The Economic and Financial Analysi s for TAP Air Portugal Polytechnic Institute of Bragança School of Public Management, Communication and Tourism… [604239]

Financial Analysis
The Economic and Financial Analysi s for TAP Air Portugal

Polytechnic Institute of Bragança
School of Public Management, Communication and Tourism
Public Management and Administration
Iuliana -Alexandra Tiță

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Contents

INTRODUCTION ………………………….. ………………………….. ………………………….. …………………… 3
THE CONCEPT OF “COMPANY” ………………………….. ………………………….. ………………. 3
OBJECTIVES AND KEY ISSUES THAT THE ECONOMIC AND
FINANCIAL ANALYSIS SHOULD ADDRESS ………………………….. ……………………… 4
OBJECTIVE AND KEY ISSUES ………………………….. ………………………….. …………………………. 4
USERS OF FINANCIAL INFORMATION ………………………….. ………………………….. …………. 5
THE SUPPORTING INFORMATION, FINANCIAL
AND NON -FINANCIAL ………………………….. ………………………….. ………………………….. ……… 7
THE RATIOS METHOD – A BASE METHOD OF THE ECONOMIC
AND FINANCIAL ANALYSIS ………………………….. ………………………….. ……………………….. 9
A. LIQUIDITY RATIOS ………………………….. ………………………….. ………………………….. ………… 10
B. ACTIVITY RATIOS ………………………….. ………………………….. ………………………….. …………. 11
C. DEBT RATIOS ………………………….. ………………………….. ………………………….. ………………….. 12
D. PROFITABILITY RATIOS ………………………….. ………………………….. ………………………….. 13
E. MARKET RATIOS ………………………….. ………………………….. ………………………….. …………… 13
RISK ANALYSIS ………………………….. ………………………….. ………………………….. …………………. 14
FINANCIAL BALANCE ………………………….. ………………………….. ………………………….. ……. 21
CONCLUSION ………………………….. ………………………….. ………………………….. ……………………… 26
References ………………………….. ………………………….. ………………………….. ………………………….. …… 27

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INTRODUCTION
―Financial analysis is the process of evaluating businesses, projects, budgets and other
finance -related entities to determine the ir performance and suitability.‖1
As is one of the most comprehensive subjects , we can divide this subject in a lot of
parts, such as The Company – Basic principles inherent to the economic activity; The
Economic and Financial Analysis; Investment Analysis: Basic Concepts in Investment
Analysis . In this projec t I will study ― The Economic and Financial Analysis ‖ part . I chose this
part as it gives me the chance to analyze a company from the economic and financial point of
view. The company I will regard in my project is TAP Air Portugal , Portuguese Airline
Company , and I will follow topics such as:
 Objectives and key issues that the Economic and Financial Analysis should address
 The supporting information, financial and non -financial
 The ratios method – a base method of the economic and financial analysis
 Risk analysis
 Financial balance
I have to mention that my analysis is based on the last TAP Air Portugal's "Management
Report and Accounts‖2 from 2016.

THE CONCEPT OF “COMPANY”
Regarding to ― Princípios de Gestão Financeira ‖ (Menezes, H. Caldeira , 2001) ― The
company is a hierarchical human group that mobilizes the human, material and financial
resources to extract, transform, transport and distribute products or provide services and that,
in order to achieve defined objectives, the motivations of profit an d social utility intervene at
the various hierarchical levels. ‖
―TAP Air Portugal (TAP – Transportes Aéreos Portugueses, SGPS, S.A. ) is the flag
carrier airline of Portugal, headquartered at Lisbon Airport which also serves as its hub. The
company has a fl eet of 90 airplanes, 68 of which were manufactured by Airbus and the
remaining 22 by Embraer and ATR, operating on behalf of the regional airline TAP Express.

1 https://www.investopedia.com/terms/f/financial -analysis.asp
2 This can be accessed followed the link : https://goo.gl/JenAJX

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In June 2015 the company was semi -privatized and became majority -owned by the
Atlantic Gateway Co nsortium, led by David Neeleman, who founded JetBlue, Azul and co –
founded WestJet Airlines, together with Portuguese entrepreneur Humberto Pedrosa. The
Atlantic Gateway Consortium purchased 61% of the carrier from the government of Portugal
on 24 June 2015 , with an option to buy the Portuguese government's remaining 34 percent
stake in 2018. This deal has been surrounded in controversy because it was completed at the
end of the center -right government's mandate with wide opposition from TAP employees. On
October 2015, a new left -wing government has sought to return majority control of the airline
to the state, having signed in February 2016 a deal with the private consortium, which
indicates that the company is 50% owned by the Portuguese state, 45% by the A tlantic
Gateway Consortium and 5% available shareholder to collab orators and employees of TAP. ‖3
TAP Air Portugal is a member of the Star Alliance since 2005.
This company operates on average 2,500 flights a week to 87 destinations in 34
countries worldwide.
Regarding with Skytrax , a United Kingdom –based consultancy which runs an airline
and a irport review and ranking site, TAP Air Portugal is rated as a three -star airline .

OBJECTIVES AND KEY ISSUES THAT THE ECONOMIC AND
FINANCIAL ANALYSIS SHOULD A DDRESS
A. OBJECTIVE AND KEY ISSUES
Purpose : Provide elements that make it possible to diagnose companies, in order to
obtain a correct and reliable prospect of their economic and financial situation.
Regarding the economic and financial situation from TAP Air Portugal , I will obtain a
correct and reliable prospect , as my analysis is based on "Management Report and Accounts‖
from 2016.
The key issues that an economic and financial analysis should address are as follows:

3 https://en.wikipedia.org/wiki/TAP_Air_Portugal

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● What is the company's ability to ge nerate value or income to satisfy all those who
participate in it and at the same time ensure its permanence in the market and the expansion of
your activity? => Business Opportunities
● To what extent does the company have the financi al means to satisfy its needs? Or
Have the possibility of having they, in order to operate independently, before third parties? =>
Financial Optics
These are some questions which I will try to respond during the project.
B. USERS OF FINANCIAL INFORMATION
Relationship with stakeholders: The Company thus considers it vital to stimulate the
relationship with interested parties, with the indispensable communication channels with its
Customers and Employees, as well as with Public Administration, Suppliers and Non –
Governmental O rganizations, among others, having been developed.

Stakeholders In the development of its objectives the Company
assumes the following positioning Communication channels
Customers Provide a quality product through the best and easiest
solutions for their journeys and increasingly adding
additional value to the product offered to them; Actively
contributing to uphold the high levels of safety,
demanded by the Aeronautical Industry, to ensure safe
conditions for people and goods. Customers | Passengers
Call Centers; Talk to Us; Loyalty Programs : Victoria, for individual
customers, and corporate for Company customers; TAP Website;
In-Flight Magazine; In -Flight Video; Executive Lounge; iPhone;
iPad; Social Networks (Facebook, Twitter). Customers| Cargo a nd
Mail Cargo spot Cargo System; Cargo Call Center; Cargo Customs
Systems; Website TAP –Cargo; Track & Trace Applications for
mobile devices; Must Go priority services; Freighter Services on
request; Claims dedicated s ervice; Mail system go-live.
Customers | Maintenance and Engineering
TAP –Maintenance and Engineering Website; Customer Managers;
Customer Satisfaction Survey; Advertising Campaigns; Care2
Customer Program aimed at highlighting a customer proximity
policy and recognizing the best customers of TAP –Maintenance and
Engineering; participation in fairs and specialized conferences with
Customer Managers and speakers from the respective staff boards,
in order to disseminate the image and the technical capacities of the
Maintenance and Engineering Busi ness Unit; organization of
specialized seminars targeted at companies in the aeronautical
sector, in most cases customers; creation of a communications
portal for customers – ACE News –, looking to disseminate content

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related to the activity of the Busines s Unit and also to boost the
interaction with customers and other entities.
Internal Customer | Business Units and Group companies
Satisfaction Portal of TAP Services; Dissemination of the evolution
of operating performance in the areas of the TAP Servic es Business
Unit.
Shareholders Always endeavoring to achieve the best results in a
sustained manner. General Meeting; General and Supervisory Board until 12
November 2015; Annual Reports; Meetings; TAP Website.
Employees Provision of conditions for profe ssional development
and employability of its Employees, the establishment of
a relationship with the Employees and respective
representative organizations according to ethical
principles and principles of mutual respect and the
promotion of balance between family and professional
life. Corporate Intranet; TAP Newspaper and Flash Information;
Corporate Agreement; Meetings with Workers‘ Committee and with
representative structures of Employees; Survey on Organizational
Climate; Performance Assessment feedback meetings; Training;
Welcome Programme for new Employees; Recognize Programme;
Ceremony of 20 years in TAP‘s service; Safe Attitude Campaign
within the scope of Health and Safety at Work, at TAP –
Maintenance and Engineering.
Society Be identified with principles of transparency, in
following its social responsibility commitment to
Society; Assume an important role in promoting changes
in society and, in this way, contribute to greater
development and social cohesion. TAP Website; Museum; Visits to the p remises; Community support
actions.
Suppliers Continue to invest in the relationship with Suppliers, in a
manner that is transparent and that guarantees the
applicability of the sustainability principles throughout
the value chain, with TAP considering that the advantage
of its services is, in part, determined by the quality of
Suppliers. TAP Website; Suppliers Portal; Events aimed to mark important
moments of Partner/Supplier relations; Participation in specialized
Fairs and Conferences.
Regulatory and
supervisory entities Transparent and continuous communication and the
rigorous fulfillment of rules established by regulatory
and supervisory entities is considered an essential
condition for carrying out TAP‘s activity Opinions, Comments, Recommendations and Reports for ANAC,
Secretary of State for Infrastructures (Ministry of Planning and
Infrastructure), DGPE/MNE and DGAE/MNE (Directorate General
of Foreign Policy and Directorate General for European Affairs of
the Ministry of Foreign Affairs), Director ates-General of the
European Commission (DG Mobility and Transport, DG
Environment, DG Competition, DG Home Affairs), among others;
Periodic meetings with all the above mentioned entities and
European and International Bodies directly related to Industry
(AEA, ERA, ALTA, IATA, ICAO); Observation of negotiations of
Air Transport Agreements between the Portuguese State or the
European Commission and Non -EU States; Assessment of the
impact of proposals for legislation in Industry.

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THE SUPPORTING INFORMATION , FINANCIAL
AND NON -FINANCIAL
Accounting documents – translate into monetary terms the situation of the company, the
formation of its results and the movement of the means of financial resources.
Non-accounting information
i. Information about the company
 Company activity: TAP Air Portugal is dedicated to air transport operations involving
passengers, cargo and mail, the implementation of maintenance and engineering
works, providing handling services during air transport stopovers, exploration of duty
free shops at airports and catering for aviation.
 Legal nature: Public limited company (―A sociedade anónima ‖) which by virtue of
Decree -Law no. 312/91 of 17 August, continues the legal personality of the public
company Transportes Aéreos Portuguese, E.P., adopts the Portuguese name of
Transportes Aéreos Portugueses, S.A., may be abbreviated as TAP, S.A., TAP
Portugal, or only TAP .
 Composition of capital : Public Compan y (―Empresa de capital aberto ‖) The share
capital of the company is forty -one million five hundred thousand euros, represented
by eight million and three hundred thousand shares, with a par value of five euros
each. The shares are nominative and take the b ook-entry form. Shares may be
represented by securities of one, five, ten or multiples of ten shares, and the executive
board of directors may issue certificates provisional or definitive instruments
representing any number of shares. (15,000,000 € – Share Capital )
 Geographic location : The company is headquartered in building number twenty -five
of Lisbon Airport .
 Quality of managers : Commitment TAP is committed to a responsible and engaged
management, providing professional development and work qual ity to the Company‘s
Employees being identified with principles of transparency, and with the intention to
assume an important role in promoting changes in society and, in this way, contributes
towards greater social development and cohesion.

ii. Information about the product and its marketing

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 Type of product : the operation of public transport services cargo and mail, as well as
the provision of commercial, industrial and financial transactions directly or indirectly
with the said holding and, also, to carry out any other activities deemed appropriate to
business interests.
 Positioning the product in its life cycle : These correspond to the value of materials and
hours spent on aircraft maintenance works for third parties which are still in progress
at the repo rting date.

iii. Information on the characteristics of the market and the sect orial framework of the
company
 The company's position in the game of forces of the various markets in which it
operates : On the World's Top 100 Airlines – 2016, TAP Air Portugal is number 64.
 Sectorial framework : The strategic guidelines defined by the TAP Group outline the
following fundamental objectives: the creation of economic and social value for
shareholders and the nation, satisfaction and anticipation of the expectations of clients
and also, guaranteeing the best conditions for the empowerment and professional
progress of staff.

iv. Information on internal operating conditions
 Customer / vendor dependency : The Company‘s business model has evolved,
providing customers with more options and creating new products and services, in
addition to the trip.
 Production process : Works were carried out to improve/increase the safety conditions
at work as well as the production capaci ties, ensuring compliance with best practices
in safety at w ork and the environment.

v. Information on the conjuncture and institutional situation
 Inflation : 0.8% in 2016
 Interest rate : The weighted average interest rate implicit in the 2016 figures, compared
to the estimated average debt balance during the year, would have been marginally
above 4% and below the same ratio calculated for 2015 .
 Tax changes : As at 31 December 2016 and 2015 the tax rate used to calculate the
deferred tax assets relating t o tax losses carried forward was 21%. In the case of

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temporary differences, the rate used was 27.5%, when it was deemed that the taxation
of temporary differences in the estimated period of application of the aforesaid rate
was probable.
THE RATIOS METH OD – A BASE METHOD OF THE ECONOMIC
AND FINANCIAL ANALYSIS
Definition
It consists of a significant relationship between two or more elements extracted from the
balance sheet, the income statement or other statistical elements related to the company. It
may be expressed as a quotient or as a percentage.
They are management indicators from which it is possibl e to draw conclusions about the
economic and financial situation of the company.
―Ratio analysis involves methods of calculating and interpreting financial ratios to analyze
and monitor the firm‘s performance. The basic inputs to ratio analysis are the firm’s income
statement and balance sheet .‖ (Gitman, 2013)
Ratio analysis is not mere ly the calculation of a given ratio , more important than this is the
interpretation of the ratio value. A meaningful basis for comparison is needed to answer such
questions as ―Is it too high or too low?‖ and ―Is it good or bad?‖
Two types of ratio compari sons can be made: cross -sectional and time -series.
Cross -sectional analysis involves the comparison of different firms‘ financial r atios at the
same point in time, with other words the cross-sectional analysis is comparison between the
ratios of a company, in a given time, with the ratios of other companies or with industry
averages. Analysts are often interested in how well a firm has performed in relation to other
firms in its industry.
Time -series analysis evaluates performance over time. Comparison of c urrent to past
performance, using ratios, enables analysts to assess the firm‘s progress. This type analyzes
the evolution of the company's ratios over several periods .
Goals
 Strategic analysis and evolution;

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 Management control;
 Credit analysis;
 Market ris k estimation;
 Bankruptcy forecast;
 Others.
Categories of Financial Ratios
―Financial ratios can be divided for convenience into five basic categories: liquidity,
activity, debt, profitability, and market ratios. Liquidity, activity, and debt ratios primarily
measure risk. Profitability ratios measure return. Market ratios capture both risk and return.
As a rule, the inputs necessary to an effective financial analysis include, at a minimum,
the income statement and the balance sheet. ‖ (Gitman, 2013)
A. LIQUIDITY RATIOS
LIQUIDITY – reflect the ability or ability of the company to meet its short -term
commitments.
―The liquidity of a firm is measured by its ability to satisfy its short -term obligations
as they come due. Liquidity refers to the solvency of the firm‘s overall financial position —the
ease with which it can pay its bills. Because a common precursor to financial distress and
bankruptcy is low or declining liquidity, these ratios are viewed as good leading indicators of
cash flow problems. The two basic measures of liquidity are the current ratio and the quick
(acid -test) ratio. ‖ (Gitman, 2013)
The current ratio, one of the most commonly cited financial ratios, measures the firm‘s
ability to meet its short -term obligations. It is expressed as follo ws:
Current ratio (General Liquidity ) =

The current ratio for TAP Air Portugal in 2016 is:

= 0.47
Interpretation : A ratio under 1 indicates that a company‘s liabilities are greater than its
assets and suggests that the company in question would be unable to pay off its obligations if

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they came due at that point. It is an important fact that the value‘s acceptability for the
Current Ratio depends on the industry in which the firm operates. For example, a current ratio
of 1.0 would be considered acceptable for a public utility but might be unacceptable for a
manufacturing firm.
The quick (acid -test) ratio is similar to t he current ratio except that it excludes
inventory, which is generally the least liquid current asset. The quick ratio is calculated as
follows:
Quick ratio (Reduced Liquidity ) =

The quick ratio for TAP Air Portugal in 2016 is:

=
= 0.40
B. ACTIVITY RATIOS
FUNCTIONING – allow to explain the financial impacts of management at the operating
cycle.
―Activity ratios measure the speed with which various accounts are converted into
sales or cash —inflows or outflows. ‖ (Gitman, 2013)
―The average collection period, or average age of accounts receivable, is useful in
evaluating credit and collection policies.‖ (Gitman, 2013)
It is arrived at by di viding the average daily sales into the accounts receivable balance:
Average collection period =
=

The average collection period for TAP Air Portugal in 2016 is:

= 39.3 days
Inventory turnover commonly measures the activity, or liquidity, of a firm‘s inventory.
It is calculated as follows:

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Inventory turnover (Rotation Inventory ) =

The inventory turnover for TAP Air Portugal in 2016 is:

= 1.7
―The total asset turnover indicates the efficiency with which the firm uses its
assets to generate sales.‖ (Gitman, 2013)
Total asset turnover is calculated as follows:
Total asset turnover =

The value of TAP Air Portugal‘s total asset turnover in 2016 is:

= 1.38
C. DEBT RATIOS
DEBT CAPACITY – translates the possibility of the company obtaining credit, being closely
related to stability, liquidity and solvency.
―The debt ratio measures the proportion of total assets financed by the firm‘s creditors.
The higher this ratio, the greater the amount of other people‘s money being used to gener ate
profits.‖ (Gitman, 2013) This ratio measure the firm‘s degree of indebtedness .
The ratio is calculated as follows:
Debt ratio =

The debt ratio for TAP Air Portugal in 2016 is:

= 1.2

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D. PROFITABILITY RATIOS
PROFITABILITY – results from a relationship between a particular result or output
generated and an amount of resources or investment that allowed generating this same result;
expresses a relation between the result (profit or loss) and sales or a greatness of capital.
The firm‘s profitability is a secondary concern of creditors , this is important for them
as they want to know that the busines s is healthy. Management (e.g. stockholders) ―is
concerned with all aspects of the firm‘s financial situation, and it attempts to produce
financial ratios that will be considered favorable by both owners and creditors. ‖ Addition ally,
management uses ratios to monitor the firm‘s performance from period to period.
―The gross profit margin measur es the percentage of each sales euro remaining after
the firm has paid for its goods. The higher the gross profit margin, the better (that is, the lower
the rela tive cost of merchandise sold).‖ (Gitman, 2013)
The gross profit margin is calculated as follows:
Gross profit margin =
=

The gross profit margin for TAP Air Portugal in 2016 is:

= 0.936 => 93.6%
E. MARKET RATIOS
―Market ratios relate the firm‘s market value, as measured by its current share price, to
certain accounting values. These ratios give insight into how well investors in the
marketplace feel the firm are doing in terms of risk and return. They tend to reflect, on a
relative basis, the common stockholders‘ assessment of all aspects of the firm‘s past and
expected future performance. ‖ (Gitman, 2013)
SOLVENCY – translates the ability or ability of the company to meet its medium – and long –
term commitments on the respective maturity dates.
PRODUCTIVITY – the relationship between the output an d the productive factors used
(input ).

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STABILITY – analyze the financial ba lance existing between the various portions of the asset
and its means of financing.
Regarding with Gitman, in the book ―Principles of Managerial Finance‖ he told us that
revenue stability and cost stability are two factors linked with business risk.
Revenue stability reflects the relative variabili ty of the firm‘s sales revenues, while
cost stability reflects the relative predictability of input prices such as those for labor and
materials.
ECONOMICS – allows you to judge about the economic advantag es achieved by the
rationalization of the use and combination of productive factors.
―The field of finance is closely related to economics. Financial managers must
understand the economic framework and be alert to the consequences of varying levels of
econ omic activity and changes in economic policy. They must also be able to use economic
theories as guidelines for efficient business operation. Examples include supply -and-demand
analysis, profit -maximizing strategies, and price theory. The primary economic principle used
in managerial finance is marginal analysis, the principle that financial decisions should be
made and actions taken only when the added benefits exceed the added costs. ‖ (Gitman,
2013)
In the book “Principles of Managerial Finance ‖ is specif y that economic principle
which states that financial decisions should be made and actions taken only when the added
benefits exceed the added costs.
RISK ANALYSIS
Risk may be classified into a number of types.
Regarding to Richard Pike and Bill Neale a clear understanding of the different forms of
risk is useful in the evaluation and monitoring of capital projects is made in the book
―CORPORATE FINANCE AND INVESTMENT ‖:
I. Business risk – the variability in operating cash flows or profits before interest. A
firm‘s business risk depends, in large measure, on the underlying economic
environment within which it operates. But variability in operating cash flows can be
heavily affected by the cost structure of the business, and hence it‘s operating gearing.

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A com pany‘s break -even point is reached when sales revenues match total costs.
These costs consist of fixed costs – that is, costs that do not vary much with the level
of sales – and variable costs. The decision to become more capital intensive generally
leads to an increase in the proportion of fixed costs in the cost structure. This increase
in operating gearing leads to greater variability in operating earnings.
It is associated with factors:
 Commercial in nature – commercial risk,
 Of a technical and product ive nature – technological risk, and
 Investment policy
Causes of volatility:
 Recession / expansion of national or international economy;
 Launch of new company products (the role of innovation – R & D);
 Launch of competitive products;
 Government control decisions;
 Strikes;
 Natural Accidents.
Economic viability
 Is the company's (holding) capacity to generate income that allows it to cover all
expenses (including depreciation and provisions for risks and operating charges).
 Economic viability is ensured a s long as annual operating permanently and over time
at appropriate levels.
 The greater the company's economic risk, the more worries its viability economic
development.

II. Financial risk – the risk, over and above business risk, that results from the use o f debt
capital. Financial gearing is increased by issuing more debt, thereby incurring more
fixed -interest charges and increasing the variability in net earnings. Financial risk is
considered more fully in later chapters.
It can be analyzed in two different but interdependent perspectives:
 Economic Perspective: Corresponds to the probability of the results (both
exploration and extra -exploration) (or not) the financial financing expenses,
regardless of the cash of the comp any's financial structure.
 Financial Perspective

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 Short -term (or short -term) viewpoint – is the probability of the
company meeting the their commitments through normal receipts (from
exploration and extra -exploitation);
 Structural (or medium – and long -term) perspective, where financial risk
refers to the probability of total solvency (ratio of equity to total debt)
is considered, by the owners of the company's capital and by the
creditors, as inadequate.
Financial viability
Can be analyzed in different p erspectives:
 Economic Perspective: A company is financially viable when it is assured the
systematic cover their capital expenditures (financial financing expenses and
remuneration of shareholders' equity);
 Financial Perspective
 Treasury – A company is financially viable when it has the capacity to
Systematically generate over time a treasury of positive and to pay
taxes on income, remuneration of third parties' own capital and capital
and reimbursement of the latter;
 Medium and long term – a company is financially viable when possible
financial autonomy over time.
III. Portfolio or market risk – the variability in shareholders‘ returns. Investors can
significantly reduce their variability in earnings by holding carefully selected
investment portfolios. This is sometimes called ‗relevant‘ risk, because only this
element of risk should be considered by a well -diversified shareholder.
 It involves economic and financial risks in the same time.
 The concept of combined degree of lever is used to quantify it.
 The company's overall risk is related to the company's ability to generate
systematically and adequate financial surplus levels to enable it to cover:
 The costs of operating and overhead costs;
 Ensure adequate political amortization of fixed capital, compensation of own and others'
and reimbursement of recent capital;
 And also ensure the future financial autonomy that is, maintaining a balanced financial
structure.

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Regarding TAP Air Portugal, t here are two types of
risk:
External Risks (46%) – Event that occurs due to
external factors; the Company does not have any type of
control and has to adapt to the new realities.
Internal Risks (54%) – Risk that is based on
internal factors with which the company can interact in
order to define a mitigation, acceptance, and transfer or refusal strategy .

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Distribution, per type and main categories, of the 155 risks :

Others important things for TAP Air Portugal are the financial risk management
policies . Risk management is conducted at the strategic level by the Group and subjec t to
ongoing monitoring by the management board . The Group's activities are exposed to a variety
of financial risk factors, includi ng the effects of market price changes, namely fuel price risk,
currency risk, interest rate risk, as well as credit risk and liquidity risk.
Market risk
Competition in commercial aviation has intensified in recent years as a result of the
increasing libe ralization of regulation in many countries and markets and as a consequence of
the increase in the number of players in the sector.
In Europe the level of competition is very high in most markets and low -cost operators
have successively achieved a large r market share. In Portugal the level of penetration of low
cost airlines is, for example, about one -third at Lisbon airport, and in Oporto has the majority
market share.
Competition on a day -to-day basis is based on the price factor, including the
stratification of supply in several fare classes on the same flight and on the same aircraft.
However, in the medium and long -haul, competition and market risks are faced by airlines

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through the construction of business models, route networks, and products that s atisfy the
customer in the various aspects valued.
This differentiated product incorporates elements such as reliability, regula rity,
timeliness, diversity of schedules, flight frequency, equipment comfort, in short, product
quality, quality in flight e xperience. Many of these aspects are inevitably linked to the
characteristics of the aircraft, which have to be comfortable, modern, technologically
advanced and also economically efficient, with low consumption, low noise, low emissions
and flexible in te rms of flight autonomy. A modern and advanced fleet is a fundamental asset
to compete.
Fuel price risk
In commercial aviation markets, airlines are particularly subject to the impact of
changes in international energy markets that determine their fuel costs. This cost is, in the
TAP Group, the component with the most weight in the operating expenses structure. On the
other hand, it is a cost component with e xtreme volatility and that is decisive for the operating
result , as well as for the definit ion of the fare condition s and market policies, in each year.
In 2016 the crude oil price fell, in average, comparing with the previous year, 17%.
On the other hand, the prices of the Plats index of jet fuel registered in 2016 a reduction, in
average, n ear 20%. The decline in the price recorded in 2016 has accentuated the trend
already seen since mid -2014, when the Brent stood at 110 dollars per barrel. From then on it
would fall to close to 60 dollars by the end of 2014 and later, about 50% during the year 2015,
reaching minimum values below 30 dollars by the end of 2015.
Currency risk
The TAP Group's overall foreign exchange exposure in all the markets in which it
operates is significant due to its operation on more than 100 routes in three conti nents, and
also the sign ificance of the routes between Europe and the American continent in air transport
activity, in addition to its inv olvement in Brazil in terms of industrial investment in aircraft
maintenance and engineering activity. To the r isks in herent to exchange rate fluctuations and
exchange rate policy decisions of the monetary authorities of countries with con trolled
exchange systems, joins the sovereign risks such as the one that occurred in Venezuela due to
its economic and financial collap se.

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Interest rate risk
The borrowings of the TAP Group were marginally below Euro 1 billion at the en d of
2016, an increase of 5.6% compared to the figure at the end of the year 2015, amounting to
Euro 942 million, which in turn had registered a reduction of 11% compared to the figure
recorded a year earlier, at the end of 2014, Euro 1,062 million. In terms of net debt, the
variations were lower, standing at approximately Euro 845 million at the end of 2016, Euro
805 million at the end of 2015 and Euro 921 million at the end of 2014.
Interest rate risk has not materialized in recent years, given the long period of rat es
close to zero that occurred in Europe and also in the United States. However, during 2016
there was a gradual rise in interest rates in dollars and in the end of the year the short and
long-term interest rates in this currency increased even more sharply. The future imp acts of a
rise in the general interest level, either in US Dollar or possibly in Euro, are relevant to the
TAP Group, not only in relation to existing debt but possibly more in terms of amounts of
debt to be contracted in the future, as a result of the pla nned investments. Interest rates are
also a factor of cost increase in operating leases to be contracted in the future, transactions in
which the level of long -term interest rates is normally passed on to the aircraft rental.
Liquidity risk
The Group's liquidity risk is, therefore, made up of a combination of factors that result
from the operation, the existent debt and its repayment schedule, the negotiations conditions
for new transactions, the intra -group liquidity, currency conversion gai ns or losses, and
investment activities, when significant. The Group has to ensure, annually, the repayment of
its debt, although properly planned and scheduled over time, has an impact on the Group´s
treasury and has to be continuously evaluated in accord ance with the events occurred during
financial years. Any turbulence in financial markets, such as those that occurred during the
sovereign debt crisis, or any market changes in terms of the Group current costs or revenues,
restricts the treasury, liquidit y, economic and financial balance and the prosperity of the
Group.

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Credit Risk
The following table presents elements relative to the Group's assets as at 31 December
2016 and 2015, as well as other accounts receivable, which reflect the credit risk on those
dates:

FINANCIAL BALANCE
A balanced financial structure is important as allows the company to operate normally,
in continuous operation, independent of creditors, and in a position to negotiate, without
accepting pressure, the coverage of its operational needs.
STATIC PERSPECTIVE ((INSUFFICIENCY OF) MINIMUM FINANCIAL
EQUILIBRIUM RULE)
Any assets of the company must be financed by the capital put at its disposal for a
period at least equal to that of the permanence of that element in the company. (FM = 0)
Minimum Financial Balance Rule
 The capital used by an enterprise to finance a fixed asset, a stock or other element of its
asset must be available for the period, which corresponds at least to the duration of the
fixed asset, stock or other element of the asset. acquired with this capital.

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 Funding part of the non -current assets with short -term foreign capital could endanger the
continuity of the company, since the company would have to respond to i ts short -term
commitments before obtaining the necessary liquidity;
 Funding part of the current assets with other medium and long -term capital would give
rise to higher expenses, when the same result could be obtained with short -term financial
resources, w hich cost less.

DYNAMIC PERSPECTIVE

A company is only financially balanced when its business releases a flow of liquid
assets sufficient to meet its operational needs and financial commitments as they mature.
 The financial equilibrium has to be analyzed in a dynamic perspective that is, taking
into account not only the coverage of capital but also the activity of the company and
its operation.
 A company is financially balanced only when its business releases a flow of liquid
assets sufficient to meet its operating needs and financial commitments as they mature.
 A company has a financial equilib rium if it has a sufficient FM, if its safety margin is
sufficient to ensure the adjustment of the rate of the transformation of assets into net
assets to the requir ement of debt and, in addition, allow the company to exist of funds,
outside the immediate requirement of the creditors, to cover risks that may affect the
maintenance of this adjustment in the future.
Regarding f inancial i nstruments for TAP Air Portugal, The Group classifies its financial
instruments in the following categories: lo ans and receivables, financial assets at fair value
through profit and loss, held -to-maturity investments, an d available -for-sale financial assets.
The classification depends on the purpose for which the financial as sets were acquired.
Management determines the classification of its instruments at initial recognition and
reassesse s this classification on each reporting date.
Financial assets and liabilities are offset and the ne t amount reported in the balance sheet
when there is a legally enforceable right to offset the recognized amounts and there is no
intention to settle on a net basis or realize the asset and settle the liability simultaneously. The
legally enforceable r ight must not be contingent on future events and must be enforceable in
the normal course of business and in th e event of default, insolvency or bankruptcy of the
company or the counterpart.

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All acquisitions and disposals of these instruments are recognized on the date of the
respective purchase and sale contracts, irrespective of the financial settlement date.
Financial instruments are initially recorded at the acquisition cost, when their fai r value
equals the price paid, including transaction expenses (except financial assets at fair value
through p rofit or loss). The subsequent measurement depends on the category the instrument
falls under, as follows: Loans and receivables , Financial assets at fair value through profit or
loss, Held -to-maturity inves tments , Held -to-maturity investments .
The balance sheet presents a snapshot of the firm‘s assets and the source of the money th at
was used to buy those assets with other words t he balance sheet means financial statement
that shows the value of the firm‘s assets and liabilities at a particular time.

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Loans and receivables
Loans and receivables are non -derivative financial assets with fixed or deter minable
payments and which are not quoted in an active market. They are originated when the Group
advances money, goo ds or services directly to a debtor without any intention of negotiating
the debt. These instruments are included in current assets, except when their maturity ex ceeds
12 months after the date of the statement of financial pos ition, in which case they are
classified as non -current assets.
Loans and other accounts receivables are initially measured at the fair value and
subsequently at amortized cost and are included in consolidated financial statements in
captions: ― Others receivables‖, ―Trade receivable‖ and ― Advances to suppliers‖.

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Financial assets at fair value through profit or loss
A financial asset is classified under this category if acquired primarily for the purpose
of selling in the short term or if so design ated by management. Assets in this category are
classified as c urrent if they are either held for trading or are expected to be realized within 12
months of the date of the st atement of financial position. These investments are measured at
fair value throu gh the income statement.
Held -to-maturity investments
Held -to-maturity investments are non -derivative financial assets, with fixed or
determinable pay ments and fixed maturities that the Group‘s management has the positive
intention and ability to hold to maturity. Investments in this category are recorded at
amortized cost using the effective interest rate method.
Available -for-sale financial assets
Available -for-sale financial assets are non -derivative financial assets that are
designated as available -for-sale at initial recognition or that do not meet the conditions to be
classified in any o f the remaining categories, as described above. Available -for-sale f inancial
assets are classified as non -current assets, except if management has the intention to sale the
financial investment within 12 months after, the reporting date. These financial instruments
are recognized at fair value, as quoted at the reporting d ate.
If there is no active market for a financial asset, the Group establishes fair value by
using valuation techniques. These include the use of recent arm‘s length transactions,
reference to other instruments that are substantial ly the same as the one i n question,
discounted cash -flows analysis and option pri cing models refined to reflect the issuer‘s
specific circumstances.
Potential fair value gains and losses arising from these instruments are recor ded
directly in the fair value reserve (shareholder s‘ equity) until the financial investment is sold,
received or disposed of in any way, at which time the accumulated gain or loss formerly
reflected in fair value reserve is taken to the income statement.
If there is no market value or if it is not possi ble to determine one, these inves tments
are recognized at their acquisition cost. At each reporting date the Group assesses whether
there is objec tive evidence that a financial asset or group of financial assets is impaired.

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CONCLUSION
As a conclusion of this The Economic and Financial Analysis for TAP Air Portugal , I
want to sum up; responding at the beginning questions which represents t he key issues that an
economic and financial analysis :
What is the company's ability to generate value or income to satisfy all those who
participate in it and at the same time ensure its permanence in the market and the expansion of
your activity? This means the Business Opportunities for company.
As it is wr ite in the TAP Air Portugal's "Management Report and Accounts‖ from
2016, one of the company‘s vision is b eing perceived by the shareholder as a company that
generates value on a sustained basis. In line with the pursuit of its Vision, TAP Air Portugal
develops its activ ity according to the following v alues:
 Compliance with best Corporate Governance practices, namely with respect to the
principles of independence and transparency;
 Commitment to society, providing services that respect and value internatio nally
recognized human rights;
 Adoption of practices that contribute to the preservation of the Environment, within the
scope of the activity that is conducted and global environmental concerns;
 Foster professional development, remuneration levels and work conditions compatible
with legitimate labor expectations and market requirements.
To what extent does the company have the financial means to satisfy its needs? Or
Have the possibility of having they, in order to operate independently, before third pa rties?
This means the Financial Optics for company.
The various materials incorporated in the TAP fleet are also normally purchased in
dollars. At the strictly financial level, still, since some loans are also denominated in dollars,
also the respective i nterest and capital repayments result in an additional exposure to the
American currency. At the end of 2016, 11% of the TAP Group's debt was denominated in
dollars, a gainst 13% at the end of 2015. T aking into account these results the possibility to
operate independently, before third parties , is veer difficult for TAP Air Portugal.

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References
Brealey, Richard. Fundamental of Corporate Finance. 2001.
Fernandes, Catarina. The Economic and Financial Analysis. 2017.
Gitman, Lawrence. Principales of Manegerial Finance. 2013.
Menezes, H. Caldeira. Princípios de Gestão Financeira. 2001.
Pike, Richard. Corporate Finance and Investment. 2009.
TAP, Air Portugal. "Management Report and Accounts." 2016.
https://www.investopedia.com/terms/f/financ ial-analysis.asp