACA, assuming ownership restrictions in Brazil and the EU can be met. (Brazil has been considering for over two years easing ownership restrictions and allowing foreign entities to own up to 49% of Brazilian carriers compared to up to 20% currently allowed.) Avianca Brazil already has a close relationship with sister carrier Avianca which includes a co-branding arrangement and codeshare.

Airlines included in Avianca-TACA Holding (majority owned by Synergy)

Carrier	Country	Alliance
Avianca	Colombia	Current member of Star
TACA International	El Salvador	Current member of Star
AeroGal	Ecuador	Future member of Star
Sansa*	Costa Rica	N/A
La Costeña*	Nicaragua	N/A
TACA Peru	Peru	Current member of Star
Aviateca*	Guatemala	Future member of Star
Tampa Cargo	Colombia	N/A
Isleña*	Honduras	N/A
Lacsa	Costa Rica	Current member of Star

Source: CAPA - Centre for Aviation
Notes: *operate under the TACA Regional brand

Airlines included in Synergy Aerospace

Carrier	Country	Alliance
Avianca Brazil	Brazil	Future member of Star
Variglog	Brazil	N/A
TAP Portugal*	Portugal	Current member of Star

Source: CAPA - Centre for Aviation
Note: *proposed acquisition

Complementary fleets offer increased leverage with Airbus

TAP and the Synergy's family of airlines have largely complementary fleets. The A320 is the backbone of the narrowbody fleet at Avianca-TACA and has also become the growth aircraft for Avianca Brazil, which also still operates a fleet of Fokker 100s which are expected to be phased out over the next few years. Avianca-TACA is one of a handful of airline groups that operate all four variants of the A320 family. Avianca, the only widebody operator in the Avianca-TACA and Synergy groups, also operates A330s.

TAP is also an A320 and A330 operator. Both TAP and Synergy have A350s on order while Synergy also has ordered the A320neo, which is expected to be operated by several Avianca-TACA and Synergy carriers.

The expanded scale of Airbus aircraft in operation and on order from all the Synergy-owned carriers would create new leverage for Synergy with the airframer as well as efficiencies in maintenance and operations throughout the enlarged network. Synergy would also gain from the TAP acquisition MRO facilities in Portugal and Brazil. The latter could be potentially used to maintain some of the fleet at Avianca Brazil and complement Avianca's main MRO facility in Bogota.

Building international breadth against LATAM

Synergy's purchase of TAP would help the Synergy family of airlines (including those under Avianca-TACA Holding) broaden its European footprint, allowing it to somewhat strengthen its competitive positioning against larger LATAM. Presently, Avianca-TACA's long-haul flights only consist of Avianca-operated service from Bogota to Barcelona and Bogota and Cali to Madrid. TAP's service from Lisbon to 10 destinations in Brazil could help feed Avianca Brazil's fast-expanding domestic operation. If new hub-to-hub routes are launched, which would be expected in a merger of this scale, TAP flights would also end up feeding Avianca-TACA's intra-Latin American network that includes hubs in Bogota, San Salvador and Lima.

Even as the strategic rationale for Synergy to purchase TAP seems solid, much needs to be accomplished before the sale will be final including the resolution of thorny ownership issues and Synergy developing an offer that matches specifications issued by the Portuguese government. But with no other bidders being allowed to move forward, Synergy has a ripe opportunity to strengthen the position of Avianca-TACA on a global scale while opening up new opportunities for Avianca Brazil in the domestic market. Synergy and the ambitious Mr Efromovich now must decide if the Portuguese government's requirements are reasonable.