Lufthansa & United To Invest In TAP Air Portugal?

Filed Under: Lufthansa, TAP Portugal

Reports suggest that Lufthansa and possibly even United might be working together to buy a major stake in TAP Air Portugal. While I totally get the logic, this would be terrible for consumers.

TAP Air Portugal’s current ownership structure

Airline entrepreneur David Neeleman founded JetBlue and Azul, and will soon be launching a new airline named Breeze in the US. On top of that, in 2015 a consortium that Neeleman is part of purchased a large stake in TAP Air Portugal, which was otherwise government owned.

At this point the consortium owns a 45% stake in the airline, and is also responsible for managing it.

Fo the country this was a smart move at the time — there’s no denying that as consumers, TAP Air Portugal has become a significantly more attractive airline in recent years, with huge expansion, great fares, and a much improved onboard product.

TAP Air Portugal’s A321LR business class

From the government’s perspective, huge expansion is good, as it brings more people to Portugal, especially as TAP Air Portugal offers free stopovers on long haul itineraries through Portugal.

Neeleman & the government have had disagreements

For quite a while there has been talk of Neeleman and the Portuguese government not getting along. Apparently the two parties have different takes on how the airline should be run — the government owns a 50% stake of the airline and delegates management to Neeleman, but isn’t happy with the results. Last year the airline lost 106 million EUR.

The government has allegedly been encouraging Neeleman to sell his stake, and the rumors of who the buyers could be are getting stronger and stronger.

TAP Air Portugal has expanded significantly

Could Lufthansa & United buy TAP Air Portugal stake?

Portugal’s Jornal De Negocios reports that Lufthansa is negotiating with Neeleman to buy his position in TAP Air Portugal. More interesting, perhaps, is that United Airlines is apparently also in on this acquisition process, even though the exact details of what a joint deal would look like are unknown.

This is something that has been rumored for several months now, but reports suggest that talks are getting more and more advanced.

This would come in the form of Lufthansa and possibly United buying at least a 50% stake in the consortium that owns the 45% stake in TAP Air Portugal, though apparently they could take full ownership of the consortium as well — that remains to be seen.

Lufthansa is allegedly interested in a TAP Air Portugal investment

This would be terrible for consumers

Why on earth would Lufthansa and United be considering buying a stake in a money losing airline where they’re going to be reporting to the Portuguese government?

It’s important to understand TAP Air Portugal’s position in the market. They’re essentially a low cost carrier on transatlantic flights, with incredibly reasonably priced fares in economy and business class, whether you’re flying roundtrip or one-way. They’re in a completely different league when it comes to pricing than Lufthansa or United.

Therefore I would assume any investment in TAP Air Portugal wouldn’t be so that they can integrate TAP Air Portugal into the existing Star Alliance transatlantic joint venture, which currently includes Air Canada, Austrian, Brussels, Lufthansa, SWISS, and United).

Rather I assume this could play out in one of two ways.

I think the most likely situation is that Lufthansa and United would have the simple goal of reducing the threat posed by a major competitor — not in the form of liquidating TAP Air Portugal (I don’t think that would end well), but perhaps trying to reduce their growth, deemphasize connections in Portugal, and trying to have them raise fares.

With Norwegian having shrunk significantly, I’d argue that at this point TAP Air Portugal is the biggest competitor to “traditional” network airlines across the Atlantic.

I’d say the other option is that they may look to somehow integrate TAP Air Portugal into their Eurowings division. Of course remember that:

  • Eurowings loses money
  • Lufthansa keeps changing their Eurowings strategy
  • This would be bad for Portugal, since almost certainly the focus would be taken away from Portugal, as Eurowings would operate more point-to-point routes

How would Eurowings fit into all of this?

Bottom line

It’ll be interesting to see if Neeleman sells his stake in TAP Air Portugal, due to him not seeing eye-to-eye with the government.

The airline is losing (somewhat) moderate amounts of money, but has grown like crazy lately, which I would assume is great for tourism in Portugal. On top of that, the airline has been innovative in terms of driving down prices across the Atlantic for all kinds of travelers.

There’s simply no universe in which it would be good for consumers if Lufthansa and United got their hands on any portion of TAP Air Portugal. I’d also argue there are very few circumstances under which this would be good for Portugal, which is why I doubt we’ll see this happen.

What do you make of Lufthansa and United potentially buying a stake in TAP Air Portugal?

Comments
  1. Can we just have an outright ban on mergers & acquisitions for big companies?
    The regulators on both sides of the Atlantic are miserably failing at ensuring free trade with fair competition. Therefore an outright restriction for companies with more than 10 000 000 000 EUR/USD revenue/year should be strictly enforced. A positive side-effect: Unproductive financial bean-counter jobs at HQ become redundant.

  2. Agree this would be terrible for competetion on TATL. Also from a service point of view, since the TP product is far superior than LH’s.

  3. I’m having some trouble at wrapping my head around an LH acquisition of TP. On the one hand LH already owns a vast majority of the Central European market, so the thought of EU regulators allowing this would be insane, as it would almost certainly have an immediate negative effect on customers. On the other hand, when you look at how EU regulators have had such an apathetic attitude towards IAG’s UX acquisition, one has to wonder what the point of these regulatory measures are.

    Just my two cents

  4. TAP is a losing machine since its beginnings. The Portuguese feel – a somehow incomprehensible – proudish attitude towards their flag company. However, they fail to understand that with their taxpayer’s money they are keeping alive a company that has never been able to manage itself properly and achieve profits. The whole airline should be in private hands since a long time ago. It is also difficult to understand why some private entity would invest in a company which has its hub – Lisbon airport – in the middle of a capital, with no possibility of expansion – TAP has just announced it will cut flights in the summer – and the announced new airport, which has been “announced” several of times, has never been taken out of documents. Portugal is a very peculiar country in many aspects, it is very difficult to get things done, everything takes its time (and no, not in a laid back attitude you are imagining), so you got to be careful before investing in such territory.

  5. If this goes through, I think TAP more likely will end up being like what Aer Lingus is for IAG. I don’t think they will reduce connections or change TAP’s business model too much aside from what is necessary to get the airline to make profit (increasing fares, cutting some costs and reassessing their route structure cutting unsustainable routes).

    TAP will serve as an ideal connecting point for TATL routes – as all of LH Group’s hubs requires considerable backtracking to get to places in western Europe and some north African destinations. Not to mention they can leverage TAP’s strength in Latin America and LH will trim their routes to core business routes and let TAP expand/feed more Latin America traffic.

  6. Agree with golfingboy, this makes good sense. The LH group would gain market share in South America and Africa, places BA/Iberia and AF/KLM are stronger…

    TAP, Brussels, Edelweiss and Edelwings would be the full-service, low’ish cost brands, separate from the premium brands LH, Austrian, Swiss…

  7. @Diogo, so many things wrong in a single comment. TAP hasn’t received taxpayer money since the late 90s. TAP is not cancelling any flights in Lisbon this summer, they are simply not getting all the slots they requested (airlines usually request many more slots that they intend to fly in any case). Lisbon airport will soon start its expansion, which will increase its capacity around 50% (from ~30 MPax to > 45 MPax).

  8. “as all of LH Group’s hubs requires considerable backtracking to get to places in western Europe and some north African destinations”

    Besides Brussels…

  9. I flew TAP in J class as recently as January between SFO and ZRH with a stop-over in LIS. Great hard product and prices were roughly 2x-4x less than on other Star Alliance carriers for a one-way flight. I’ll be flying TAP as much as possible and hope Lufthansa and United don’t ruin this airline.

  10. My take:

    1 – TAP is in a great geographic position, the notion LHG would buy into TAP to reduce competition on the Atlantic doesn’t make sense. TAP isn’t a big enough threat to warrant that, and with its Latin connection possibilities wouldn’t it make more sense to capitalize on that rather than spend more money on buying into TAP than what TAP could possibly do in damage on Atlantic routes?

    2 – Lufthansa does not keep changing its Eurowings strategy. If you read into it they went one way, then decided a better option was available to they adjusted.

    3 – There is no Eurowings division, it’s just Eurowings (and some of their wet leases like SunExpress). If you look into it, Brussels Airlines was moved out and is now a brand alongside OS, EN, LH, LX and WK. Integrating TAP would just place TP in that same list. Making it point to point doesn’t make sense as it would waste any benefit from buying TAP in the first place.

    4 – Competition wise this actually has the possibility of making Europe South America more competitive, not less. TAP has limited reach beyond Brazil, but with a bigger network able to support and feed it, and with the economies of scale of a group behind it, TAP has a much better chance of surviving and eventually thriving. The government supporting it is so far, seemingly escaping the views of the EU regulators, won’t be sustainable in the future. That doesn’t only put TAPs employees and economic impact at risk but about a factor of 5 if you look at what else is in that chain around it.

  11. This is clearly a move by LH to move into the South American market which TAP dominates and with IAG’s recent purchase of AirEuropa, they need a better foothold. Time will tell if it’s good for the Portuguese or not. However, of the carriers that LH has bought into in the recent past, with the exception of Alitalia, all of them are a little better than they were prior to LH.

  12. EU’s antitrust policy is such a joke… The fact that LH grows to what it is today is intolerable enough, and now they want to take over the last airline that offers reasonable TATL fare for premium cabin/one-way tickets? Give me a break…

  13. @Lucky: If Neeleman’s consortium owns 45% and the Portuguese government 50%, who has the other 5%? Perhaps I’m missing something. Thanks.

  14. Please, not! — LH has done a terrible job of getting their hard and soft products right. Their catering, once superb, now is just on par with other mediocre carriers. Their F and C class products? Girl, let’s not start talking about them. TAL will suffer under LH’s “guidance”, not sparkle or shine — and I say that as an (soon) ex-HON Circle member after 12 years of loyalty…

  15. So what have TAP’s low fares gotten them? How much profit have they made the last few years? LH has stepped in when Brussels, Austrian and SWISS were not doing well and now look at it. SWISS went bankrupt twice on their own and now together with LH has become a proper cash cow.

  16. I think you’re focusing quite heavily on TAP’s North TATL strategy and structure.

    First of all, there’s no way that TAP gets folded into anything, let alone Eurowings. If this story is true then UA is a partner in this investment and how does that benefit them?

    Second, TAP has a lot more than just a low cost North TATL component of it’s business. There are basically 4-5 components:
    -EU
    -North TATL
    -South TATL (mostly Brazil)
    -Africa
    -Domestic Portugal, including probably loss making routes to the Azores, Madeira, etc.

    UA gets a pretty convenient set of connections to the Iberian peninsula, Africa, and the other parts of Europe. LH gets connections to Africa, Brazil, and a low cost TATL partner to get exposure to that market (there’s a lot of focus on Norwegian but IAG is growing Level pretty aggressively).
    And TAP probably serves them at lower cost than UA or LH.

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