TAP struggles to survive low-cost wipe-out

National flag-carrier TAP could be facing losses of up to €2 billion and its biggest battle for survival to date since low-cost airlines Easyjet and Ryanair have taken the national market by storm; their competitive pricing tactics are capturing passengers from the traditional carrier and forcing it to slash fares to stay in the game.

Tap flights to Faro Lisbon Oporto PortugalAs a result TAP, which until now has tried to distance itself from its budget counterparts, could be facing sackings and even closure should it fail to keep its head above water.

An internal study, carried out by TAP, showed that the low-cost airlines’ dominance of the national market could spell disaster for the flag-carrier.

It has been found that the national airline could lose up to €2 billion in defecting passengers and reduced fares.

The study was carried out at the beginning of this year at the management’s request, TAP said in statements published by national newspaper Público.

The airline described the document as “a technical study carried out by services to analyse the low-cost segment”, and reportedly refused to comment on its findings.

Among its conclusions the document highlighted long-term losses indicating a sharp drop in revenue.

Based on a financial year, the impact on future revenue “could translate into a reduction of over €1 billion, solely taking into account Easyjet’s Lisbon base, and €2 billion, should Ryanair be taken into account [if it also established a base in Lisbon].”

In Portugal, British low-cost airline Easyjet has a base at Lisbon’s Portela Airport, where it will eventually have seven aircraft stationed. It also flies to and from Faro, Oporto and Funchal (Madeira).

Irish counterpart Ryanair has bases in Faro and Oporto and has made public its interest in having a third national base in Lisbon, though it has demanded Portela’s taxes be lowered before it settles in.

Taking into account national airport Management Company ANA is looking to create a dedicated low-cost terminal in Lisbon, Ryanair’s dream of a base in the capital looks a likely reality.

Since Easyjet established its base at Portela, TAP’s losses are estimated to be in the region of between €44 million and €54 million per year. That value is expected to rise to between €60 million and €83 million when the airline achieves its objectives of operating all seven aircraft from the capital.

Should Ryanair also move into Portela, TAP’s overall losses could soar to an estimated €152 million per year.

Long-term, losses of €2 billion could have drastic effects: “The company’s value will be dramatically affected and its survival brought into question”, the study’s conclusions read.

With market quota losses to Easyjet and Ryanair and pressure to reduce its prices, the national airline “could become an operator of lesser importance, which could even eventually culminate in its closure”, it elaborated.

By losing out to competition, the flag-carrier would be forced into “reducing its fleet, which would affect its resources, and, should the situation worsen, result in sackings”, the document warns.

It is expected that government-owned TAP will become privatised this year, as part of the financial bail-out agreement signed with the Troika. The beleaguered airline is already suffering the effects that low-cost airlines have had on Portugal. Between 2008 and 2010 the airline’s European passenger traffic dropped and revenue decreased by 34 percent, with the most noticeable losses being on routes such as London and Paris.

One of the main problems highlighted by the study is the problem that TAP faces in combating its low-cost rivals’ aggressive marketing tactics, as well as the matter of perception.

It states: “Due to their strong publicity campaigns, low-cost companies are perceived as always being cheaper than traditional airlines, even when that situation is not verified. And, at this moment (…) the price factor is ever-more determining.”


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