TAP returned to profit, with recovery due to increased overall activity and improved efficiency, despite results continuing to be affected by the high cost of fuel. How do you explain that change?

The 2006 year was, without a doubt, one of growth. TAP carried 6.9 million passengers, or half a million more than in 2005, we began renewing the fleet with three Airbus A330 going into operation, we re-launched longhaul flights from Oporto, increased links to Brazil, Africa and Europe and, even with this strong increase in supply, we managed to improve our yield by half a percentage point.

It should also be mentioned that revenue from external markets saw an increase of 29% against the previous year, reaching 1.058 billion euros, which, as it was due to greater international activity, gives TAP a leading role amongst the main Portuguese exporters and is an important contribution to the growth of tourism in Portugal.

Grupo TAP ended 2006 with profit of 7.3 million euros, which was higher than the set target of around 3 million euros. In order to respond to high accumulated losses in the first half of the year, and which were mainly driven by fuel price increases and by the ever increasing competition from low cost companies, TAP employed a strategy of defending from the front. Instead of closing destinations or reducing activity, the Company did exactly the opposite and maintained its response strategy to no-frills companies by focusing on competitive pricing and increasing supply.

In this way, Grupo TAP ended the year with an operating net income of 38.5 million euros, which represents an increase of 48.5 million euros compared with the 9.9 million loss in 2005. The good performance of the carrier’s several business areas – Air Transport and Maintenance and Engineering – had a significant impact on this result, driving revenue to a 21.7% rise, against the previous year, on reaching 1.654 billion euros, and posting a rise in costs of 15.3%.

However, if fuel costs are added to this – totalling 373.8 million euros – costs rose by a total of 18.4%. The Maintenance and Engineering area contributed to TAP’s improved results in 2006, ending the year with revenue from third parties of 117.7 million euros, or 11.1% more than in 2005. Also, in terms of Cargo and Mail transport, there was a rise in activity, with total revenue of 105 million euros, representing growth of 26.6% on 2005.

Another positive contribution was the sale of the stake in charter airline White, announced last Summer, having generated an effect on results in the order of 2.7 million euros.

In fact, the price of fuel continues to be a source of concern for the aviation sector, even because of its volatility. It should be pointed out that, currently fuel has a weighting of 22% in our cost structure, while three years ago, these costs accounted for around 14% of the total. In 2006, we continued to witness a rise in the price of crude oil and refined products, having reached a new high of 78 dollars per barrel, in August. The price of Brent, on average was around 65 dollars per barrel, which was a 20% rise against 2005, and ended the year near 61 dollars per barrel.

In the Strategic Plan, one of the objectives outlined is to safeguard the Company from these variations, and therefore a hedging policy was implemented in order to achieve greater protection. In 2006 TAP showed its interest in purchasing regional air carrier Portugália, for 144 million euros, free of any debt.

To what extent is this strategic step for TAP’s development, as you called it, a determining factor for the Company’s repositioning? What synergies will result from this merger?

In November 2006, TAP signed a contract with Espírito Santo International for the acquisition of 99.81% of the capital of PGA. This transaction is currently being analysed by the Competition Authority (AdC – Autoridade da Concorrência) and its conclusion requires that agency’s authorisation. This acquisition is considered a strategic step for TAP’s development as it enables customers' needs to be better met and enhances the main operating centres, from Lisbon, and particularly from Oporto.

TAP’s strategy is to consolidate its main hub (Lisbon) and develop its second hub (Oporto), with a view to attracting and distributing traffic between hubs and small and medium-sized points, which is where the potential of the complementarities between the networks of the two companies are seen.

The aviation Industry and most other economic sectors are carrying out their activities in an atmosphere of increasing competition. However, acting in the global market requires that business gain mass, and that is why, all over the world, we are witnessing a progressive concentration of companies.

In the case of air transport this concentration provides critical mass, makes it possible to reduce costs and improve coordination of aircraft capacity in relation to routes and schedules, as well as allowing for greater tariff flexibility. We therefore believe that an operation of this kind will better serve the interests of our Customers. This synergy will make it possible to increase international supply, which represents over 66% of TAP’s revenue. PGA has been internationally recognised, over the last five years, as the best regional airline in Europe, it has a good brand and will make it possible to enhance our hubs in Lisbon and Oporto. In relation to Oporto, it should be noted that TAP now offers its customers the possibility of travelling directly from the North of Portugal to intercontinental destinations, namely to Brazil and the USA.

We have thus tried to meet our Customers' expectations, always satisfying their needs and providing them with more and better options for their air travel.

In 2006, a new corporate governance model was created for TAP Portugal, with a structure that includes the General and Supervisory Board and the Executive Board of Directors. What is your opinion of the new model?

The new structure aims to respond to the implementation of absolutely professional management, adopting best international management practices.

Amongst the main changes to the previous model is the creation of a Specialised Auditing Commission to check on the Company’s financial development. The aim is to turn TAP into a more transparent company and bring it closer to international management models, preparing it for its future privatisation.

The Company’s new governance model includes the maintenance of two separate companies – TAP, SGPS, S.A. and TAP S.A. – and the creation of a supervisory board. The work of these two bodies will be supervised by a commission of auditors who will be responsible, amongst other things, for defining policies and guidelines, as well as identifying risks of a financial, operating or security nature, which may lead to significant direct or indirect losses.

The new structure also includes the creation of a Specialised Sustainability and Corporate Governance Commission, which will be responsible to the General Supervisory Board, and whose mission will be to ensure that the Governing Bodies create conditions for sustainable growth on an economic, social and environmental level. This commission will also aim to ensure benchmarking is carried out through a poll of the largest European air carriers.

I am conscious that over the next three years TAP will have to overcome more and bigger challenges, but I believe that the Company is prepared for them, and that the new governing bodies, now put in place are a complement to a job that will be difficult and demanding.

Can you tell us about the general outline of the Strategic Plan already approved by TAP?

Stability and growth have been the keys to the success achieved by TAP over the last few years. Having overcome the phase of fighting for survival, we then won the battle of consolidation and regained our credibility in relation to our Customers, Employees and the Shareholder. The market has confidence in TAP again. Now a new leap forward is required, with new ambitious and demanding targets, but which can be reached if we are able to maintain the winning spirit with which we have faced our previous challenges.

The central issue is that TAP cannot continue to reach small results, keeping itself merely at the brink of survival. TAP's mission is to present a reasonable level of sustainable growth alongside good profitability but also to ensure good expected return on capital invested.

As I said previously, the commitment to management excellence, which already includes the acquisition of PGA, was defined in comparison to a poll of the world's nine largest companies, including Europe's Air France/KLM, Lufthansa and British Airways.

Four performance indicators for annual assessment were also established: return on capital invested, EBITDAR margin, revenue growth and profit development. With this agreement, the trustees hope that TAP will, over the next three years, achieve a return on capital invested at a level of best practice of the world’s main air carriers. Overall performance will be assessed based on indicators such as image of Grupo TAP in the national and international markets, capacity for change and adaptation to new market demands, and fulfilling strategic targets on a national and international level.

In order to fulfil all of these objectives, the strategic guidelines include developing a regional operation, expansion to new destinations and an increase of current capacity, excellence in marketing and sales, obtaining additional economies of scale in contracts, managing other businesses that create value for air transport, putting into practice a brand strategy and implementing an organisational transformation programme. Without doubt, these are difficult objectives, but also very motivating.

In effect, everyone of us at TAP, had over the last few years acquired a new corporate culture, which I can define as a liking for challenge. We should be proud of the Company, for the self-confidence it inspires in the Portuguese and the spreading of the name of Portugal, which we continue to project internationally.

The document that the Board of Directors signed recently is in fact entitled A Commitment to Excellence, and to win this stage in our Company’s life we will have to continue to do more and better if we want to face up to our competitors and stand out amongst them. I know this objective is within our reach, with the effort and enthusiasm of all our Employees who, as in the recent pass, will be conscious of our mission and our purpose.

Lastly, I would like to recognise all of those whose contribution has had a decisive role in the Company’s success – our Customers, the State Shareholder, Government Bodies namely INAC, and the General and Supervisory Board – vital for us to confidently move forward with building the future of TAP.