Portugal tightens the Air France-KLM and Lufthansa in the final stretch of the privatization of TAP. The Government of Luís Montenegro has decided to keep both groups in the race and open an additional negotiation period for them to present final and improved offers for up to 44.9% of the Portuguese airline, after concluding that neither of the two binding proposals submitted in July offers a sufficient advantage over the other for now.
The Council of Ministers approved this Friday, September 4, the report prepared by Parpública, the public company responsible for managing the State's business holdings, and gave the green light to this new phase. According to the Executive, the offers have different contents, but have obtained a global valuation "very close", a circumstance that has led Lisbon to avoid an immediate choice and try to extract better conditions from both bidders in the coming weeks.
Lisbon takes advantage of the tie to raise the price
The movement represents, in practice, a final bidding between two of the largest European airline groups. Air France-KLM and Lufthansa submitted their binding proposals on July 29 after surpassing the previous phases of the process, but Portugal believes that there is still room to improve both the economic conditions and the industrial commitments associated with the operation.
The price will be important, but it will not be the only criterion. Since the beginning of the privatization, the Portuguese Government has made it clear that it will also examine the industrial plan, the financial capacity of the buyer, and their commitments to the connectivity of the country. Lisbon wants to preserve the role of TAP as a link between Portugal, its autonomous regions, the diaspora, and Portuguese-speaking countries, in addition to boosting the activity of other national airports and strengthening maintenance and engineering centers.
The goal is, therefore, to sell better and not simply sell to the highest bidder. The chosen partner must commit to a ten-year growth plan, investments in fleet, maintenance of industrial capacity in Portugal, and a strategy that strengthens connections from Lisbon, Porto, Faro, Azores, and Madeira.
The 44.9% for one partner and another 5% for the workers
The design of the operation contemplates the privatization of up to 49.9% of TAP's capital. Of that percentage, a maximum of 44.9% will be acquired by the winning strategic investor and up to 5% will be reserved for the company's workers. The State will initially retain the majority of the capital.
The chosen formula allows Lisbon to incorporate one of the large European groups into the management of TAP without immediately losing control of the airline. The future partner will, however, have a relevant role in the management of the company, according to the conditions set by the Portuguese Executive.
The privatization also responds to the high cost that the State has assumed over the last few years to sustain the company. The Government recalls that more than 3.2 billion euros of public money have been allocated to TAP and intends to recover part of that effort through the entry of private capital, while seeking to ensure that the airline can compete within an increasingly concentrated European sector.
Air France-KLM and Lufthansa compete for a strategic piece
TAP is particularly attractive due to a network that is difficult to replicate for its competitors. The company has a privileged position in the connections between Europe and Brazil, Lusophone Africa, and the United States, in addition to having valuable operating rights at the congested Lisbon airport. Incorporating it into one of the large European conglomerates would significantly strengthen the presence of either of the two candidates in the Atlantic.
Air France-KLM has submitted its candidacy accompanied by a strategic plan that has the backing of Delta Air Lines, its main U.S. partner, while Lufthansa has defended its intention to build a long-term relationship with Portugal and has proposed, among other projects, the creation of a maintenance center in the country.
The competition also has an important dimension of airline alliances. TAP currently forms part of Star Alliance, the same group to which Lufthansa belongs, so a German victory would facilitate its integration within an already shared structure. Air France-KLM, for its part, would strengthen SkyTeam's position with TAP and achieve a particularly powerful platform towards South America.
IAG is out of the race
The battle ended reduced to two candidates after IAG, parent of Iberia, British Airways, Vueling, Aer Lingus, and LEVEL, decided not to submit a non-binding offer when the time came to formalize its interest. Air France-KLM and Lufthansa were thus the only contenders for the 44.9%, despite the fact that initially the Hispano-British group had also studied the operation.
The absence of IAG left two very different strategies facing each other for TAP, but the analysis carried out by Parpública has practically ended in a tie. That equality is precisely what Portugal intends to use now to its advantage: maintain competitive pressure until the last moment to raise the economic and strategic value of the sale.
The decision is delayed a few weeks
The original schedule contemplated that the Government could select the buyer between late August and early September, but the opening of this additional negotiation postpones the decision. Lisbon expects the process to last a few weeks, after which Air France-KLM and Lufthansa must present their final proposals.
It will be then when Portugal has to choose not only who pays more to enter TAP, but which group offers greater guarantees to maintain in the country an airline that the Executive considers strategic. The hub in Lisbon, the routes with Brazil and Lusophone countries, the growth from Porto, the investments in fleet and maintenance, and the financial capacity of the candidates will weigh alongside the price in the final decision.
For now, there is no winner. Air France-KLM and Lufthansa arrive practically tied to the final round and Portugal has decided to use that competition to demand more from both. After years of postponements, public rescues, and debates about the future of the company, the privatization of TAP thus enters its decisive phase.