LONDON – The European Commission has approved restructuring aid and pandemic compensation package to TAP Portugal to help the group return to reality seen in the pre-Covid-19 era.
The total package of € 2.25 billion in restricting aid and further € 107.1 million in COVID damages.
Much-Needed Compensation for TAP
Compensation has been allotted to the TAP SGPS group under EU state aid directives on 21st December 2021.
Margrethe Vestager, the Executive Vice President and compensation policy maker addressed that, “The measures we approved today will enable Portugal to compensate TAP for damages directly suffered because of travel restrictions put in place to limit the spread of coronavirus. At the same time, the approved restructuring plan for TAP will ensure the airline’s path towards long term viability.”
“The significant public support will come with safeguards to limit distortions of competition. In particular, TAP has committed to making available slots at the congested Lisbon airport, where TAP holds significant market power.”
“This gives competing carriers the chance to expand their activities at this airport, ensuring fair price and increased choice for European consumers.”
Context of the Deal
The restructuring aid announcement was made on 10th June 2021 through Commission restructuring aid.
It aims to finance TAP Group via TAP Portugal airline. Following this announcement, on 16th July 2021, the Commission assigned an in-depth investigation to further assess the yielding and feasibility of the proposed restricting plan submitted by the government for TAP Group.
The emphasis on the investigation was guidelines for rescue and restructuring aid utilization. With the investigation outcome, the Commission approved €1.2 billion on 16th July 2021. This was the same day the investigation started.
However, on 21st December 2021, following the pending part of the investigation, the Commission approved the remaining part of the proposed restructuring plan.
The aid will be in the form of € 2.55 billion in equity measures.
They include the conversion of the previously approved €1.2 billion rescue loan into equity. The Commission made this decision an investigation under Guidelines on State aid for the rescue and restructuring of companies in distress.
Under the restructuring plan, which focuses mainly on streamlining TAP SGPS’s operations and reducing operating costs.
The plan is further divided into two different verticals. The first one would be the TAP Air Portugal and Portugalia which is supported under the current restricting plan.
The second would be to divest the non-core assets under restructuring. These include subsidiaries in Brazil that deal in the MRO business of the airline, catering, and ground handling units.
Furthermore, the TAP SGPS group and TAP Air Portugal will not undertake any acquisitions until the end of the restructuring plan. Additionally, they will reduce their fleets.
They will also streamline their network and adjust to the latest forecasted demand.
Lisbon airport, Tap Air Portugal’s hub, has restricted the number of slots airlines can acquire at the airport.
This condition has made competing airlines participate in the healthy and effective competition from Lisbon airport.
According to the aid plan, TAP Air Portugal will make 18 slots per day available for the competing airlines in Lisbon.
Deal Enables Expansion Needed
The Commission maintains that this move will enable the entry or expansion of the competing carrier at Lisbon airport. This will add further benefits for the passengers and the airport.
The Commission implied that A non – discriminatory and transparent selection procedure will be adhered to by the Commission. This will be supported by a Monitoring Trustee, which will overall observe the selection procedures for the competing carriers.
The first call for proposals is due to take place in late 2022, post the IATA winter session.
The Commission said the restructuring aid is in line with the EU rules and directives. They are confident that it will bring TAP Air Portugal back on the path of profitability and fair competition.
Along with the restructuring aid, Portugal supplemented the Commission with another bailout package of € 107.1 million. This package will help with damages and losses suffered during the 1st and 2nd waves of the Covid-19 pandemic.
During this period, TAP Air Portugal suffered significant losses and a steep decline in passenger traffic.
This additional € 107.1 million follows by the previously approved compensation package to TAP Air Portugal announced in April 2021.
The compensation package can take form in either capital injection or the loan that may be converted into the capital infusion.
The choice of which will be made by the Portuguese government exclusively.
This € 107.1 million compensation has been assessed by the Commission under Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU).
This empowers Commission to approve State Aid to compensate specific sectors for the damages directly caused by exceptional events such as pandemics.
Under this, the TFEU believes that the outbreak of pandemic has extensively and significantly affected the TAP Air Portugal with economic impacts.
Because of exceptional interventions by the Member State, the EU Commission is granting damage compensation to the Portuguese government.
With the economic support and aids from the EU, TAP Air Portugal is expected to make a remarkable comeback in the post COVID economy.
The Socio-Economic importance of TAP Air Portugal can be reasserted, being the major airline in the region.
Their route network spanning from remote areas of Madeira and Azores to trans-Atlantic destinations in South America mostly connecting the Portuguese diaspora.
The TAP Air Portugal plays a vital role in the tourism economy and thus creating a major workforce for the country.