Air France under the spotlight with bid for a stake in Tap, but the crisis in the Middle East weighs heavily

(Il Sole 24 Ore Radiocor) - The market's cold reception to the news that Air France-Klm has made a non-binding offer for a minority stake in Tap Air Portugal, the Portuguese carrier whose privatisation Lisbon has begun. The strength of the Portuguese group lies in its geographic location in Lisbon, a hub in southern Europe offering extensive connectivity, particularly to the Americas (including Brazil), a key market for both Tap and Air France-Klm, as well as to Africa.

For its part, Tap would benefit from integration into a global commercial organisation comprising Air France-Klm and Transavia, as well as aclose collaboration with Delta Air Lines and Virgin Atlantic, the Franco-Dutch group's partners in their transatlantic joint venture. The networks of Tap and Air France-Klm are largely complementary and Portugal would benefit from increased air connectivity.

In the communiqué, the Franco-Dutch group explains that its unique approach 'to consolidation favours cooperation within a clear framework, designed to maximise economic and operational synergies. This model would allow Tap to fully benefit from a smooth integration within a large and solid group, taking advantage of economies of scale and global reach, thus strengthening its competitiveness. Such cooperation would extend to all areas of activity and would include a focus on decarbonisation'.

Weighing on the stock, however, was the decision byMorgan Stanley to downgrade some European airlines including Air France, lowering the target price to EUR 9.60 from EUR 11.70 with the rating still at Equal-weight. In general, airlines are experiencing a period of pressure with oil prices continuing to travel well above USD 100 (currently Wti at USD 107.14 and Brent at USD 108.66). Added to this are the latest statements by the US president, Donald Trump, that the military will intensify its operations against Iran in the next two to three weeks, effectively dashing hopes for a short-lived conflict.

A complex picture that does not help the airlines so much that both Deutsche Lufthansa and Ryanair (in New York in the pre-market) have raised the first alarms. The first consequence could be the grounding of up to 40 aircraft, in the middle of the summer season, in the case of Lufthansa. No decision has been taken at the moment, but according to CEO Carsten Spohr the increase in fuel costs will also affect ticket prices. The second alarm comes from Ryanair's number one, Michael O'Leary, who says that the supply of jet fuel to Europe could be disrupted from June if the conflict in the Middle East does not end by next month, potentially forcing the airline and its competitors to consider cancelling flights for the summer season. In terms of numbers, the company reported that traffic grew by 5% in March with 15.8 million passengers.