June 12, 2021

TAP Rescue took off a year ago. Brussels response got lost on the way – ECO

The airline is about to appoint a new CEO and has already made major changes to the operating structure. However, it needs to receive approval for the restructuring plan to move forward.

It wouldn’t be serious if you tried to convey the idea that we can carry out a restructuring without consequences“. Exactly a year ago, the minister of Infrastructure and Housing, Pedro Nuno Santos, announced that TAP needed a bailout and that the state was willing to lend up to 1.2 billion euros to solve the company’s problems. It took six months for the conditions — centered on a sharp reduction in payroll and operating costs — to be made known in a proposed plan that is still awaiting approval from the European Commission.

The Covid-19 pandemic forced TAP, like other international airlines, to park almost the entire fleet, which left the company in financial difficulties. I needed fresh money to ensure sustainability. Brussels approved emergency support and the Supplementary Budget provided 946 million euros to help the company, but it had a financial cushion of around 200 million euros (which was needed).

The “ok” from the European Commission (with a deadline of six months to send a restructuring plan) unlocked the Government’s financing, but it was still necessary for the private shareholders to accept. At the time, the State had 50% of the capital, Atlantic Gateway (owned in partnership by entrepreneurs David Neeleman and Humberto Pedrosa) had 45% and the workers the remaining 5%.

David Neeleman didn’t have a euro to put in TAP. We had a partner who didn’t want to put a penny in the airline.

Pedro Nuno Santos

Minister of Infrastructure and Housing

After weeks of negotiations, the agreement found provided that the State would hold 72.5% of the company and that Neeleman would leave with 55 million euros. According to the Government, this money was not a payment for participation, but a compensation for giving up additional benefits of 224 million euros to which I was entitled.

“David Neeleman didn’t have a euro to put in TAP,” Pedro Nuno Santos would later explain in Parliament. “We had a partner who didn’t want to put a penny in the airline. the gentlemen [deputados] they wanted us to guarantee, to give a public guarantee for loans to TAP, […] and they would continue to run the company according to their interests, […] that were not aligned with the good interests of the country and the Portuguese?”.

With Neeleman, former CEO Antonoaldo Neves also left, who would be replaced on an interim basis by Ramiro Sequeira. In the case of Humberto Pedrosa, the Portuguese businessman (who is also a shareholder of the Barraqueiro group) took a minority position and abdicated his ancillary services without compensation, but left the Board of Directors to avoid possible conflicts of interest.

From left to right: Miguel Frasquilho, chairman of TAP Air Portugal, Pedro Nuno Santos, minister of Infrastructure and Housing, Antonoaldo Neves, executive chairman of TAP Air Portugal and Klaus Röwe, senior vice president – ​​head of the A320 Family, AirbusTAP Air Portugal

State can enter with up to 3.7 billion euros

With the shareholder structure reorganized, a new CEO (even if interim) and the Government with reinforced powers, TAP then began to prepare the restructuring plan. At the time, even with the summer suggesting that the pandemic could be close to its end, the entire sector was being heavily penalized and international perspectives pointed to aviation continuing to be affected for years.

It was with this conviction that, on December 10, the Minister of Infrastructure and Housing presented the general outline of the document that had been sent to Brussels. The base scenario points to accumulated revenue losses amounting to €6.7 billion by 2025. It is these losses that lead the airline to need more money beyond the first 2020 check.

In 2021, it will be between 970 million and 1,164 million euros. In 2022, the range is between 473 million and 503 million euros. This is followed by 379 million to 438 million in 2023 and 392 million to 420 million euros in 2024. the cost of public support from 2020 to 2024 will be between 3,414 million and 3,725 million euros.

We hope to always stay below the bottom of the range and not have liabilities above 3.3 billion, but we have to be prepared for the worst-case scenario.

Pedro Nuno Santos

Minister of Infrastructure and Housing

“We hope to always stay below the bottom of the range and that we don’t have liabilities greater than 3.3 billion”, says Pedro Nuno Santos, but he points out: “we have to be prepared for the worst scenario”. And he justified the needs: in addition to the “unprecedented crisis in the aviation sector”, TAP has “additional problems because it already had before the pandemic”.

It was, therefore, need to cut. In pulp the company had to find a way to save €1.4 billion. To this end, it negotiated with the unions the suspension of company agreements and replacement by emergency agreements that include 25% cuts in salaries in general. At the same time, it started a program of voluntary measures: mutually agreed terminations, early retirement, pre-retirement, part-time work and unpaid leave.

In operating costs, the expected savings are 1.3 billion euros, and TAP soon began to renegotiate orders and payments with suppliers and lessors, while making changes to the fleet and routes to adapt to the crisis in the sector. At the end of the period, in 2025, the fleet will consist of 99 planes (compared to the 105 that entered the pandemic).

Minister Pedro Nuno Santos and Secretaries of State Miguel Cruz and Hugo Santos Mendes present TAP’s restructuring plan on December 11, 2020. EPA/NUNO FOXEPA/NUNO FOX

New CEO doesn’t wait for Brussels

In December, the government said it expected the plan to be approved by Brussels in the first quarter of the year and guaranteed that there was enough liquidity for the company to resist until then. Time has progressed and there is still no answer. “I would say that what happens is normal in these processes. There are several interactions, there are additional clarifications and analysis that are requested“, explained Ramiro Sequeira last month. “We continue to reiterate that the delay means no doubt about the process.”

The final strategy and (mainly) remedies imposed by the competition authority are not yet known. But that hasn’t stopped the company from moving forward with changes in line with what is already known will be needed. TAP’s workforce fell to 7,526 at the end of March, 1,617 fewer workers than at the beginning of the pandemic, while another 1,160 people saw their fixed-term contracts not being renewed. After closing the voluntary programs, the company is now preparing a collective dismissal of 200 employees.

In operational terms, it is carrying out a fleet conversion to increase efficiency and reduce costs. The fleet currently has 93 aircraft, but by the end of the month three more Airbus aircraft should be in operation. This is while converting planes to the cargo segment, which has been compensating for shortfalls in passenger transport. Despite the changes, TAP had losses of 365.1 million in the first quarter of 2021, after a record 1.230 million in 2020.

Fewer workers in a reduced fleet

Data source: TAP quarterly reports

But not everything can go forward without the “ok” from Brussels and there are two fundamental points that remain tied: more tranches of financial support and the entry of a new management team. The question of money was dealt with in another way, with the European Commission approving a request by Portugal to grant TAP interim support of 462 million euros. Despite coming from the same envelope, this money can already be advanced as it is a compensation for the impact of the measures to contain the pandemic.

The check — which entered as a capital increase and led the State to further strengthen its position in the company — gave the company strength to face the coming months and wait for the guarantee to receive more support. The replacement of the CEO is still awaiting. Although the Government has always said that it intended to wait for the Commission to announce the new leadership, the general meeting of shareholders is already scheduled for June 24th, so the name is already closed.

The airline’s executive president will be Christine Ourmières-Widener, as the ECO said. The manager was previously CEO of Flybe Group (one of the most important regional airlines in Europe with operations in the UK) and CEO of a company of leasing specialized in the aviation sector, having also passed through Air France/KLM. On LinkedIn, it identifies itself as a specialist in transformation and restructuring processes, exactly the stage in which TAP is.

Subscribe to ECO Premium

When information matters more than ever, support independent and rigorous journalism.

In what way? Subscribe to ECO Premium and get access to exclusive news, the opinion that counts, reports and specials that show the other side of the story, and the ECO Insider and Novo Normal newsletters.

This subscription is a way to support the ECO and its journalists. Our counterpart is independent, rigorous and credible journalism.