"After Switzerland and Austria, Portugal too" European aviation giant 'Lufthansa' expands across the Atlantic and bets on economies of scale with TAP acquisition

Plans to expand South American operations utilizing TAP's Brazilian routes
Complementary to existing routes, reducing concerns over competition restrictions
Expecting EU approval through remedial measures such as transfer of landing and takeoff slots

Germany's Lufthansa Group has secured the position as the shareholder acquiring a stake in Portugal's state-owned airline TAP, beating Air France-KLM, laying the groundwork to expand its transatlantic route network. Particularly, through TAP's strengths in connecting Europe and Brazil, Lufthansa can strengthen its presence in the South American market. Although antitrust review by the European Union (EU) remains, the complementary nature of the route networks and the possibility of addressing competition concerns through remedial measures increase the likelihood of approval.

Lufthansa leads in the competition to acquire TAP

On the 14th (local time), the Portuguese government approved a cabinet meeting agenda designating Lufthansa as the buyer for a 44.9% stake in TAP. According to the sale plan, Lufthansa is set to acquire 44.9% of TAP's shares. Five percent of the total shares are initially allocated to employees, with the option for Lufthansa to acquire any unpurchased shares, potentially raising their stake to a maximum of 49.9%. The total sale scale including the employee allocation amounts to 1.201 billion euros (approximately US$1.38 billion). The Portuguese government will maintain its status as the largest shareholder with 50.1% ownership and entrust management and operations to Lufthansa.

Lufthansa's acquisition proposal was highly rated for its price and payment conditions. Portuguese Prime Minister Luís Montenegro explained that Lufthansa's offered amount is 16% higher than competitor Air France-KLM and that the transaction's uncertainty is low. The condition to pay the full purchase price in cash also worked favorably in selection. The Portuguese government also reviewed TAP's growth plans and the potential for additional investment in Portugal's aviation industry. Following the selection of the acquirer, final contracts and the EU’s regulatory approval process remain. The Portuguese government expects approval to take 18 to 24 months and is aiming to finalize the deal by 2028.

Table 1. Conditions and progress of Lufthansa's acquisition of TAP shares

After 3.2 billion euros injection, attracting private investment

This sale took place in the process of re-privatizing TAP, which was renationalized due to the COVID-19 pandemic. The Portuguese government intervened with rescue measures as TAP faced a management crisis due to the sharp drop in air travel demand in 2020. Subsequently, 3.2 billion euros (approximately US$3.72 billion) of public funds were injected. The aim of reprivatization is to recover invested funds and attract private investment necessary for aircraft and route expansion. The sale process was suspended in March last year due to government collapse but restarted in July after the Montenegro government returned to power following the May general election. At that time, the government set principles to maintain the TAP brand and Lisbon hub and to preserve key routes connecting the Portuguese diaspora and Portuguese-speaking countries.

The acquisition race intensified as the three major European airline groups expressed interest. In November last year, Lufthansa, Air France-KLM, and International Airlines Group (IAG), the parent company of British Airways, submitted letters of intent to Portugal’s state holding company Parpublica. Afterwards, IAG withdrew from the bidding, stating a focus on growth opportunities for its existing affiliates, changing the competition dynamics. In April this year, only Lufthansa and Air France-KLM submitted preliminary proposals. Both companies submitted binding acquisition offers by the end of July, engaged in further negotiations with the Portuguese government, and submitted final proposals at the end of September.

Lufthansa's core strategy is 'integrated experience'

The key reason European airlines showed interest in TAP is its transatlantic route network. TAP connects Lisbon with Brazil, the United States, and Portuguese-speaking countries in Africa, and has particular strengths on routes linking Europe and Brazil. Airport landing and takeoff slots allowing operation during prime time for main routes were assets noted by acquisition candidates. Air France-KLM revealed plans during the bidding to designate Lisbon as their sole Southern European hub. Leveraging existing partnerships with Brazilian carrier Gol for domestic connections, they aimed to expand their Brazilian business by integrating TAP's routes.

Lufthansa emphasized its long-standing cooperation with TAP and its business foundation in Portugal as strengths in the acquisition battle. Both airlines are members of the Star Alliance, having cooperated for years. Upon officially announcing its acquisition interest in November last year, Lufthansa proposed a long-term partnership. Lufthansa’s group airlines operate over 280 weekly flights to and from Portugal and have maintained a presence there for over 70 years. Lufthansa also highlighted its experience of incorporating Swiss, Austrian, Brussels, and ITA Airlines into the group, maintaining each airline's brand and national identity while expanding their businesses. They plan to use this experience in integrating TAP as well.

Enhancing profitability through joint purchasing and route connection

A key objective of airline integration is securing economies of scale by joint purchasing and shared operational systems. Bulk purchasing of aircraft, engines, and parts enables negotiating more favorable prices based on order volume. Airlines also reduce costs by jointly using reservation, ticketing systems, and overseas sales networks. Standardizing aircraft fleets allows shared maintenance parts and integrated pilot training. When acquiring ITA Airlines, Lufthansa cited integration of IT, procurement, and sales systems as major synergy factors.

Network integration helps improve load factors on long-haul flights. Passengers arriving on short-haul routes of affiliate airlines can connect to long-haul flights at hub airports, expanding customer catchment areas. It enhances profitability by filling empty seats on existing flights without incurring the expense of additional flights. Initiatives linking mileage and booking services encourage use of group flights. Indeed, Lufthansa integrated ITA Airlines’ reservation, sales, and fare systems into the group in May this year. In cargo operations, Lufthansa Cargo has sold ITA Airlines’ cargo space since last year, jointly utilizing existing sales networks.

Complementarity of South Atlantic route networks may lower antitrust hurdles

However, to incorporate TAP into its group operations, Lufthansa must pass the EU's antitrust review. The evaluation of the TAP acquisition will focus on tariff, seat supply, and the concentration of airport landing and takeoff rights on overlapping routes between the two companies. Previously, the EU Commission’s ITA Airlines acquisition review examined not only direct flights but also competing connecting flights. For North American routes, operations by United Airlines and Air Canada, with whom Lufthansa has joint ventures, were also considered. This review of TAP is also expected to consider direct route overlaps as well as the competitive scope including partner airlines.

Lufthansa emphasizes that TAP’s South Atlantic route network complements its own operations. The argument that the two companies compete only minimally in the same markets may serve as favorable grounds during approval negotiations. Moreover, there are precedents where remedial measures addressing competition concerns have led to approval. In July 2024, the EU Commission approved Lufthansa’s acquisition of ITA Airlines shares conditioned on supporting competitor entry on some European routes and transferring landing and takeoff slots at Milan Linate Airport. Measures to expand competitors’ direct flights and improve transfer connections were also required for North American routes. Similar negotiations over slot allocation and competitor access guarantees are expected to arise around routes flagged in the review of this TAP acquisition.