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Restructured TAP Portugal growing towards South America
By Sebastian Steinke
“Two years ago you asked me whether I had any fear of low-cost airlines,” recalls Fernando Pinto, CEO of TAP Portugal, smiling. “And the answer was, 'not at all.' Today 29 of the 35 European low-cost airlines fly to Portugal. They fly to Lisbon and Porto, but we are competing very well. When Ryanair started up in Porto, we feared we might lose to them. But the total number of flights increased, and our business did too. Only British Airways cancelled its route.”
TAP (Transportes Aéreos Portugueses SGPS S.A.) responded to the low-cost competition with special offers at competitive prices. In mid-February, for example, the airline announced special offers from Lisbon to Barcelona and Madrid for 48 euros, to Paris for 78 euros, to Venice for 98 euros and to Prague and Budapest for 108 euros. Note that these prices are for return flights, although they don't include taxes and other charges.
“We offer a portion of the seats at very reasonable prices, sometimes just as cheaply as the low-cost competition,” explains Pinto. “The difference is that we offer better service and often fly to more attractive airports. These low-cost offers do not reduce our average profits, and we do not intend to set up our own low-cost airline,” asserts Pinto. On the other hand, the additional passengers have improved TAP's capacity utilisation and considerably increased revenues. “We have grown 50 percent in the last five years, with an annual growth rate of 19 percent in 2006. In the year 2000 we still had 9,000 employees. Today, ten percent fewer employees handle 50 percent more passengers and generate 50 percent more revenue. Compared to large airlines, our staff are very efficient, and the same holds true when you compare us with low-cost airlines.”
Although TAP is essentially a traditional airline providing full service and a business class, the company is constantly trying to reduce costs behind the scenes without harming the product. Pinto comes up with the example of in-flight catering, which has been entirely converted to Portuguese products on European flights without any involvement of external caterers: “That helps a great deal and has allowed us to cut catering costs by 20 percent.” Nevertheless, the in-flight catering still compares very well with the competition. For instance, the breakfast served to “Top Executive” business class passengers on the morning flight from Frankfurt to Lisbon at the end of January included steak-kebab with a small salad and filled puff pastry.
The latest additions to the fleet are cost-efficient twin-engine jets, which further reduce costs. By May this year, four additional A330-200 aircraft will be added to the airline's Airbus-only fleet, which currently numbers 48. In November 2005, TAP ordered ten A350 aircraft and thus took a very early decision in favour of the next twin-engine Airbus jet. Until it takes delivery of these, the airline is leasing seven A330 jets from Airbus as part of the same package.
“The A330 was the king in this market. Nobody else had a product like it. However, when Boeing launched the 787, it suddenly had a better, revolutionary aircraft in terms of design, comfort and performance. Much, much better than the A330. Initially, Airbus tried to improve the A330. Then they developed an aircraft that is similar or even better than the 787. As far as passenger comfort is concerned, it is even more spacious than the 787, while offering the same performance,” says Fernando Pinto, who clearly also pursued a serious interest in the 787. “But perhaps Boeing didn't really believe we would buy the 787, given that we've always bought Airbuses in the past,” recalls Pinto. “Our plans for the future are to have the A320 family and the A350 family, except for the planned version –1000,” reveals Pinto. “We will confirm our orders for the A350 for the A350XBW as well at the price agreed initially, which is common practice in the industry. However, the delivery dates are still not fixed.”
When it comes to the question of whether it is better to buy or lease aircraft, Pinto is a clear advocate of buying: “While leasing is more flexible, today's market is so hot that leasing costs are high. And when you buy an aircraft you have an asset that you can sell at a later date. I prefer to buy a fleet.”
Considered for many years to be a hopeless case in need of radical restructuring, the Portuguese airline, which has a long history, finally made a profit last year following an annual loss of 9.9 million euros in 2005. “I expect positive year-end results in 2006. And in the next three years our revenues and profits will continue to grow,” reveals Pinto.
That includes a new air freight service launched in mid-January from Lisbon to Frankfurt and Cologne with an A300F leased “wet” (i.e. with crew). The freight carrier flies twice a week, offering a capacity of 48 tonnes. On its first two flights, it carried 43 and 42 tonnes of freight, thus achieving good capacity utilisation straight away. Air freight already accounts for 8 percent of TAP's revenue and is set to grow by 20 percent in 2007 to 120 million euros.
What will boost growth most, however, is TAP's planned takeover this year of regional airline Portugalia, whose 17 Fokker and Embraer regional jets will be a valuable addition for feeder services requiring smaller capacities. Up to now, TAP has had to use at least an A319 for this purpose and compensated by making intermediate stops to pick up additional passengers. Daily services to Nice, Toulouse and Lyon will soon be added, assuming the Portuguese antitrust commission approves the takeover, as hoped, in March or April.
Italy was the European market where TAP experienced most growth in 2006, but there has also been notable success in Germany. “There has been double-digit growth for a number of years despite the fact that capacity has not changed,” says German sales director Francisco Manuel de Sousa e Silva with satisfaction. The new second daily Munich flight is “doing even better than Frankfurt”, which TAP already serves three times a day. In 2006, TAP flew a total of 281,000 passengers between Germany and Portugal, 10 percent more than in the previous year. Average capacity utilisation is now 63 percent. 15 percent of passengers on flights between Portugal and Germany are business people, who accounted for 30 percent of revenue. And 13 percent of passengers from Germany flew on to Brazil via Lisbon.
On its 48 weekly services on the South Atlantic route, TAP boasts average capacity utilisation of 82 percent. The airline is trying to fill the temporary gap left by Varig's collapse as quickly as possible. Pinto is a Brazilian himself and worked for Varig himself for many years.
The airline no longer sees its primary function as taking tourists to Portugal; instead, it sees itself as a network airline for business travellers to South America, where much of its growth comes from. The new A330 jets, which are to be fitted with a new generation of reclining seats in Business Class, will also be used for additional long-haul services to Belo Horizonte and Sao Paulo. TAP is also considering a new flight to the Brazilian capital.
The TAP route network also includes seven destinations in Africa. Daily flights are planned to Luanda (rather than five times a week at present), as is significant expansion in routes to South Africa. “Africa can become as important as Brazil,” says TAP boss Pinto, turning his attention to the future. On the other hand, following its withdrawal from the former Portuguese colony of Macao, the airline no longer offers any destinations at all in Asia.
The next item in the plans of TAP Germany director de Sousa is a new flight to Hamburg, where there is a large Portuguese community. “However, it's not cultural ties we expect to benefit from so much as business opportunities,” asserts the sales director and promises: “We are also looking into Berlin, which will be come important, but the business market is not yet as strong. As soon as we have more aircraft, we will be there.” Düsseldorf and Stuttgart, on the other hand, are not so promising: “These destinations are already well served.” There is also too much competition from low-cost airlines.
Perhaps this restraint also has something to do with the Star Alliance, of which TAP has been a member since 2005. “We are very happy to be a member of the Star Alliance,” stresses de Sousa e Silva. “Business Class bookings have increased very markedly, and relations with Lufthansa are very good.”
Despite his satisfaction at the airline's successful restructuring, TAP boss Pinto makes no bones about the current challenges: “We still have our problems. Chief among them is adherence to the timetable. Following our recent rapid growth, our Lisbon (LIS) hub has become too small.” The airport offers only one passenger boarding bridge that is suitable for wide-body aircraft. All other wide-body jets have to be served by bus while they stand on the apron. Pinto consoles himself with the thought that the situation will be better in two years once the four additional gates are built to accelerate passenger processing, something Pinto himself initiated. TAP's jets are handled by the company's own subsidiary, Groundforce Portugal. In addition, Pinto wants separate Schengen and non-Schengen areas in the airport in order to be able to handle more international flights directly in the terminal.
By the end of 2007, the TAP hangar in Lisbon will be extended as well. The large wingspans of the new A330 jets mean they need more hangar space than the A310 aircraft used up to now. TAP keeps them in the air an average of 14 hours a day, and yet they achieve very high operational reliability of 97 percent, two global records. “The A310 is a good aircraft, but it consumes a little bit too much fuel,” says Pinto.
His greatest challenge is the imminent privatisation of the airline, which is still state-owned. “The government has announced that the process will begin in 2007. When it will be completed is hard to say. We'll start with the preparations, and there are already interested parties both at home and abroad.” At the same time, Pinto is sceptical as to whether a takeover by a large airline would be the best thing for TAP. “Perhaps the range of flights offered to Portuguese passengers would suffer. Now that we are a member of the Star Alliance, we already have all the commercial benefits of working with the large airlines.”
From page 22 of FLUG REVUE 4/2007
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