How to Control Airline Routes from the Supply Side: The Case of TAP

Competition in the European airline industry is currently fierce in the face of depressed demand conditions, and in the wake of privatizations and liberalization. The Portuguese flag carrier, TAP Air Portugal, operates within this environment. It is a medium sized carrier that was part of the defunct Qualiflyer Group alliance and has recently joined the Star Alliance. It controls more than 50% of the air market between Europe and Brazil and Europe and Angola. Nevertheless, it has been experiencing financial losses. One reason for this is that, following the reasoning of Ronald Coase (1946), it is difficult for any company with decreasing average costs to recover full costs in a highly competitive market. One way of approaching the problem is to establish quasi-monopoly power and airlines have done this through such things as frequent flyer programs and hub-and-spoke operations. Other airlines, notably charter carriers, have sought to adjust capacity and services to meet an anticipated cash flow. In practice, many have used a combination of measures with mixed success. This paper focuses on how TAP has responded to changing conditions by adjusting its supply-side activities in terms of restructuring its network to maximize potential revenues.