TAM to buy TAP? Not so fast

The Brazilian carrier TAM is said to be the lastest suitor for TAP, its Portuguese counterpart, one of several state-owned companies that Lisbon is looking to privatise as part of its €78bn bailout by the European Union and the International Monetary Fund.

For a string of reasons, the two look like a natural fit. But a reality check is needed. For two reasons at least, this could be one deal that can’t be done.

According to Reuters, TAM has approached the Brazilian government to help it finance a deal. The tie-up seems to make sense. In terms of frequencies, TAP is the biggest airline between Europe and Brazil, closely followed by TAM, so it would strengthen the Brazilian carrier’s grip over an important long haul market.

And the two airlines know each other well. As members of the Star Alliance, the grouping that includes Germany’s Lufthansa and United Airlines of the US, they already cooperate closely via so-called codeshare agreements, which allow them to cross-sell seats on each other’s networks.

Moreover, Fernando Pinto, the chairman of TAP who has been credited with turning round what was long seen as one of the true basket-case airlines in Europe, knows TAM well. He is a Brazilian national and used to run the now defunct Brazilian state-carrier Varig.

Politically, the government of Dilma Rousseff might also find it appealing to support a deal for TAP. The Brazilian president has said on previous occasions that she would like to help Portugal out and securing the flag carrier of the “old country” would be rich with symbolism.

But that may not be so easy. There are two serious obstacles to any deal that would see TAM take control of TAP and at least one of them looks insurmountable for the present.

Firstly, foreign ownership in the airline sector is always a tricky business. Any international airline’s access other countries is controlled by intra-governmental bilateral accords that almost without fail stipulate said airline must be domiciled and majority-owned by nationals of the country it is flying from. This means that most countries impose a foreign ownership limit on their airlines. In the case of the airlines based the European Union, that limit is 49 per cent.

Secondly, TAM and TAP combined account for just under 50 per cent of all direct flights between Europe and Brazil – a dominant share that would certainly have competition authorities in Brussels up in arms.

Those barriers mean any deal between the two airlines would limit TAM to a minority stake, which would seem to fly in the face of Lisbon’s need to privatise the carrier.

Rather than TAM, the most likely suitors waiting in the wings for TAP are Germany’s Lufthansa and IAG, the new company created from the merger of British Airways and Spain’s Iberia.

Lufthansa might be interested as it would keep TAP within the Star Alliance. But the German airline has been busy buying up a range of other smaller, unprofitable carriers in recent years and still has some way to go to turn most of those round.

IAG is certainly interested in expanding via acquisition but its chief executive Willie Walsh only last week ruled out any imminent deals as he focuses on the integration of BA and Iberia. The other problem for IAG is Lisbon’s reluctance to sell its flag carrier to an entity so closely associated with Madrid.

That leaves the universe of buyers for TAP looking limited – which could also constrain Lisbon’s ability to get much value for TAP. That said, in the wider context of the €78bn bail-out, any sale of TAP – which generated revenues of less than €2bn in 2009 – would not have much impact on the government’s books.