ANALYSIS: Where next for TAP as the race for Portugal’s flag carrier narrows down to Lufthansa and Air France/KLM

The kings, jacks, queens, aces, and perhaps the joker, all the cards are now on the table and the non-players have left the table. The withdrawal of International Airlines Group from the privatisation process for TAP Air Portugal has narrowed the field to two major European groups and clarified the strategic choices available to the Portuguese government and the airline itself.

IAG confirmed that it would not proceed with a binding offer after careful consideration, citing the priority of growth opportunities within its existing portfolio and a preference for controlling positions rather than the minority stake on offer. It was a tall order to get the Portuguese government to agree to let in an airline that had a sizeable base in Madrid and three Spanish airlines in its five-brand portfolio (including Aer Lingus).

Portugal’s plan was to sell a reference 44.9pc holding, with up to 5pc reserved for employees and the possibility for the selected investor to acquire any unsubscribed portion under a right of first refusal, leaving the state with a residual majority of at least 50.1pc. That structure proved incompatible with IAG’s stated capital allocation discipline.

Air France-KLM and Lufthansa Group submitted binding offers by the 29 July deadline. Parpública, the state holding company managing the process, is preparing its evaluation report for the government, with a decision expected in September. The chosen partner could assume co-management responsibilities later in 2026, while formal capital entry is projected for the summer of 2027 pending European Commission approval.

The government has stressed that the selection is a strategic decision that cannot be reduced to price alone. Bidders must demonstrate commitments to strengthen operations and connectivity not only at the Lisbon hub but also at Porto,

Faro and the airports serving the Azores and Madeira. Industrial plans covering fleet development, maintenance capacity and sustainable aviation fuels form part of the assessment criteria.

Crown jewels

For TAP the immediate option is to integrate with whichever group emerges as preferred partner while retaining operational autonomy under continued state majority ownership.

Tap’s crown jewels are the South American route. Lisbon’s position as a gateway to Brazil, Portuguese-speaking African markets and transatlantic routes to the United States constitutes the core commercial asset. Air France-KLM has positioned Lisbon as its sole southern European hub, with explicit support from Delta Air Lines for North Atlantic coordination.

The Franco-Dutch group has indicated intentions to reinforce links with the Americas and Africa while expanding domestic Portuguese connectivity, including services from Porto. A partnership of this nature would place TAP inside a multi-hub system already spanning Paris, Amsterdam and, through Delta, major United States gateways. Code-share depth, joint venture economics on key long-haul flows and access to a broader frequent-flyer base would become available without requiring full merger.

Carsten’s plans

Lufthansa Group offers a different configuration. As the largest airline group outside the United States and an existing Star Alliance partner of TAP, it has pointed to its record of integrating SWISS, Austrian Airlines, Brussels Airlines and ITA Airways while preserving national brands and identities. Lufthansa has described Lisbon as a potential strategic South Atlantic hub that would complement its existing European network and strengthen the group’s competitive standing on routes to Latin America. Synergies with ITA Airways have been referenced as an additional benefit.

Under this model TAP would gain scale in procurement, maintenance and training while remaining a distinct brand focused on Portuguese-speaking markets and the South Atlantic. The presence of a large engineering and maintenance organisation within the Lufthansa Group aligns with TAP’s own ambitions to expand its maintenance business, including potential defence-related work and a new hub at Porto.

The BIG matter of price

A third option available to the Portuguese authorities is to invite one or both bidders to improve their final proposals after Parpública’s report. The process allows for such negotiations before a definitive selection.

Price will matter, yet the government has repeatedly indicated that industrial commitments, employment safeguards, regional connectivity obligations and the long-term development of the Portuguese airport system carry equal or greater weight. Bernstein analysts have valued the 44.9pc stake at approximately €700m on the basis of a €1.5bn enterprise value for the carrier, but final figures remain confidential within the binding submissions.

Any improvement phase would test the willingness of Air France-KLM and Lufthansa to increase capital commitments or to harden guarantees on fleet investment and secondary Portuguese airports.

Temptation to press pause

A fourth course would be to pause or restructure the process if neither offer fully satisfies the strategic criteria. The government has completed the European Commission-mandated restructuring plan, repaid residual amounts and reduced capital to clean the balance sheet. TAP has returned €24.9m to the state and completed the sale of non-core subsidiaries.

Fleet size is projected to reach between 104 and 106 aircraft by the end of 2026 once remaining restructuring constraints lapse, supported by ongoing Airbus deliveries of A320neo, A321neo and A330neo family aircraft. Maintenance revenue has grown and now contributes a higher margin than pure flying operations.

These improvements strengthen TAP’s standalone position relative to the period of heavy state aid, yet the government continues to argue that the carrier requires membership of a larger group to withstand future shocks under European state-aid rules that limit further public support.

Alone it stands

Continuing as a standalone airline remains theoretically possible but politically and financially constrained. Without a strategic partner TAP would retain full control of its Lisbon slots and brand identity, yet would lack the scale advantages in fuel hedging, aircraft financing, engine support and global sales distribution that the two remaining bidders can supply. Competition from larger groups on South Atlantic and African routes would intensify.

The minority-stake model itself reflects a deliberate Portuguese preference for retaining ultimate control while securing industrial partnership. IAG’s withdrawal confirmed that this preference deters buyers seeking majority influence, leaving only those groups prepared to operate within a framework of shared governance.

The winter and spring periods ahead will test the practical implications of whichever partnership is selected. Co-management arrangements, if activated in late 2026, would require rapid alignment of commercial systems, revenue management and network planning while formal ownership transfer awaits regulatory clearance. European competition authorities will examine overlaps on routes between the Iberian Peninsula, northern Europe and long-haul markets.

Slot holdings at congested airports and the treatment of TAP’s extensive bilateral rights with Brazil will form part of that scrutiny. Labour commitments already embedded in the tender documentation will constrain growth and slow down the restructuring of the cost base.

The growth constraint issue

TAP’s options are therefore bounded by the structure of the privatisation itself. Integration with Air France-KLM would orient the carrier toward a multi-hub model with strong North Atlantic and African reinforcement and Delta’s commercial weight. Alignment with Lufthansa Group would embed TAP more deeply inside the Star Alliance ecosystem and leverage existing engineering scale while prioritising the South Atlantic.

An improved offer process could extract additional commitments from either side. Prolonged standalone status remains feasible only if the government is prepared to accept slower growth and higher vulnerability to external shocks.

The evaluation report now under preparation by Parpública will determine which of these paths is opened. The subsequent government decision will fix the industrial trajectory of Portugal’s flag carrier for the remainder of the decade. The stakes are high, six miles high, or for Portugal’s long term future, higher again.