This summer, TAP Air Portugal continues its rapid expansion by adding three new destinations in the US: Chicago, San Francisco, and Washington/Dulles. The airline now has 100 aircraft, double where it was only about a decade ago. This kind of rapid growth combined with the airline’s low fares makes me think of Norwegian, but there are differences. I spoke with the airline’s CEO, Brazil-native Antonoaldo Neves, to get a better understanding of how TAP works.
Brett Snyder, Cranky Flier: TAP has become a very fast-growing airline, adding three cities in North American this year in addition to all the growth elsewhere. You are taking a lot of new aircraft. What’s the strategy behind such rapid growth?
Antonoaldo Neves, CEO, TAP Air Portugal: The intention is not growing fast; that’s not the strategic intention. The context is very important for you to understand why we’re growing fast. TAP was privatized in 2015, so this has become a private enterprise for the past 3 years and a half. The company was constrained in terms of funding, in terms of management, [and] in terms of capabilities to grow. So in the end what we’re doing here is actually accelerating whatever could [have been] done beforehand [if we had no constraints]. There is a great business opportunity for us, especially in the Americas.
Four years ago, we had only 14 flights a week to the US. Today we have 56. In Brazil where we have a dominant presence — we have more than 25 percent of the seats from Brazil to Europe — we’re growing, but we’re not growing more than the market. But reality is that in the US we have less than 0.8 percent of the seats to Europe, and we’re so close to the US…. We’re growing a lot because our strategy is to become relevant in North America and to keep and maintain our dominance in Brazil.
Because the Brazilian market grows itself — it’s an emerging market — and because we were so irrelevant in the US, we had to grow because there was a business opportunity. Now we’re in a big fleet transformation, and that also allows us to grow. The challenge we have is how to make that happen.
Cranky: Other airlines outside the big three joint ventures have struggled to grow in the US-Europe market. So why can TAP make this work? What is TAP’s advantage?
Antonoaldo: We have three advantages.
First, distance. To provide service to Southern Spain, Southern Italy, and Southern France… our geographic position is very competitive. If you take for instance Bordeaux, it’s shorter to take a flight from Bordeaux to Lisbon and then Lisbon to New York rather than go back to Paris. The geographic location is a major competitive advantage. [Ed Note: Great Circle Mapper confirms that going via CDG is actually 7 miles shorter, but then again, I’ll take Lisbon as a connecting point of CDG any day.]
Second, the A321LR is actually what we call the 321 Lisbon Range, because nobody can fly a 321LR from major cities in Europe to the East Coast of the US and to the northeast of Brazil. They will need the XLR whenever this is ready, 2023. So I have a competitive edge until 2023.
We are going to start Oporto to New York [with the 321LR]. The trip cost is 50 percent less than the 330. Today I don’t do daily service to Washington year round, [but] I will be able to do it. Eighty percent of my Transatlantic hours will be flown on new generation aircraft by December.
Cranky: But those airplanes come with high ownership costs. They’re brand new.
Antonoaldo: For sure, but on the other hand, my [current] fleet is so old… SO old. There is margin expansion. We are getting about 3 to 5 points in EBIT using the 330-900neo compared to the old fleet. In the 320s I get up to 10 points in margin expansion… they’re so old, SO old. Of course they’re safe but they’re so inefficient. A 321neo burns less fuel than a 319, did you know that? We are getting 21% less fuel burn on the 320neo as opposed to the 320ceo.
Yes, there is high ownership but my maintenance costs are very high today. My fuel costs are very high.
Cranky: I interrupted you, but what was the third advantage?
Antonoaldo: Third, because I have a very strong presence in Brazil and I have what I call capillarity [Ed note: At least, that’s what my notes say he said] in Europe. Fifty five percent of my clients go to Lisbon. We are a hub-and-spoke airline. There is not enough demand in Portugal for us. [But] because we have this dominant presence in Brazil, my network in Europe is already strong. That helps me quickly build up the North Atlantic. It’s amazing to see more than 65 percent of my tickets in the North Atlantic are sold in the US. These are people going to Valencia, Naples, even to Paris [where] we always have a good deal. Not to [mention] the [Lisbon free] stopover program. We have it for a destination that is very hot right now.
Looking at future booking curves, we have eight destinations in North America by the end of June, and we’re going to go to 10 next year. That’s the same size as Brazil but we are only 2 percent of seats from Europe to North America.
Cranky: Two more destinations in North America next year? So what is coming? There have been rumors about Los Angeles, Houston, and Atlanta.
Antonoaldo: It’s too early to tell. I know you see rumors. There are a number of cities in the five-year plan: Houston, LA, Providence, Orlando, Atlanta, Montreal, more flights to New York… but I don’t like to make the decision right now. I prefer to make it around September or October, because it’s going to be more clear, the competitive dynamic. I honestly don’t know. We need to be flexible in that, the management team here is very flexible to the network approach. We understand it takes a year, year and half, then we just stop flying if it doesn’t work. We have no obligation to fly to any market, so it’s going to be a pure economic decision, and I think it’s too early. I would say it’ll be 2 new markets rather than 3, but it’s too early to tell. Among [the five-year plan list] it can be any.
Cranky: Tell me about your fare strategy, especially in North America. You have really low fares, and that seems difficult considering you’re an airline that five years ago was a legacy state-owned airline.
Antonoaldo: If you take the European market — I have to start there — our medium-haul fleet was totally outdated from a seat configuration perspective, very low density. [Ed note: “Medium-haul” means intra-Europe flight on narrowbodies] And during the first two years of the privatization, we invested a lot in bringing commonality to our fleet configurations, and also, having what I call the segmentation within the plane.
Today we technically have 3 classes in our medium-haul operation, and why we needed that? …to fight Ryanair, to fight easyJet in the local market in Portugal. My clients have easyJet and Ryanair here, so if they want to take a low-cost carrier, I have the product for them in the back of the plane. But I also have business class in front so if you want to pay more, and if you want to compare to a legacy carrier, the first 3 or 4 rows, you can get a full meal from Lisbon to Berlin.
Then we have the middle [section] seats that we’re now still working to upsell those, but it’s starting to work. The first move we have is first you have low fares — you have to have a segment — then as the bookings build up, we raise fares [closer to departure]. And then it gets closer to the legacy carriers, but if you book in advance, you’re going to get good deals.
The change in seat configuration is also very important to our connecting flight strategy on long-haul. So if you took a Sao Paulo-Paris flight, I had no seat available on the Lisbon-Paris flight. I could not compete in the connecting market because my medium-haul is full. Now we have space, with 320s, 321s, and at the same time, we did the reconfiguration of the airplane, added 12 to 20 seats depending on the plane. I have space. That’s why you see very good fares from New York to Paris, New York to Frankfurt. That’s because the way we restructured the airline fleet.
In addition, we are investing a lot in cutting costs. In the past the airline CASK [unit cost] was already low compared to the legacy carriers, but we were not happy. So only last year we cut about 100 million euros in costs. In our operation in Brazil, we had, still have an MRO [maintenance and repair organization] in Brazil. We restructured it last year. Now we have a better cost structure. We don’t price based on cost, we price based on demand and capacity, but reality is we are getting better.
And last but not least, we were among the first to implement different classes of fares, the first to do a fare to Brazil and North America without a bag. We not only have different prices for our customers, but if you don’t need a bag, you’re going to pay less.
Cranky: It seems like your fares may still be too low. After all, you lost money last year.
Antonoaldo: Last year was a cost problem. I mean, if you take year-on-year, we were ok. Our TRASK (unit revenue) stayed the same as the year before and we added capacity. So I could argue we did very well because we added 10 percent capacity and the unit revenue didn’t change.
We had about 90 million euros in non-recurring costs last year. Last year was the restructuring year. We did an early retirement program that cost us a lot, we restructured the MRO operation, we fired 1,000 people in Brazil, and we had a strike. The pilots say they didn’t strike but it’s what they call a slowdown, but we had a lot of [leased capacity] because of that. And last but not least we also paid some labor liability from the past to settle under a new union agreement. All this was about 90 million euros, and we also had zero fuel hedge.
Cranky: But you still lost money without one-time costs.
Antonoaldo: That was oil. Oil was much higher than the year before. If you saw the oil increase last year, it was more than 30 percent year-over-year. Most airlines in Europe are hedged so they had no impact. This year our hedge position is better.
Cranky: Will you be profitable this year?
Antonoaldo: Yeah that’s our expectation. We are maintaining that expectation. Last year we had the worst of two worlds, oil at its peak and the [less fuel efficient] engines. Now we have more hedges.
Cranky: But for oil, you have to adjust. If oil stays high, you will still need to pay those prices eventually.
Antonoaldo: Yeah, that’s what we have to believe, because everyone will be affected the same way. In the long term you can’t get enough protection, so last year we were in a situation where we had no protection and our competition had protection. If oil is high, there is going to be a pass-through, and I’m optimistic about demand because the US economy is doing very well.
Cranky: How important are your partnerships with United and JetBlue in the US?
Antonoaldo: Extremely important, equally important. We fly to Boston and that’s JetBlue’s hub. We fly to JFK and that’s JetBlue again. We fly to Newark, that’s United. We fly to Miami and we have an interline agreement with American in Miami. We have an open philosophy about interline and codeshare. We date anyone as long as they’re safe and have good service. In Brazil we have a codeshare with Gol and Azul, equally important for us in Brazil.
Cranky: You mentioned flying to Atlanta. Does that mean you’ll want to partner with Delta?
Antonoaldo: Atlanta is the last one on my list, and that’s a very fair point. Atlanta is on the list because of its size but not because of its connectivity. I’m not expecting anything from Delta. I cannot count on that. Delta is a great airline but my point is, I cannot bet in Atlanta based on a potential partnership with Delta. Out of [the list of potential destinations], it’s the last one.
Cranky: I’m curious about San Francisco. You’re overflying most of the US, so are you seeing connectivity at all?
Antonoaldo: It’s too early to provide a clear view. The Bay Area is a big local market, so the bet is not on connecting. If you take places like Las Vegas, places like Salt Lake City… I know we are overflying but there is some good connectivity there, and Hawai’i. But it’s too early to tell.
It’s a good point. We are paying a lot of attention to that. There is a big Portuguese community on the other hand, so that helps on the other side. So far we are so good but let’s see. It’s too early to tell.
Cranky: Thanks for your time. I’m in Southern California, so hopefully we’ll see you here soon.
Antonoaldo: *laughs* I have a funny story. I lived in San Diego for 3 months taking English courses. I said I want to live in California one day. Then I came to Portugal and said “this is as good.” It’s as beautiful.