Contingencies with crew and Azul lower TAP’s value

On Thursday, the government kicked off the privatisation of TAP by approving the sale of 49.9% of its capital. The two valuations made of the airline, by EY and Banco Finantia, have not been revealed, but the Executive admits that there are contingencies that will affect the amount to be offered by interested parties.

The Minister for Infrastructure, Miguel Pinto Luz, acknowledged that there are contingencies in relation to TAP that could affect the value of the airline in the privatisation. “There is a dispute in court with TAP workers that will have to be included in the price of whoever wants to buy TAP. They know what they’re getting into and we’re not hiding it”, said the minister.

The airline has already made a provision of 41 million euros to deal with the lawsuits filed by cabin crew members who claim they were irregularly dismissed during the pandemic and were not integrated into the professional category they were entitled to. The airline has appealed the decisions to the Constitutional Court, but has so far lost the cases. This means that the amount claimed is likely to increase. The Sindicato Nacional do Pessoal de Voo da Aviação Civil (National Union of Civil Aviation Flight Personnel), which represents the class, estimates the total value of possible compensation at around 300 million euros.

This is not the only contingency facing TAP. Azul is claiming 177 million euros from TAP SGPS for a bond loan made in 2016. The holding company, whose name was changed to SIAVILO, no longer has any stake in the airline and is now owned by the state, but the guarantees for the financing are with TAP. Among these guarantees is the Miles & Go loyalty programme.

The airline has already gone to court to have the guarantees declared null and void, which Azul is contesting. If they are recognised, TAP will become liable to pay the debt. The Minister for Infrastructure said on Thursday that there will be a dialogue between the two companies and that the case should be “settled in court”.

TAP’s deteriorating results are also weighing against its valuation. After record profits of 177 million euros in 2023, these fell to 53.7 million in 2024, with the sharp increase in staff costs weighing on the figures. “The stagnation of results is a concern. It’s one of the most profound reasons for privatisation”, said the Secretary of State for Infrastructure, Hugo Espírito Santo. The rise in staff costs is also a concern, but he pointed out that they happen “in the context of management”.

The exhaustion of Lisbon airport also limits the company’s growth. “There’s a cap there limiting TAP’s growth, and it’s called Humberto Delgado Airport. Humberto Delgado won’t allow TAP to have the ambition to be a company with 150 or 180 aeroplanes”, said Miguel Pinto Luz. The government will therefore ask interested parties to present their vision for the company’s development at the future Luís de Camões airport.

The context of high global economic uncertainty doesn’t help either. Even so, the sector in Europe has managed to fly through the difficulties and has appreciated by around 17% since the beginning of the year, according to the Stoxx Europe Airlines Index.

From synergies to management: the arguments that value TAP

While these contingencies could penalise the value offered by interested parties, the government also points to arguments that make TAP an attractive bride. One of them is the fact that the Portuguese airline is one of the last medium-sized companies in Europe not yet owned by a large group.

The Executive points to a high potential for synergies. Considering a group of four acquisitions made in recent years in the sector and TAP’s revenues of 4.2 billion in 2024, it is estimated that a merger involving the Portuguese carrier would generate, on average, around 300 million euros in synergies per year.

Although the Prime Minister has advocated a 100% sale in the past, the government has opted for a minority sale, which reduces the political risk of the operation being rejected in Parliament — Chega has already said he will ask for the privatisation decree-law to be examined — or being reversed in the future.

Selling less than 50% could also bring in a larger number of interested parties. For the Minister for Infrastructure, the model chosen “allows offers from investors outside the European Union”, since EU legislation prevents airlines from being majority-owned by shareholders from outside the bloc.

The government also puts forward other arguments. “The government’s intention is to allow for the creation of synergies by assigning a relevant role in management and requiring a broad majority (state and partner) for critical decisions.” The relationship will be defined through a shareholder agreement that gives the investor management power and the state the final say in strategic decisions for the national interest, such as routes or the location of the headquarters.

One last carrot: the possibility of a second phase of privatisation, to which the Executive does not commit, but in which it will give preference rights to whoever remains as a shareholder.

A lot of water will still flow under the mill before the 49.9% (5% of which is reserved for employees) changes hands. The privatisation decree-law approved on Thursday still has to be promulgated by the President of the Republic. After publication in the Diário da República, there will be two months for bidders to express their interest.

Within two weeks, the specifications will be approved, detailing the criteria for the operation, which will take the form of a direct sale. Then there will be the submission of non-binding tenders, followed by binding tenders and finally a final negotiation phase with one or more candidates.

What is certain is that the candidates will have to be air carriers of a significant size and financial strength. Investment funds will only be accepted in consortia led by airlines.

Three groups are already in the pipeline: IAG, Lufthansa and Air France – KLM, which have even met with the government about the operation.