TAP | Annual Report - TAP Air...

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IndexANNUAL REPORT 2010

05 TAP GROUP

07 Message from the Chairman of the General and Supervisory Board 08 Interview with the Chairman of the Executive Board of Directors 11 Shareholder Structure of TAP Group 12 Corporate Governance 12 > Corporate Governance Model 13 > Governing Bodies

27 MANAGEMENT REPORT TAP, SGPS, S.A.

28 Profile 30 Key Figures 2010 32 Sustainable Development of TAP Group 34 Key Events 38 Summary of the Performance 41 TAP Group Key Figures 42 Analysis of the Economic Climate 45 Strategy 47 Performance of TAP Group Companies 47 TAP, S.A. 50 > Air Transport Business Unit 67 > TAP Serviços Business Unit 72 > Maintenance and Engineering Business Unit 78 Information Systems and Technological Development 80 Human Resources 82 Other Activities of TAP Group 96 Risk Management100 Economic and Financial Performance of TAP Group 104 Outlook for 2011 106 History of TAP

111 ACCOUNTING REPORT TAP, SGPS, S.A.

112 Consolidated Financial Statements 168 Audit Report 170 Proposed Application of Results 172 Financial Statements

197 REPORT OF THE GENERAL AND SUPERVISORY BOARD 2010 TAP, SGPS

200 ABBREVIATIONS AND GLOSSARY

TAP Group

TAP Group Annual Report 20106

Annual Report 2010 TAP Group 7

Message from the Chairman of the General and Supervisory Board

2010 brutally exposed the vulnerability of the air transport industry to a diversity of risks, each of which, per se, are capable of causing serious disturbance and major losses to the sector.

A chronic factor of uncertainty in the operating and financial planning of the activity, the volatility of the fuel market, after relative calm in 2009, reared its head once again in 2010, with prices returning to their irregular upward trend of previous years. This fact alone resulted in an aggravation of EUR 142 million in operating costs for TAP.

Added to this were the volcanic eruptions in Iceland, the harsh winter weather conditions in certain geographical areas,andstrikesofairtrafficcontrollersinsomecountries.Leading to the closing of airports and vast zones of air space, these events of local origin rapidly took on a transnational scale intheirconsequences,affectingglobalairtrafficatamajorscale, especially in the European space.

TAP, as was the case with other airline companies, was faced in 2010 – was well as the normal complexity of management in such a highly competitive Industry as that of air transport – not only with the enormous additional challenges that these unpredictable events posed to the operation, but also the accumulation of the losses resulting thereof.

However, TAP proved to be capable of responding to these problems, withflexibilityandeffectiveness,mobilisingitsresourcesandeffortstowardsthereconfigurationoftheprofileofitsoffer,intensifiedimple-mentation of the cost-cutting plan and reinforcement of sales dynamics, in such terms that the air transport business unit was able to close the year with a notable positive net income.

The Group's consolidated net income experienced the effects, however, of the unfavourable performance of Groundforce and TAP–Maintenance and Engineering Brazil, associated companies involved in recovery processes which have proved to be slower and more complex than had been foreseen initially. In this context, and after a considered revaluation of the situation,

TAP adopted a vast additional series of structural actions, with a view to stimulating and intensifying the respective restructuring processes.

On the other hand, during 2010, the Company's chronic situationofinsufficientequityremainedanopenwound.The perspective of the privatisation of TAP in the near future, recently aired in the public agenda, indicates the path towards what might be the most plausible solution to the urgent need to recapitalise the Company. In view of the important position which TAP has conquered on the market, I believe that various investors or potential part-ners will show interest in the Group's activities.

ItismyfirmconvictionthatTAPcurrentlyhasanaggre-gate value which is also recognised by the market. When the conditions are met for the start-up of a new cycle in the history of the Company, these circumstances can-not but constitute, for its Employees, Customers and the Portugueseingeneral,amotiveofprideand,also,confi-dence in the Company's future.

On behalf of the General and Supervisory Board, I would like to express our gratitude to the Management, Workers and Employees of TAP for the notable personal contribu-tion they have given to promoting the economic feasibility of TAP Group.

Manuel Pinto Barbosa Chairman of the General and Supervisory Board


Interview with Fernando Pinto,Chairman of the Executive Board of Directors

TAP obtained its best result ever in 2010, having broken the record for number of passengers transported – more than 9 mil-lion – and also achieved an occupancy rate offlightsof74.5%,6%morethanintheprevious year. Is this assessment quite positive?

Thesefigurespointtowardsacorrectstratagemof TAP in terms of the maintenance of a growth strategy, in a year in which the European econ-omies were slowing down and Portugal was showing signs of some weakness. Nevertheless, we focused on new destinations (Marrakesh and Algiers) and increased the offer on some routes, in line with a policy of continuity always within a growth perspective. Any way, we always sought to grow cautiously, so as to achieve a better use of the seats on offer, also competing better on price,todealwithanincreasinglydifficultmar-ket. The strategy proved to be correct, which is demonstrated by these good results. I would like to mention that the activity in 2010 was positive notonlyintermsofTAP,S.A.,themajorityofGroup companies contributed positively. I must emphasise that, with these results, TAP, S.A. returned to a positive net income position and that is very important, and so much more so in a year in which it is preparing for a privatisation process.

Theoccupancyrateof74.5%isalreadyinline with the average of AEA airlines. Is there room for further improvement?

We are already very close to the limit that the Portuguese market and the Lisbon hub allow to be achieved. Other companies in Europe man-age to achieve occupancy rates close to 80 percent, but are present in markets of a differ-ent size, with similar occupancy rates for both outward and return journeys. Ours are notthat balanced, there is that difference. Some improvement is possible, although not as much as we would like. We maintain the idea that this year it will be possible to continue to grow with-outincreasingthefleet,ratherthroughitsbetteruse and a better use of space.

Fuel costs were responsible for an invoice of 523millioneuros,45%morethanin2009.Nonetheless, the results were quite frankly better …

Precisely because we managed to achieve a better use of the seats on offer. We had the pos-sibility of, with the same offer, have a higher quantity of passengers on our planes, and that

also enabled us to have a more diluted fuel consumption per passenger. Wealsoinvestedinthesubstitutionofoldaircraftfornew,moreefficientones.ThesixnewA320broughtaboutanefficiencygainofeightper-cent and we maintained our Fuel Conservation programme, which has brought us excellent results and has been fundamental. On the whole, inspiteoftheincreaseinthefuelinvoice,wehaveregisteredeffi-ciency gains, through a better planning of routes and of our offer.

Other factors contributed to 2010 almost being a “black year”, such as the cloud of volcanic ashes that led to the greatest commercial aviation blockade in Europe since World War II. How did TAP deal with and manage to overcome this factor?

It was extremely stressful. At the start of the problem, the cloudhadnodirectinfluenceontheairspaceofPortugal,onlyCentralEurope.Butsincethemajorityofourtrafficisconnectiontraffic,ourflightswerenotfedandcouldalsonot distribute our passengers that came from long-haul flightstofinaldestinations.Inasecond“wave”,thecloudwas already over Portugal and we suffered greater losses andaddeddifficulties. Thatwhole situation causedenormous losses,almostonethousandflightswerecancelled, but we managed very well the communica-tion and relations with our passengers. We resorted to modern and current channels, used Facebook and other social networks to talk to customers. It was a worrying time, in which air transport companies lost hundreds of millions of euros, but I would say that at TAP we handled things quite well in terms of customer relations. I recall that, in 2010, there were also other disruptions to operations, such asstrikesofSpanishandFrenchairtrafficcon-trollers, snow storms in Europe and then in the United States … In spite of all that, TAP man-aged to overcome all of these setbacks. These situations led to huge losses but, thanks to the good image we were able to ensure, we managed to recover.

As you mentioned, TAP managed to findnewchannelstocommunicatewith customers. In situations such as that of the volcano, there is always a rupture in traditional channels. What is your opinion on this process and what was your involvement?

It all took place very quickly. Facebook initially emerged as a promotional channel, but we

conquered many “fans” quickly and initiated with them a very

swift and effective communi-cation process. At present, we

have more than 140 thousand fans on Facebook, the communi-

cation is very different, within the Company a new process has been

set up to enable a quick response to any request, it is a process that has

brought greater agility to the Company and greater proximity to customers.

TAP, even at an international level, was a pioneer in the use of the social networks, it is something extremely important for

us, we are a younger Company.

Within the scope of new technologies, I must also point out that, in 2010, TAP suffered a major transformation processwith the adoption of a new system of reser-

vations with many new features, which uses a common platform with STAR Alliance, thus

boosting sales and enhancing its ease-of-use …

Condé Nast Traveler distinguished TAP as the best airline company in the world in 2010 and

the World Travel Award for the “Best Airline Company in the World for South America” was

awarded again to TAP. Do these awards still mean anything?

They’re very important, that is what we pursue all the time,havingsatisfiedcustomersthatchooseTAPas

their favourite airline. The customers also end up being partners of the Company and we need to go even further,

we need to be among the best companies in the world in service quality, to stand out. Only that way can we con-

tinue to have an important participation in an increasingly competitive market.


Now turning to TAP Group, Maintenance and Engineering Brazil (TAP M&E Brazil) has not yet achieved, in 2010, the desired equi-librium, in spite of some positive data, such astheobtainmentofthequalificationoftheAuthorised Services Centre from Embraer. Is there something still amiss with TAP M&E Brazil?

We have always pointed out that TAP M&E Brazil is a long-term strategic investment and we have always been very careful about the expected results. 2010 was a year of many changes for the company, it was not only the important recognition by Embraer, but an entire adapta-tion process, with emphasis on the adoption of a series of standard procedures followed by TAP M&E Portugal and a whole revolution in structural terms. We continued with the cost reduction programme and worked intensively in terms of guaranteeing the quality of the serv-ices provided, seeking to thus consolidate a solid customer base, so that customers will stay with the company for many years. That was the main investment, which has been made and will con-tinue, and that will make the company viable. I have no doubts that the results of 2011 will be much better and in 2012 even better, it is a process of growth and maturity, the company is getting better and better. The result does not show it yet, it also registers extraordinary losses, but it will reach an operational equilibrium. Today, we are already very proud of the quality of the service that the company provides, in the fulfilmentofdeadlines,customersatisfaction…It is an enormous investment and we can never forget that the main reason for it to be done has to do with our growth limitations here in Lisbon. WithoutTAPM&EBrazil,wewouldbereject-ing new customers. Today, we bring customers of greater added value to TAP Portugal, with

competitive, serving Europe, South America and Africa. TAP occupies an extremely important position in the South Atlantic and Africa. We are the largest transporter from Europe to Brazil and also very important for Africa. That makes our positioning in terms of Europe highly strate-gic. Whoever wants to ally themselves with TAP will be doing so with one of the most impor-tant market players in these enormous “niches”. It is also important to point out that TAP is well organisedandisalreadyoneofthemosteffi-cient companies in Europe, in accordance with several indicators. TAP is one of the four most efficientnetworkcompaniesinEurope.Allofthat makes TAP very desirable.

What message would you like to leave the various stakeholders?

Our customers are our reason for existence and are already more than 9 million. I would like to thankthemforthepreferenceandconfidenceplaced in us. We have worked very hard to con-tinue to improve the quality of the service and I have to thank the employees for their dedica-tion and permanent quest for perfectionism. Finally, the entire Company has sought to add value to the shareholder, to whom I wish to express my thanks for all the support they have provided. And a special thanks to the General and Supervisory Board of TAP, in the person of its Chairman, Professor Pinto Barbosa, who has contributed and helped us a lot to improve.

higher margins, and we take some TAP services to Brazil, due to the advantages in terms of cost. We can boost those synergies even better.

And what about Groundforce?

Groundforce has improved immensely, initially in the quality of the service provided and in the bag-gagearea,inwhichTAPhasfinallyachievedtheEuropean average in terms of general network (in the competition between hubs, we are above average). In terms of punctuality, TAP is today better than the European average. We are on the righttrack.Intermsofefficiencyandcosts,2010brought better operating results. The closure of the Faro stopover, which took place at the end oftheyear,wasonlyreflectedentirelyintermsof costs in 2010. The balance that that measure brings to the company’s accounts shall only take effect in 2011. We have prepared the sales proc-ess of Groundforce, which we are obliged to do, and the factors that I have mentioned add value to the company as a whole.

What is your opinion of the market in 2010?

There was stability in the Portuguese market. The competition is increasingly more aggressive, but that is good and forces us to improve, provided there are clear and transparent rules, which is not always the case.

You said recently that TAP was at the right moment to be privatised. Was the year 2010 decisive for that?

If you analyse things from an historical per-spective, the Company has been improving at every level, the Lisbon stopover has become a reality and has shown itself to be extremely



Shareholder Structure of TAP GroupDecember 31, 2010

At the end of 2010, the Group of companies that were part of the consolidation perimeter of the TAP holding was made up of TAP–Transportes Aéreos Portugueses, SGPS, S.A. and its subsidiaries, according to the organisational diagram below.

*

TAP, SGPS, S.A.100% Parpública

TAP, S.A.

SPdH, S.A.

TAPGER, S.A.

TAP–Air Transport TAP ServiçosTAP–Maintenanceand Engineering

100%

100%

100%

6% 43.9% 50.1%

51%

51%

100%

100%

1%99%

98.64%

Aero-LB, S.A.

TAP–Maintenace andEngineering Brazil, S.A.

Portugália, S.A.

CateringPor

Lojas Francas

Megasis

UCS

* Control held by an independent entity, according to the deliberation of the Competition Authority.


The Corporate Governance model adopted by TAP since 2006hassignificantlycontributedtotheconsolidationofamanagement practice based on principles of accountability.

The coexistence, in the same governance structure, of the Executive Board of Directors, the General and Supervisory Board, and the Specialised Audit Commission and the Specialised Sustainability and Corporate Governance Commission has enabled, through organic specialisation, a more effective separation of the executive management and cor-porate supervisory duties. In the performance of these duties, the Corporate Governance of TAP also relies on the Statutory Auditor (Supervisory Body) and the advisory services of an External Auditor.

The information on the Company's regulations, Articles of Association and activities of the Governing Bodies is available for consultation at the website of TAP Group [ www.flytap.com ].

Corporate GovernanceCorporate Governance Model

7 8

9

10

1112

13

http://www.flytap.com


Governing Bodies

TAP – Transportes Aéreos Portugueses, SGPS, S.A. TAP, S.A.

Through deliberation at the General Meeting Committee of 2nd June, 2009, for the three-year period 2009-2011.

General Meeting Committee Chairman Paulo Manuel Marques Fernandes Vice-Chairman António Lorena de SèvesSecretary Orlanda do Céu S. Sampaio Pimenta d' Aguiar

Structure of the Executive Board of Directors, the General and Supervisory Board and the Specialised Commissions

Executive Board of Directors

Chairman Fernando Abs da Cruz Souza Pinto 1

Member Fernando Jorge Alves Sobral 2

Member Luís Manuel da Silva Rodrigues 3

Member Luiz da Gama Mór 4

Member Manoel José Fontes Torres 5

Member Michael Anthony Conolly 6

General and Supervisory Board

Chairman Manuel Soares Pinto Barbosa 7

MemberCarlosAlbertoVeigaAnjos 8

Member João Luís Traça Borges de Assunção 9

Member Luís Manuel dos Santos Silva Patrão 10

Member Maria do Rosário Miranda Andrade Ribeiro Vítor 11

Member Rui Manuel Azevedo Pereira da Silva 12

Member Vítor José Cabrita Neto 13

Through deliberation of the General and Supervisory Board, in a meeting on 26th June, 2009.

Specialised Auditing Commission Manuel Soares Pinto Barbosa João Luís Traça Borges de Assunção Rui Manuel Azevedo Pereira da Silva

Specialised Sustainability and Corporate Governance Commission

Manuel Soares Pinto Barbosa CarlosAlbertoVeigaAnjos João Luís Traça Borges de Assunção Luís Manuel dos Santos Silva Patrão Maria do Rosário Miranda Andrade Ribeiro Vítor Rui Manuel Azevedo Pereira da Silva Vítor José Cabrita Neto

Company Secretary

Through deliberation of the Executive Board of Directors, in a meeting on 23rd June, 2009.

Company Secretary Orlanda do Céu S. Sampaio Pimenta d' Aguiar Alternate Company Secretary Alda Maria dos Santos Pato

1

6

5

3 2

4


Meetings of the Board of Directors During 2010, 16 meetings were held by the Board of Directors of TAP, SGPS, S.A. and 23 meetings were held by the Board of Directors of TAP, S.A..

Main Deliberations of the Boards of Directors in 2010

TAP, SGPS, S.A.

Implementation of the transversal Cost-Cutting Programme for 2010-2012 in all companies of TAP Group

Extinction of Reaching Force, SGPS, S.A. – Merger by incorporation in TAP, SGPS, S.A.

TAP, S.A.

Organisational restructuring of TAP–Maintenance and Engineering Portugal and TAP–Maintenance and Engineering Brazil

Cost-cutting Programme for 2010-2012

Extinction of AP Tours – Merger by incorporation in TAP, S.A.

Supervision of the Company

Official Accountant

By Decision in General Meeting Committee on June 2, 2009, for the 2009-2011 period.

Permanent Oliveira, Reis & Associados represented by José Vieira dos Reis

AlternateFernando Marques Oliveira

Remuneration Status of the Governing Bodies

ρ The remunerations of the Governing Bodies of TAP are set by General Meeting (see Article 11 of the Statutes of TAP, SGPS).

ρ The members of the Executive Board of Directors and the General and Supervisory Board are remunerated, exclusively, for the functions exercised at TAP, S.A., not earning any remuneration for functions exercised at TAP, SGPS or any other company of TAP Group.

Remunerations set for the 2006-2008 period (in Minute no. 1/2007 of the Remunerations Commission of TAP, S.A.)

By Unanimous Board Decision in Writing on 29 July, 2009, “(…) for the three-year period 2009-2011 there will be no alteration of the remuneration status (…)”.

Executive Board of Directors

Chairman

Fixed Compensation

ρ Fixed remuneration: Gross monthly remuneration of EUR 30,000, paid 14 months a year.

ρ Meal Subsidy: Application of the Labour Agreement for active permanent staff.

Variable Compensation

ρ Variable Short Term Compensation: Attribution of the variable remuneration component in accordance with the fulfilment of annuallymeasurableobjectives,withamaximumannuallimitof75%ofthetotalAnnualFixedCompensation.

ρ Variable Long Term Compensation: Attribution of the variable remuneration component in accordance with the fulfilment of pluriannual(mandate)measurableobjectives,withamaximumlimitof75%ofthetotalaccumulatedFixedCompensationofthe mandate.

Benefits

ρ Life insurance, health insurance and personal accident insur-ance: in force at the Company, according to the model applicable to all employees.

ρ Vehicle policy: Attribution of a service vehicle up to a maximum rental of EUR 1,260, which includes motor insurance and main-tenance costs, for a three year period, and covers the use of via verde, parking and fuel (in compliance with the provisions of articles 32 and 33 of DL no. 71/2007 of 27 March, the annual maximum limit for fuel expenses was set at EUR 4,000).

ρ Telephone expenses: Use of the service mobile phone (in com-pliance with the provisions of articles 32 and 33 of DL no. 71/2007 of 27 March, the annual maximum limit for expenses related with mobile phone use was set at EUR 9,000).

ρ Company credit card: Exclusively to cover documented expenses associated with the exercise of functions at the Company’s service.

Members

Fixed Compensation

ρ Fixed remuneration: Gross monthly remuneration of EUR 20,000, paid 14 months a year.

ρ Meal Subsidy: Application of the Labour Agreement for active permanent staff.


Variable Compensation

ρ Variable Short Term Compensation: Attribution of the variable remuneration component in accordance withthefulfilmentofannuallymeasurableobjectives,withamaximumlimitof75%ofthetotalAnnualFixedCompensation.

ρ Variable Long Term Compensation: Attribution of the variable remuneration component in accordance with the fulfilment of pluriannual (mandate) measurable objectives,withamaximumlimitof75%ofthetotalaccumulated Fixed Compensation of the mandate.

Benefits

ρ Life insurance, health insurance and personal accident insurance: in force at the Company, according to the model applicable to all employees.

ρ Vehicle policy: attribution of a service vehicle up to a maximum rental of EUR 865, which includes motor insur-ance and maintenance costs, for a three year period, and covers the use of via verde, parking and fuel (in compli-ance with the provisions of articles 32 and 33 of DL no. 71/2007 of 27 March, the annual maximum limit for fuel expenses was set at EUR 4,000).

ρ Telephone expenses: Use of the service mobile phone (in compliance with the provisions of articles 32 and 33 of DL no. 71/2007 of 27 March, the annual maximum limit for expenses related with mobile phone use was set at EUR 9,000).

ρ Company credit card: Exclusively to cover documented expenses associated with the exercise of functions at the Company’s service.

Through Unanimous Corporate Deliberations in Writing of 14th May 2009 and 29th July 2009, the directors whose residence was not originally in Portugal benefit from the right to receive accommo-dation allowances under the Status of Expatriate Staff conferred to workers of TAP, S.A..

General and Supervisory Board

Chairman: Gross monthly remuneration of EUR 6,000, paid 14 months a year.

Members: Gross monthly remuneration of EUR 4,000, paid 14 months a year.

A supplementary monthly remuneration of EUR 3,000 is attributed to the members of the General and Supervisory Board that participate in the Specialised Auditing and Sustainability and Corporate Governance Commissions.

Remunerations set for the 2006-2008 period (in Minute no. 1/2007 of the Remunerations Commission of TAP, S.A.)

By Unanimous Board Decision in Writing on 29 July, 2009, “(…) for the three-year period 2009-2011 there will be no alteration of the remuneration status (…)”.

General Meeting Committee

Chairman: Attendance money, in the gross amount of EUR 640.

Vice-Chairman: Attendance money, in the gross amount of EUR 400.

Secretary: Attendance money, in the gross amount of EUR 330.

Official Accountan

Remuneration is regulated by the values of the indicative benchmark recommended by the Portuguese Institute of Statutory Auditors (Article 60 of DL no. 487/99 of 16 November): Annual amount of EUR 13,800, VAT is added under the terms of the law.


General and Supervisory BoardEUR

Manuel Pinto Barbosa

(Chairman)

Carlos Veiga Anjos

(Member)

João Borges de Assunção

(Member)

Vítor Cabrita Neto

(Member)

Luís Patrão *

(Member)

Rui Azevedo Pereira da Silva

(Member)

Maria do Rosário Ribeiro Vítor

(Member)

1. Remuneration

1.1. Base remuneration*** 126,000.00 98,000.00 98,000.00 98,000.00 – 98,000.00 98,000.00

1.2. Accumulation of management functions – – – – – – –

1.3. Supplementary remuneration – – – – – – –

1.4. Management prizes (......months) – – – – – – –

1.5. Others (identify in detail) – – – – – – – * Remuneration not received, out of choice. *** The reduction established in Law 12-A/2010, of 30 June, will be presented in the data of the Annual Report for 2011

2. Other benefits and compensation

2.1. Telephone use expenses – – – – – – –

2.2. Value of acquisition, by the company, of the service vehicle – – – – – – –

2.3. Value of fuel spent on service vehicle – – – – – – –

2.4. Travel allowance – – – – – – –

2.5. Meal subsidy – – – – – – –

2.6. Others (identify in detail) – – – – – – –

3. Company Benefit Costs

3.1. Compulsory social security 16,092.56 14,994.00 16,092.56 16,092.56 – 13,350.62 –

3.2. Health insurance – – – – – – –

3.3. Life insurance – – – – – – –


4. Additional Information

4.1. Option of original salary (y/n) No No No No Yes No No

4.2. Social Security Regime Social Sec. Social Sec. Social Sec. Social Sec. – Social Sec. –

4.3. Compliance with No. 7 of RCM 155/2005 Yes Yes Yes Yes Yes Yes Yes

4.4. Year of acquisition of vehicle by company – – – – – – –

4.5. Exercise option acquisition of service vehicle No No No No No No No

4.6.Usufruct of company house No No No No No No No

4.7. Exercise of remunerated functions outside the Group Yes Yes Yes Yes Yes Yes Yes


Executive Board of DirectorsEUR

Fernando Pinto

(Chairman)

Michael Conolly

(Member)

Luiz Mór

(Member)

Fernando Jorge Sobral

(Member)

Manoel Torres

(Member)

Luís Silva Rodrigues

(Member)

1. Remuneration

1.1. Base remuneration *** 420,000.00 280,000.00 280,000.00 280,000.00 280,000.00 280,000.00

1.2. Accumulation of management functions – – – – – –

1.3. Supplementary remuneration – – – – – –

1.4. Management prizes – – – – – –

1.5. Others (identify in detail) – – – – – – *** The reduction established in Law 12-A/2010, of 30 June, will be presented in the data of the Annual Report for 2011

2. Other benefits and compensation

2.1. Telephone use expenses 9,124.34 1,010.84 3,194.59 2,046.57 3,203.28 2,061.12

2.2. Value of acquisition, by the company, of the service vehicle – – – – – –

2.3. Value of fuel spent on service vehicle ** 3,895.00 1,827.00 1,381.80 1,381.72 2,675.30 3,520.40

2.4. Travel allowance – – – – – –

2.5. Meal subsidy 1,062.36 1,043.64 1,081.08 973.44 1,053.00 1,113.84

2.6. Others (renting of service vehicle) 15,252.36 10,945.14 10,883.72 11,371.93 10,945.14 11,470.74 ** Shared utilization with Support Services to the Governing Bodies

3. Company Benefit Costs

3.1. Compulsory social security 16,092.56 66,500.00 66,500.00 66,500.00 66,500.00 16,092.56

3.2. Health insurance 896.00 896.00 896.00 896.00 896.00 896.00

3.3. Life insurance 12,351.57 22,492.10 9,332.42 12,351.57 52,186.93 6,222.00

3.4. Others (Personal Accident Insurance) 985.65 985.65 985.65 985.65 985.65 985.65

4. Additional Information

4.1. Option of original salary (y/n) No No No No No No

4.2. Social Security Regime Social Sec. Social Sec. Social Sec. Social Sec. Social Sec. Social Sec.

4.3.Compliance with No. 7 of RCM 155/2005 Yes Yes Yes Yes Yes Yes

4.4. Year of acquisition of vehicle by company – – – – – –

4.5. Exercise option acquisition of service vehicle No No No No No No

4.6. Usufruct of company house No No No No No No

4.7. Exercise of remunerated functions outside the Group No No No No No No

4.8. Others-Payment of Accomodation Expenses in Portugal(net value) 55,383.72 55,383.72 55,383.72 – 55,383.72 –

Remunerations earned in 2010


EUR Chairman Vice-Chairman Secretary


Attendance Money TAP, SGPS, S.A. 640.00 400.00 330.00

Attendance Money TAP, S.A. 640.00 400.00 330.00

Official Accountant

Contractual Remuneration TAP, SGPS, S.A. (net of VAT) 13,800.00Contractual Remuneration TAP, S.A. (net of VAT) 32,100.00

Remuneration 2010

Company Internal Regulations

Risk management, as a pillar of the corporate culture of the TAP Group, is inherent to all management processes and is assumed as a constant concern of allmanagersandemployeesoftheGroup,throughtheidentification,managementandcontroloftheuncertaintiesandthreatswhichmightaffectthedifferent businesses, in a perspective of continuity of the operations and the making the most of business opportunities.

At the same time, the Company has developed and implemented a series of Internal Regulations composed of Codes of Conduct and Good Practices, of which the following are of particular importance:

ρ The Code of Ethics – As a statement of the principles, ideals and charter of intentions, the Code of Ethics is a document where the Company estab-lishesobjectivesofanethicalandbehaviouralcharacterforbusinesswithitsstakeholders,thatis,withitssuppliers,workersand/orcustomers,financialinstitutions,thelocalcommunityandnationaleconomy,amongstothers.ThisCodecontainsastatementofobjectives–themissionoftheCompany–.thefundamentalethicalprinciplesandtheimplementationofthismissionandtheseobjectivesinspecificareasofparticularinterest, seeking to safeguard the principles of transparency and independence in the businesses on the part of the different participants in these businesses;

ρ The Procurement and Sales Directives and Duties – The procurement areas, as the services responsible for the provisioning process, must endeavour to ensure compliance with the applicable legislation and directives in force at TAP, in their respective areas of intervention. The regulation establishes the delegation of duties, so as to ensure the implementation of the different responsibilities in the procurement areas within the Company;

ρ The Financial Directives (Head Office and Representations) – The Company has produced internal regulations for the purpose of guar-anteeing effective internal control in the context of the action of the financial function, as well as regarding the action and delegation of duties in this area;

ρ The Contractualisation Regulation – Through the establishment of Exchange Agreements, the Company has constituted a Regulation for the establishment of contracts by which the parties undertake to exchange services between one another. All services which are tradable may be exchanged, with situations of goods of different utility and/or value being assessed through criteria.

InternalAuditing,asanactivitysubjecttointernationalruleswhichmanagetheprofession,complieswiththestandardsofthe(Institute of Internal Auditors), regarding compulsory Attribution Standards:

ρ Standard 1000 – Purpose, Authority and Responsibility

ρ Standard1100–IndependenceandObjectivity

ρ Standard 1200 – Proficiency and Professional Dedication

ρ Standard 1300 – Quality Guarantee and Improvement Programmes

Likewise, in coordination with IPAI (Portuguese Institute of Internal Auditors), Internal Auditing promotes the benchmarking of the best practices of the profession, and stimulates the training of its professionals.

Code of Ethics

The Group's Code of Ethics is a live document which, as a statement of the principles and guidelines for business between the workers, Governing Bodies, between the companies of the Group and its stakeholders, requires the ongoing assess-mentbothofitscomplianceandofthematterstobeincludedorclarifiedinitsrules.Hence,theCodeofEthicsis a process of improvement, namely in its adaptation to new realities, such as regarding its action in social networks. It is expected that the approval of some of these alterations will be concluded in the beginning of 2011. The Code of Ethics isavailableforconsultationonTAP'sofficialwebsite[ www.flytap.com ] (in “TAP Group”).



Principles of Good Governance

Recommendations Degree ofCompliance Mention in the Report

Mission, Objectives and General Principles of Action

Obligation of compliance, respect and dissemination, of the mission, objectives and policies, for TAP and the associated companies it controls, set in an economic, financial, social and environmentally efficient manner;

Fulfilled Corporate Governance and Sustainability Report

Elaboration of budgets in accordance with the resources and sources of fund-ingavailable,takingintoaccounttheirmissionandtheobjectivesset;

Fulfilled Annual Report

Adoption of equality plans, so as to attain a definitive equality of treatment and opportunities between men and women, eliminating discrimination based on gender and enabling a balance between professional, family and personal life;


Code of Ethics

Annual information report issued to regulatory bodies and the general public onhowthemissionwasconducted,degreeofcompliancewithobjectives,meansof fulfilment of social responsibility and sustainable development policy and means of ensuring its competitiveness;


Compliance with legislation and regulations, applicable to the three axes of economic, environmental and social sustainability;


Obligation of treating all employees with respect and integrity and con-tribute towards their personal development;


Code of Ethics

Obligation of treating customers, suppliers and others with legitimate rights with equity.


Code of Ethics

Management and SupervisionStructures

The governance model must ensure the effective segregation of manage-ment and supervisory functions;


Corporate Governance and Sustainability Report (existence of a Dualist Management Model)

Companies of a large-scale and complexity must have their accounts audited by independent entities with identical standards to those practiced by companies with shares quoted on regulated markets; the members of the super-visory body are responsible for selecting, confirming and hiring auditors, for the approval of any other services outside the scope of the auditing function and to act as interlocutors between the company and auditors.

Fulfilled According to thereport on activities of the General and Supervisory Board

Remuneration and Other Rights

Annual divulgation of the total remunerations (fixed and variable) earned by each member of the management body;

Fulfilled TAP website

Annual Report

Annual divulgation of the remunerations earned by each member of the super-visory body;


Annual Report

Annual divulgation of any other benefits (health insurance, use of a vehicle and other benefits granted by the company).


Annual Report

Prevention of conflicts of interest

Obligation of members of corporate bodies to abstain from intervening in decisions involving their own interests;

Fulfilled Code of Ethics

Statutes

Obligation of members of corporate bodies to declare any important share-holdings they hold in the company;

Fulfilled Communication to the Court of Auditors, the Constitutional Court and others, in compliance with legal obligations

Obligation of members of governing bodies to declare any relevant relation-ships maintained with suppliers, customers, ICs or others, which may generate conflicts of interest.


Statutes

Divulgation ofrelevant information

Communicate immediately all information that they have knowledge of, which may have a significant effect on the economic, financial and asset situation of the company;


Make available for divulgation on the site of State-owned companies, in a clear, relevant and updated manner, all the abovementioned information, the historical and updated financial information of the company and the identity and curricular elements of all the members of its governing bodies;

Fulfilled Connection of the TAP website to the Parpública website

Include in the Management Report a point on corporate governance (internal andexternalregulationswhichTAPissubjectto,informationonrelevanttransactionswith related entities, remuneration of members of governing bodies, sustainability anal-ysis and evaluation of the degree of compliance with the principles of good governance).


Note: The Code of Ethics and Statutes are available on the TAP website

Principles of Good Governance

Evaluation of the degree of compliance with the principles of Good Governance, which TAP is committed to in accordance with the resolution of the Council of Ministers No. 49/2007.


Functions exercised by the Members of the Management Body in other Companies

Fernando Abs da Cruz Souza Pinto

Chairman of the Board of Directors of TAP, S.A.Chairman of the Board of Directors of Portugália–Companhia Portuguesa de Transportes Aéreos, S.A. (PGA)Chairman of the Board of Directors of TAPGER–Sociedade de Gestão e Serviços, S.A.

Fernando Jorge Alves Sobral

Executive Director of TAP, S.A.Non-executive Director of Portugália–Companhia Portuguesa de Transportes Aéreos, S.A. (PGA)

Luís Manuel da Silva Rodrigues

Executive Director of TAP, S.A.Chairman of the Board of Directors of TAP–Maintenance and Engineering Brazil, S.A. (ex-VEM)Non-executive Director of SPdH–Serviços Portugueses de Handling, S.A.

Luiz da Gama Mór

Executive Director of TAP, S.A.Chairman of the Board of Directors of CATERINGPOR–Catering de Portugal, S.A.ChairmanoftheBoardofDirectorsofL.F.P.–LojasFrancasdePortugal,S.A.

Manoel José Fontes Torres

Executive Director of TAP, S.A.Non-executive Director of Portugália–Companhia Portuguesa de Transportes Aéreos, S.A. (PGA)

Michael Anthony Conolly

Executive Director of TAP, S.A.Non-executive Director of Portugália–Companhia Portuguesa de Transportes Aéreos, S.A. (PGA)Non-executive Director of TAPGER–Sociedade de Gestão e Serviços, S.A.Chairman of the Board of Directors of U.C.S.–Cuidados Integrados de Saúde, S.A.Chairman of the Board of Directors of MEGASIS–Sociedade de Serviços e Engenharia Informática, S.A.

List of the suppliers of TAP, S.A. which represent more than 5% of the total supplies and services provided by third parties to the Company

Supplier EUR million %Petrogal–Petróleos de Portugal 208.942 14Eurocontrol–UE 90.552 6ANA–Aeroportos de Portugal 87.398 6SPdH, S.A. 79.868 5Petrobras Distribuidora, S.A. 69.697 5


Main curricular elements and professional activities undertaken by the Members of the General and Supervisory Board

Manuel Pinto Barbosa

Nationality: Portuguese | Date of birth: May 1944

Appointed Chairman of the Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (between September 2004 and December 2006) and Chairman of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Chairman of the Specialised Auditing and Sustainability and Corporate Governance Commissions (since December 2006).

Professional Activity: Chairman of the Board of Directors, Nova Forum (2005) | Non-executive Director, PTII (2002-06) | Member of the Advisors Committee, Barclays Bank (1996-99) | Non-executive Director, Portucel Industrial (1995-98) | Member, Executive Council of the Luso-American Foundation (1994-2006) | Vice-Chairman, Economic and Social Board (1992-93) | Member, Expert Commission of the ACE programme (ECE) (1990) | Member, Expert Commission of the Tinker Foundation (1989) | Member, Expert Commission of the SPES programme (ECE) (1989) | Member, Commission in charge of the negotiation of the Portugal-USA Defence Agreement (1981-84) | Founding shareholder, Association for the Study of International Relations (1978-83) | Consultant, Portuguese Industrial Association (1970-72) |OfficeroftheNavalReserve, Portuguese Armada (1967-69).

University Positions: Member of the Installing Commission, Faculdade de Economia of the Universidade Nova de Lisboa (FEUNL) | Acting-Director, FEUNL | Full Professor, FEUNL | Deputy Head, Universidade Nova de Lisboa (UNL) | Vice-Chancellor, UNL | Vice-Chairman, UNICA, network of universities from European capitals | Member, Installing Commission of the Faculty of Law of the UNL | Provost of International Issues, Universidade Gama Filho (Brazil).

Other Activities:Teachingandscientificresearch–Directorofgraduationandpost-graduationcoursesandseminars(intheareasofMacroeconomics, Monetary Theory and Policy, Commerce and International Finance) at UNL and other universities | Coordinator of applied researchprojects,intheareasofExternalRelationsofPortugal,AssetMarketandFinancialSystems,MacroeconomicStabilisation.

ρ Holds a degree from the Instituto Superior de Ciências Económicas e Financeiras (ISCEF), Universidade Técnica de Lisboa | Masters, Yale University | PhD, Yale University | Recognition, UNL.

Carlos Alberto Veiga Anjos

Nationality: Portuguese | Date of birth: September 1942

Appointed Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Sustainability and Corporate Governance Commissions (since December 2006), Member of the Specialised Auditing Commission (December 2006-June 09).

Professional Activity: Chairman of the Board of Directors, Hidroeléctrica de Cahora Bassa, S.A. (1999-2003) | Chairman of the Board of Directors and Director, Siderurgia Nacional, SGPS and Group Companies (1994-99) | Due to being inherent to the functions, representative of Portugal in the Consulting Committee of the ECSC–European Coal and Steel Community and at the IISI–International Iron and Steel Institute | Chief Executive Officer,SOPONATA–SociedadePortuguesadeNaviosTanques,S.A.;Director,CIVE–CompanhiaIndustrialdeVidrosdeEmbalagem,S.A., in representation of IPE (1992-93) |ChiefExecutiveOfficer,CompanhiadeCelulosedoCaima,S.A.;Chairman,ACEL–AssociaçãoPortuguesados Produtores de Celulose; representative of Portugal on the board of CEPI–Confederation of European Paper Industry (1988-91) | Director, EDM–EmpresadeDesenvolvimentoMineiro,S.A.,whichplayedasignificantpartintheprocessofcreationofSOMINCOR(1985-88)| Director, Ferrominas, E.P. (1977-85) | Director, Financial Director and Head of Services, Lusalite–Sociedade Produtora de Fibrocimento, S.A. (1968-77)

ρ Holds a degree in Finance from ISCEF, Universidade Técnica de Lisboa.


João Borges de Assunção

Nationality: Portuguese | Data of birth: July 1962

Appointed Member of the Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (between September 2004 and December 2006) and Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Auditing and Sustainability and Corporate Governance Commissions (since December 2006).

Professional Activity: Economic Consultant to the President of the Republic, Civil Affairs Ministry of the President of the Republic (since 2006) | Member, Economic and Social Board (2003-04) |EconomicAdvisortothePrime-MinisterofPortugal,OfficeofthePrime-MinisterofPortugal(2002-04) | CEO, Telecel Vodafone Foundation (2001-02) | Chairman, Supervisory Board of Eurocash Sp. z.o.o., Poland | Coordinator, Centre of Studies of the Economic Climate of the Portuguese Economy, CEA of FCEE of UCP | Advisor, Group on Societal Policy Analysis (GSPA), BEPA, Presidency of the European Commission.

Other Activities: Academic experience – Member, Strategic Orientation Board of the Faculdade de Ciências Económicas e Empresariais (FCEE) of the Universidade Católica Portuguesa (since 2005) | Associate Professor, Universidade Católica Portuguesa (since 1998) |Member,ScientificBoard of the Instituto de Formação Bancária (1993-2004) | Director, FCEE (1996-2001) | Auxiliary Professor, Columbia University (1990-94) | Research Assistant and post-graduate student, UCLA (1986-90) | Research activity, teaching and professional interests – Marketing Management Models, Brand Strategy, Pricing, Promotions, Strategy, International Business, Service Industries, Dynamic Optimisation Models, Individual Decision Making, Game Theory, Economic Policy, Regulation, Economic Development and Growth.

ρ Holds a degree in Business Administration and Management from the Universidade Católica Portuguesa of Lisbon | MBA in Management from UNL | Ph.D. in Management from the Anderson Graduate School of Management, UCLA.

Vítor José Cabrita Neto

Nationality: Portuguese | Data of birth: July 1943

Appointed Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Sustainability and Corporate Governance Commission (since December 2006).

Professional Activity: Chairman, Board of Directors of the Group TEÓFILO FONTAINHAS NETO (Algarve) – agro-industrial, distribution, real estate and tourism sectors | Director, Globalgarve, Development Agency of the Algarve | Member, Directive Commission of the Operational Programme of the Algarve | Chairman, Corporate Association of the Algarve (NERA) | Vice-Chairman, Portuguese Industrial Association – Business Confederation | Member, Department of the European Union of Handicrafts and Small and Medium-sized Enterprises | State Secretary for Tourism in the XIII and XIV constitutional governments (1997 and 2002) | Deputy to the Assembly of the Republic.

Other Activities: Honorary Consul of Italy in the Algarve | Chairman, Organising Commission of the International Fair of Tourism of Lisbon (BTL) | Columnist, Diário Económico | Speaker on the Tourism area.

ρ Holds academic background in Management.

Luís Manuel dos Santos Silva Patrão

Nationality: Portuguese | Data of birth: December 1954

Appointed Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Sustainability and Corporate Governance Commission (since December 2006).

Professional Activity: Chairman, Executive Council of Turismo Portugal, I.P. (since 2006) | Member, Board of Directors of ENATUR–Empresa Nacional de Turismo, S.A. (since 2006) |ChiefoftheOfficeofthePrime-MinisteroftheXVIIGovernment(2005-06)| Main Advisor, Head of Division,DirectorofServices,CoordinatorofthePOSI/ICProjectTeamandManageroftheTelematicNetworkofInformationtotheConsumerandConsumers’PortalProjects,InstituteoftheConsumer(1986/89–2001/04)| Chairman and Non-executive Director, Board of Directors of SÍTIOS, Serviços de Informação Turística (2001-04) | State Secretary for the Interior of the XIV Government (1999-2000) |ChiefoftheOfficeofthePrime-Minister of the XIII Government (1995-99) | Vice-Chairman and Chairman of the Executive Commission of DECO–Portuguese Consumer Rights Association (1989-95) | Chairman of the Executive Commission of Youth Hostels (1984-87) | Director of Services of the Support Fund for Youth Organisations (1978/1980 – 1983/1986).

Other Activities: Arbitration Judge, Arbitration Centre of the Automotive Sector (2004) |ChiefoftheOfficeandAdvisor,ParliamentaryGroupofthe Socialist Party (1989/95 – 2004/05) | Deputy to the Assembly of the Republic by the Voting District of Faro (1999-2001) and Lisbon (1981-83) | Member, Parliamentary Commissions of National Defence, of Education and Science, of Youth and Labour.

ρ Holds a degree in Law from the University of Coimbra.


Rui Manuel Azevedo Pereira da Silva

Nationality: Portuguese | Data of birth: June 1956

Appointed Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Sustainability and Corporate Governance Commission (since December 2006), Member of the Specialised Auditing Commission (since June 2009).

Professional Activity: Consultant, Conference on the Maritime Peripheral Regions of Europe; Consultant, Coordination Commission of the North Region (since 2007) | Coordinator, State Secretariat and of Local Administration (2001-08) | Director, Prospective Cell of the Conference on the Maritime Peripheral Regions of Europe (1999-2007) | Founding shareholder (1990), General Director (1991-93); Chief Executive Officer(1994-95);ChairmanoftheBoardofDirectors(1996-99),QuaternairePortugal,S.A.| Vice-Chairman, Commission of Coordination and Development of the North Region (1989-91) | Advance Technician, Commission of Coordination and Development of the North Region (1981-89).

Other Activities: Academic experience – Invited Auxiliary Professor at the Faculty of Engineering of the University of Porto (since 1996).

ρ Holds a degree in Economics from the Faculty of Economics of the University of Porto | Course of Technician in Cooperative Development of the United Nations Programme for the Development of the Instituto António Sérgio do Sector Cooperativo | General Management Course from the Instituto Superior de Estudos Empresariais of the University of Porto | Languages: English, French and Spanish.

Maria do Rosário Mattos

Nationality: Portuguese | Data of birth: October 1960

Appointed Member of the General and Supervisory Board of TAP, S.A. and TAP, SGPS, S.A., Member of the Specialised Sustainability and Corporate Governance Commissions (since December 2006), Member of the Specialised Auditing Commission (December 2006-June 09).

Professional Activity: Law practice (1985-2009) | Member, Boards of Directors of several Companies, namely from the tourism sector (2002-09) | Directress, RTP–Radiotelevisão Portuguesa, S.A.; Chairman, Board of Directors, EBS 2004; Member, Executive Council of the Emmy Awards; Member, Executive Council of OTI–Organización de las Televisiones Ibero-Americanas, RTP–Radiotelevisão Portuguesa, S.A. (1998-2002) | Vice-Chairman, General Meeting Committee of Auto-Leasing (1994-99) | Directress, SMP–Semicondutores de Portugal, S.A.; Directress, Tronitec–Componentes Eléctricos, S.A., Companhia Portuguesa Rádio Marconi (1992-95) |ChiefExecutiveOfficerand,subsequently,Chairmanof the Board of Directors, IRENA, Investimentos e Participações em Recursos Naturais, SGPS, S.A.; Directress, Argitécnica, S.A.; Manageress, Empresa Águas de S. Lourenço, Lda.; Manageress, Empresa Fonte das Avencas, Lda.; Manageress, Ortes–Ornamental Resources, Lda., Amorim Group (1991-97) | Legal Consultant of a large company in the civil construction and public works sector, in the areas of Commercial and Corporate Law (1991-94) | Legal Advisor to the Governor of Macau; Member, Audit Board, CAM–Companhia do Aeroporto Internacional de Macau, S.A.R.L.; Legal Consultant, TDM–Televisão de Macau, E.P., Macau (1987-91) | Member, Board of Directors of several companies, namely, Expandindústria, S.A., Comismar Norte, Lda. and Ecassos, Lda. (1985-87) | Law internship, focusing essentially on Commercial Law, Labour Law, Civil Law and Administrative Law.

ρ Holds a degree in Law (Legal Sciences area) from the Universidade Católica Portuguesa (UCP) | Post-Graduation in Management from the UCP | Post-Graduation in Turnaround Management and Bankruptcy, from the UCP | Post-Graduation in Commercial Law from the UCP | Course on Law Making | Course on Competencies Delegation | Languages: English, French and Spanish.


Main curricular elements and professional activities undertaken by the Members of the Management Body Executive Board Of Directors

Fernando Abs da Cruz Souza Pinto

Nationality: Portuguese and Brazilian | Data of birth: June 1949

Appointed Executive Chairman/CEO, at TAP (October 2000-December 2006); President of the Executive Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (December 2006).

Professional Activity: Chairman of the Council of IATA (June 2007-June 2008) | Chairman of AEA–Association of European Airlines (2005) | President of VARIG, S.A. (Viação Aérea Rio-Grandense) (1996-2000) | President (1992-96) and Technical Manager (1988-92) of RIO-SUL, Serviços Aéreos Regionais | Head of the Workshops and Maintenance Sub-department (1982-88); In-house engineer at Airbus Industries (Toulouse-France) (1981-82); Head of Motors Division (1976-81); Coordinating engineer of the Motors Test-Bench, responsible for coordinating thevariousphasesoftheprojectandtheconstructionofaturbinetestsystemintheindustrialareaoftheInternationalAirportofRiodeJaneiro(1973-76); Engineering trainee (Wheels and Brakes Workshop) (1972-73) at VARIG S.A. (Viação Aérea Rio-Grandense).

Other Activities: Private Pilot | Glider Pilot | Sports Pilot of Ultra-light Aircraft.

ρ HoldsadegreeinMechanicalEngineeringfromtheUniversidadeFederaldoRiodeJaneiro.Ashisfinalyeargraduationprojecthepresentedaprototype of the first hovercraft manufactured in Brazil, with technology introduced from England, following several internships in British manu-facturing plants (Isle of Wight) | Machines and Motors Technical Course (Escola Técnica Federal do Rio de Janeiro) | Post-graduation Course in Management (Fundação Getúlio Vargas – Rio de Janeiro) | Several Technical Courses in the Aeronautics area | Languages: English and French.

Fernando Jorge Alves Sobral

Nationality: Portuguese | Data of birth: April 1949

Appointed Member of the Executive Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (December 2006)

Management Duties in the following areas: TAP–Maintenance and Engineering Business Unit; PGA; TAP–Maintenance and Engineering Brazil, S.A. (ex-VEM), until February 24, 2010.

Professional Activity: Chairman of the Board of Directors of VEM (VARIG Engenharia e Manutenção) (2006) | Member of the Board of Directors, together with the functions of Vice-Executive Chairman of Maintenance and Engineering at TAP–Air Portugal at TAP, S.A. (2003) | Vice-Executive Chairman of Maintenance and Engineering at TAP–Air Portugal (2001) | General Director of Maintenance and Engineering (1996-2001); Assistant General Director of Maintenance and Engineering (1996); Head of the Maintenance-Processes team, having taken part in aprojectinvolvingtheglobalrestructuringoftheCompany–TAP2000(1995-96);HeadoftheComponentsServiceoftheGeneralMaintenanceand Engineering Department (1990-96); Head of the Production Engineering Division of the Instruments, Electricity and Radio Service, of the General Maintenance and Engineering Department (1987-90); Electrical Engineer holding functions at the Engineering Service of the General Maintenance and Engineering Department (1979-87) at TAP | Electrical Engineer in the General Civil Aeronautics Department (Direcção Geral de Aeronáutica Civil) (1973-79).

Other Activities: Chairman of the European Aircraft Engineering & Maintenance Conference (2005) | Chairman of the 4th Managing Aircraft Maintenance Costs Conference (2003) | Vice-Chairman of the Airlines International Electronics Meeting (1995) | Technical representative of TAP forAirbus,inToulouse,forthereceptionofTAP’sA340fleet(1995)| TAP representative at the Airline International Electronics Meetings and at the Avionics Maintenance Conferences (1987-95) | Academic experience: Auxiliary Professor at the Instituto Superior de Engenharia de Lisboa (1989-97) | Assistant Professor at the Instituto Superior de Engenharia de Lisboa (1976-89) | Assistant Professor at the Instituto Superior Técnico (1972-75) | Monitor at the Instituto Superior Técnico (1970-72).

ρ Holds a degree in Electrical Engineering, Electronics and Telecommunications Branch from the Instituto Superior Técnico).


Luís Manuel da Silva Rodrigues

Nationality: Portuguese | Data of birth: January 1965

Appointed Member of the Executive Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (June 2009).

Management Duties in the following areas: Air Transport Business Unit: Customer Service, Talk to Us; SPdH; TAP–Maintenance and Engineering Brazil, S.A. (ex-VEM), since February 24, 2010.

Professional Activity: Chairman, Fischer Portugal (July 2008-May 2009) | Consultant, Confronto d’Ideias, Sociedade Unipessoal (January 2008-May 2009) | Fixed Network Marketing Director (2006-07); Director of Marketing, Corporate Business (2003-07), PT Comunicações | Executive Director of Marketing, Sales and Contents, Media Capital Multimédia; Executive Director, Unidivisa, Sociedade Gestora de Cartões de Crédito, Grupo Media Capital (2000-03) | Coordinating Director of Marketing, Public Relations, New Technologies, TVI, Televisão Independente, Grupo Media Capital (1999-2000) | European Marketing Manager New Initiatives, Procter & Gamble Europe (1996-97) | Marketing Manager (1994-96); Brand Manager (1993-94); Assistant Brand Manager (1990-93), Procter & Gamble Portugal.

Other Activities: Permanent member of the Committee for the Analysis and Research of Means of the Portuguese Advertisers Association (1999-2000) | Elected member of the Board of the Portuguese Association of Advertising Agencies | Elected Marketing Personality of the Year for 2007 by the Portuguese Association of Marketing Professionals | Secretary-General of Harvard Business School (AMP 164 2003) | Total Quality Trainer (1995-96) Procter & Gamble Portugal.

ρ Holds a licentiate degree in Economics from UNL | MBA from UNL | Advanced Management Program (AMP 164, 2003) from Harvard Business School, USA.

Luiz da Gama Mór

Nationality: Portuguese and Brazilian | Data of birth: April 1952

Appointed Vice-Executive Chairman of Air Transport of TAP Portugal, of TAP, S.A. (October 2000-December 2006); Member of the Executive Board of Directors of TAP, S.A and TAP, SGPS, S.A. (December 2006).

Management Duties in the following areas: TAP Air Transport Business Unit: Marketing, Communications and Public Relations, Sales, Cargo andMail;Cateringpor;LojasFrancasdePortugal.

Professional Activity: Chairman of the Board of Directors of Cateringpor (aviation catering company) | Chairman of the Board of Directors of LFP (airport and onboard duty free company) | Member of the Board of Directors of Groundforce (passenger and cargo ground handling com-pany) | Vice-Chairman of Sales and Marketing; Commercial Director; Operational Logistics Director; Commercial Manager of RGS; Manager of EVAER–Escola VARIG de Aeronáutica of VARIG, S.A. (March 1990-June 2000) | Marketing Director; Administrative and Commercial Manager; Maintenance Manager of AEROMOT, S.A. (September 1977-February 1990).

Other Activities: Professor of O Piloto e o Mercado at the Faculty of Aeronautical Sciences of PUC/RS (1995) | Professor of Estudo dos Problemas do Turismo no Brasil at the Faculty of Tourism of PUC/RS (1994) | Marketing Professor at the Management School of ULBRA/RS (1989) | Organization and Methods Professor at the Management School of ULBRA/RS (1984) | Member of the Commission that developed the Aeronautical Sciences Course of PUC/RS | Director (Adviser) of Pluna Linhas Aéreas Uruguaias S.A. | Member of the Executive Council of the Amadeus Brasil Company.

ρ Holds a degree in Mechanical Engineering from the UFRGS | Post-graduation in Management (PPGA/UFGRS) | Airline Business, (London Business School) | Advanced Management Programme (INSEAD–France).

Qualifications: Executive with 30 years of experience in Operations, Sales, Marketing and Top Management of medium-sized and large avia-tion and associated companies | Market diagnostic capability, construction of a vision of the future and elaboration of competition strategies in highly competitive environments | Experience in turnaround of companies operating in high pressure environments, including state-owned | Experience in managing large teams in international operations. Skilled in coordinating cultural changes, in motivational and recognition pro-grammes seeking strategy alignment | Experience in rebranding, product development and building client loyalty | Coordination of corporate projectswithconsultancycompanieswiththeaimofincreasingefficiency,reducingcostsandincreasingrevenues.


Manoel José Fontes Torres

Nationality: Portuguese and Brazilian | Data of birth: June1947

Appointed Vice-Executive Chairman of Air Transport of TAP Portugal, of TAP, S.A. (October 2000-December 2006); Member of the Executive Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (December 2006).

Management Duties in the following areas: TAP Air Transport Business Unit: Flight Operations, Fleet Planning, Network and Planning, Operational Control, International Relations and Alliances, Information Technologies, Emergency Planning; PGA.

Professional Activity: Chairman of the Board of Directors of White Airways, S.A. | Vice-Executive Chairman–Corporate Planning and Route Network of VARIG, S.A. (Viação Aérea Rio-Grandense) | Member of the Board of Directors of PLUNA, S.A. (Uruguay) | General Director of ITAP–Indústria Técnica de Artefactos Plásticos (solid packages) | Manager of the Manufacturing Division of TOGA – Indústria de Papéis | Consultant for PLANASA (in the Planning and Systems areas).

Other Activities: Member of the Management Board of STAR Alliance | Member of the Industry Affairs Committee of IATA.

ρ Holds a degree in Mechanical Engineering from the University of Sao Paulo | Post-graduation in Management (Escola de Administração de Empresas de Sao Paulo of the Fundação Getúlio Vargas) | Completion of the following specialisation courses, among others: Management (INSEAD–France); Aircraft Fleet Planning–Cranfield College of Aeronautics (England); Aircraft System and Performance (The Boeing Commercial Airplane Company – USA).

Michael Anthony Conolly

Nationality: Portuguese and Brazilian | Data of birth: December 1949

Appointed Vice-Executive Chairman of TAP, S.A. (October 2000-December 2006); Member of the Executive Board of Directors of TAP, S.A. and TAP, SGPS, S.A. (December 2006).

Management Duties in the following areas: TAP Serviços Business Unit; Responsibilities in the TAP Group: Finance, Human Resources, Logistics, Legal, Administration and Physical Resources Management, Planning/Business Portfolio and Performance, Information Technologies, Audit; Megasis; UCS; TAPGER; SPdH; PGA..

Professional Activity:ChiefFinancialOfficerofVARIG,S.A.(ViaçãoAéreaRio-Grandense)| Worldwide Controller of Bunge Internacional (agro-industrial group with activities in South, Central and North America, Europe, Oceania and Asia) | President of MCS Trading (Brazilian import and export company that also has retail operations in the following main markets: Brazil, United States of America, Europe and Asia | Controller for Latin America of Alcoa (Aluminium Co. of America, largest manufacturer of aluminium in the world).

ρ Holds a degree in Management from the Escola de Administração de Empresas de Sao Paulo of the Fundação Getúlio Vargas | Accountancy (Escola Técnica de Comércio of the Fundação Getúlio Vargas) | Several specialisation courses in Brazil and overseas | Languages: Portuguese, English, Spanish and French.

Qualifications: 30 years of professional activity in the Finance, Strategic Planning and Production areas and Chairmanship in the Service, Industrial, Agro-Industrial, Trading and Commercial Aviation sectors.

Management Report

TAP, SGPS, S.A.


PORTO

LISBOA

EuropeAthensBordeuxDubrovnikDusseldorfManchesterVienna

AfricaAccraBamakoSao Vicente

North AtlanticMiami

South AtlanticPorto Alegre

NEW DESTINATIONS IN 2011

5

1 22

4.0%1.9%

1

2.2%0.9%

9 26

42.2%15.7%

8 1

5.2%16.9%

35 69

35.1%58.0%

11 7

11.3%6.6%

TAP Operation

Operation by Partner Company

% Representativeness of demand by Region (passenger-kilometres)

% Representativeness of demand by Region (passengers)

Route Network:

TAP, SGPS, S.A.Profile

TAP will focus on the Air Transport service and its complementary activities, consistently aiming at investor return and leadership of the niche market in which it operates. TAP will offer its Customers a quality product and will always be the best choice for those who want to use its services and one of the best companies to work for.

The Company will act in accordance with its commitment to society and the environment.

TAP, SGPS, S.A. is a Company whose aim is the management of shareholdings in other companies.

The following contribute to the Group’s results:

ρ TAP–Transportes Aéreos Portugueses, S.A. (TAP Portugal), whose main activity is air passenger and cargo transport, also pro-vides services to third parties through its Maintenance business, in Portugal and Brazil;

ρ A group of companies which carry out their activities in areas linked to the Group’s core businesses – Air Transport and Maintenance and Engineering –, with a view to controlling the service chain.

Demand by Region and Route Network

SALES AND SERVICES RENDERED EUR million

2010 2009 var. (%)

External market * 1,782.8 1,521.0 17.2

Internal market 532.8 554.0 (3.8)

* TAP companies reporting directly to the Bank of Portugal

REINFORCEMENT OF SALES IN MARKETS ABROAD

In 2010, TAP Group strengthened the positioning of its contribution to the volume of national exports, with a total contribution of EUR 1,782.8 million of sales and services rendered in markets abroad, 17.2% more than in 2009.

Growth strongly reinforced, particularly in external market

External MarketAnnual compound average growth rate

2003-2010

+13.3%

2003 2009 2010

Internal Market TotalExternal Market

Sales and ServicesRendered

EUR million

0

500

1,000

1,500

2,000

2,500

1,783

533554744

518

2,3162,075

1,262

1,521


PORTO

LISBOA

EuropeAthensBordeuxDubrovnikDusseldorfManchesterVienna

AfricaAccraBamakoSao Vicente

North AtlanticMiami

South AtlanticPorto Alegre

NEW DESTINATIONS IN 2011

5

1 22

4.0%1.9%

1

2.2%0.9%

9 26

42.2%15.7%

8 1

5.2%16.9%

35 69

35.1%58.0%

11 7

11.3%6.6%

TAP Operation

Operation by Partner Company

% Representativeness of demand by Region (passenger-kilometres)

% Representativeness of demand by Region (passengers)

Route Network:

Following its strategic direction, TAP’s priority istofulfilitsCustomers’expectations,promot-ing their loyalty and maintaining strong ties with Portugal, a focus that corresponds to the market niche in which its competitive position is most established.

TAP Portugal is an international airline company which operates from its base in Lisbon, a city which, due to its geographic location, is a privi-leged access platform to markets located in other Continents, and also operates from Porto airport, its second operational hub.

In the development of its network, the Company pursues a niche strategy, connecting Europe to a growing number of destinations located in Africa, in North, Central and South America, and inthelatteristheleadingEuropeanaircarrierfly-ing to Brazil.

The TAP Group ended 2010 with a net income around EUR -57.1 million, less EUR 53.6 million than the EUR -3.5 million registered in the previ-ous year.

At the operating level (before interest and taxes), the Company recorded EUR -0.4 million, aroundthebreak-evenpoint,whichreflectsahighcapacitytorespondinaflexiblemannertomarket alterations and, in this way, enable the absorption of the losses caused by the various external impacts which occurred.

Particular note should be made of the fact that by the end of 2010, TAP had more than doubled its size in relation to 2000, with its offer having grownbyapproximately136%overthisperiod.

In the development of its activity, TAP Portugal, together with its partners, as at 31 December, offered its passengers and cargo customers access to 163 cities, 64 with its own aircraft, of which 80 are located in Europe and 56 in the Americas and the rest in other continents. By the end of 2010, the Company had transported 9.1 million passengers and 94.2 thousand tons of cargo and mail.

Theoperationsusedarecentfleet,whichbythe end of the year was composed of 56 Airbus aircraft only, of which 16 are prepared for long-haulflights.Theacquisitionofthecompany

Portugália, which took place during 2007, hasenabledTAPtoattract regional traffictoits operation network, creating synergies and strengthening its competitive position at an international level, due to the addition of 16 aircraft prepared for regional route operations.

Complementing the above, the TAP–Maintenance and Engineering Business Unit provided services to approximately 40 Third Party Customers, of which 28 were airline companies.

During the year, the TAP Group (TAP, S.A. and other participated companies) employed an aver-age of 13,197 persons, ending the year with 13,113 workers.

TurnoverEUR million

2010 2009 var. (%)

Air Transport (TAP, S.A.) 1,995.3 1,775.3 12.4 Maintenance – Third Parties Assistance – Portugal 126.5 113.3 11.7Maintenance – Third Parties Assistance – Brazil 51.3 53.8 (4.6)Duty Free 134.1 119.2 12.5 Catering 6.7 5.7 17.1Other Activities of TAP, SGPS, S.A. 6.1 11.3 (45.5)

TOTAL 2,320.1 2,078.6 11.6

Demand by Region and Route Network


Key Figures 2010

Flight HoursOwn aircraft

2000 2009 2010

124,073

221,472 229,703

85.1%

3.7%

229,703hours

The number of flight hours by the TAP fleet came to a total of approximately 230 thousand, 3.7% more than in 2009.

Maintenance Revenues

2000 2009 2010

85,730

113,315

126,541

47.6%

11.7%

126,541EUR thousand

The total Sales and Services Rendered by TAP–Maintenance and Engineering Portugal increased by 11.7%, reflecting the improved efficiency of the sales process and increased number of units submitted for intervention.Note: Values for 2009 and 2010 in accordance with the IFRS (International Financial Reporting Standards).

Cargo Revenues

2000 2009 2010

78,471

98,166

124,871

59.1%

27.2%

124,871EUR thousand

In 2010 there was a trend towards the recovery of the normal pattern of growth of the volume of air cargo transported, leading to an increase of 27.2% in the respective income.

Passenger Revenues

1,648

1,843

2000 2009 2010

840

119.4%

11.8%

1,843EUR million

Frequency EvolutionEurope

(000)

2000 2009 2010

27,359

66,59167,742

147.6%

1.7%

Africa

2000 2009 2010

1,419

4,573

5,485

286.5%

19.9%

U.S.A.

2000 2009 2010

1,333

869 822

-38.3%

-5.4%

Venezuela

2000 2009 2010

346

512432

24.9%

-15.6%

Brazil

2000 2009 2010

1,676

5,8796,479

286.6%

10.2%

135.6%

Supply - ASKs Demand - RPKs

32,138million ASKs

23,944million RPKs

The capacity of the operation increased by 4.4%, with demand having increased in a significantly higher proportion, by approxima-tely 13.6%.

4.4%

13,643

141.6%

2000 2009 2010

9,909

30,785 32,138

13.6%

21,07623,944

million

Passenger revenues increased by 11.8%, reflecting the increase in demand, namely, to the routes of the South Atlantic and Africa regions.


Human ResourcesTAP, S.A. + PGA, S.A.

7,683Employees

In view of the growth in the development of the business since 2000, the evolution of the Staff of TAP, S.A. + PGA, S.A. reflects the general increase in the Company's productivity levels.

7,6837,290

5.4%

2000 2009 2010

4,957

7,626

0.7%

4,169 4,200

Total Ground Staff

Operating Revenues and Gains

2000 2009 2010

1,235

2,1992,351

90.5%

6.9%

2,351EUR million

The operating revenues and gains of Group companies as a whole reflected the effect of the increase in demand levels. Note: Values for 2009 and 2010 in accordance with the IFRS (International Financial Reporting Standards).

Fuel

2000 2009 2010

156,007

358,641

522,933

235.2%

45.8%

522,933EUR thousand

Once again on an upward trend, the behaviour of the jet-fuel price was reflected in TAP, S.A. fuel costs.

295 USDp/ton.

567 USDp/ton.

724 USDp/ton.

Ticket Sales

Portugal30.8%

Europe35.8%

Africa6.6%

NorthAtlantic3.1%

MidAtlantic2.1%

South Atlantic21.0%

Rest of the world0.2%

Others0.4%

Portugal31.8%

Europe39.5%

Africa6.4%

NorthAtlantic3.1%

MidAtlantic2.7%

South Atlantic15.7%

Rest of the world0.4%

Others0.4%

2010

2009

Net Income

-57,103EUR thousand

In spite of some retrocession, in 2010, the trend of the Company's recovery is visible, supported by the increased efficiency that it has achieved over the last few years. Note: Values for 2009 and 2010 in accordance with the IFRS (International Financial Reporting Standards).

Operating Net Income

-421EUR thousand

The operating income of the Group reached EUR -0.4 million, standing practically at the break-even point.Note: Values for 2009 and 2010 in accordance with the IFRS (International Financial Reporting Standards).

192,412EUR thousand

The net operating cash flow to deal with financial and investment costs for the companies of TAP Group as a whole decreased by EUR 86.2 thousand.

Debt

1,277EUR million

The total debt reflects the continuous effort placed in the reduction of the Company's indebtedness.

EBITDAR

2000 2009 2010

78,856

144.0%

-31.0%

278,661

192,412

2000 2009 2010

-61,730

99.3%

-100.8%

52,173

-421

2000 2009 2010

122,082

53.2%

-1,512.2%

-3,542

-57,103

2000 2009 2010

948

902

1,303

1,1711,054

1,277

Net DebtTotal Debt

(000)

(000)


This attitude which, in turn, is directly related to the Employees’ perception on what the Company represents to him or her, is deter-minant for an external image of the offer of a service of recognised excellence, making the Company a preferential choice for the Customer.

However, the best company in which to work is, at any given time, the combined result of the quality of the human resources which operate therein and the existing working conditions. It is in this sense that TAP's internal conduct is guided, promoting processes to welcome new employees, which is fundamental in the proc-ess of their adaptation and future performance, byencouragingtheirinterestandconfidence.The investment in human capital is thus carried out, in an intensive manner, through policies of development, recognition, encouragement of creativity and compensations, which result in a stable and motivated staff, in each of the markets in which the Company operates, both in Portugal and abroad.

The processes of individual development, throughtrainingwhichisspecificoraimedatfunctional enrichment, simultaneously with personalised career management, through the monitoring of professional performance andcontinuouslyadjustedretribution,orwithfacilities which promote wellbeing (the inter-nal medical clinic, life and health insurance, and others), as well as attractive social bene-fits(travelandaccommodation,orrent-a-car,museums and child-care facilities, amongst others) are determinant factors in the effec-tive management of the Company's human resources.

Social responsibility

The quality of the product sold by TAP arises from the daily investment made by each Employee in the Company.

Externally,theobjectivesdefinedfor2010,astheEuropean Year for Combating Poverty and Social Exclusion, are included in TAP's agenda of con-cerns, both in its ethical conduct and respect for its stakeholders.

When, in February 2010, a group of employ-ees formed a TAP Pool of Volunteers, on their own initiative, called Voluntários com Asas (Volunteers with Wings), the Company sup-ported and greatly encouraged this initiative, right from the very beginning.

Also of impact on the external side, regular actions are organised in favour of the surround-ing community or in the context of voluntary work. Particular note should be made of vari-ous initiatives, such as blood donation, the collection of articles for charities and the con-stitution of a group to support situations of emergency or humanitarian assistance. It is also important to highlight the permanent integra-tion of disabled persons, who hold positions which are suitable to their capacities inside the Company. Also noteworthy is the Ganhar Asas (Gaining Wings) programme which, through an organisedprogramme,helpspeoplewithflightphobia syndrome.

For all these reasons, TAP is considered, today, as a reference company in terms of employ-ability, and with a status which is recognised as responsible, in the social context.

Sustainable Development of TAP Group


Environmental Responsibility

CO2 Emissions Compensation Programme

TAP continued its CO2 Emissions Compensation Programme (Carbon Offset), launched in June 2009, in partnership with IATA.

Th is programme i s ava i lab le at [ www.flytap.com ] and allows its passen-gers to decide if they would like, voluntarily, to compensate the carbon emissions resulting fromtheirjourney,bycontributingtoemissionreductionprojectsandtothereductionofthecarbon footprint.

The participation of the passengers in the CO2 emissions compensation programme, during 2010,exceededtheobjectiveandhaspermittedobtaining the following accumulated results since the beginning of the programme:

Training on the Environment

In order to stimulate the environmental culture of the Employees, TAP's Environment area has car-ried out actions of training on the Environment, covering not only workers already holding posi-tions in the Company but also new workers, during their initial entry phase.

During 2010, 24 editions of the training on the Environment course were held, where 334 work-ers were trained from the different Business Units or Companies of TAP Group.

Environmental license in the Maintenance activity

In 2010, TAP–Maintenance and Engineering maintainedtheobjectiveofcompliancewiththe requirements of the Environmental License which it holds for its activity of maintenance and repair of aircraft, including the surface treat-ment of metals and plastic materials, which uses an electrolytic or chemical process, concentrat-ing its efforts towards the appropriate meeting of all the requirements for the Environmental License. For this purpose, the various monitoring campaigns definedbytheEnvironmentalLicensewerecarriedoutand the four periodic reports were submitted, which constitute the mechanisms accompanying the License, to the regulating entity, the Portuguese Environmental Agency. At the same time, new initiatives were carried out with a view to the progressive improvement of the environmental performance, by the Business Unit. In this context, particular note should be made of the implementa-tion of the labels identifying the waste. This practice, started in July 2010, allows for better supervision of the production ofwasteineacharea,andalsoenablesmoreefficientcontrolby the internal manager, as well as by the TAP Serviços Business Unit, relative to the provision of the waste management service.

Noteshouldalsobemadeoftheundertakingofthefirstinter-nal audit of the Environmental License. This audit, carried out in October/November, revealed some Non-Conformities which, inviewoftheirspecificity,weretransformedintoasingleSpecialProject,tobestartedin2011.

During the last quarter of 2010, the process of implementation of an Environmental Management System for the Business Unit was resumed. The system will be created in accordance with the require-ments of the Standard NP EN ISO 14001, so that, once in operation, its certificationmayberequested.Thefirstactivitiesinvolvedthesurveyanddescriptionofthereferencesituation,throughtheidentificationoftheenvironmental aspects associated to the Maintenance and Engineering activity. Simultaneously, the drafting of new procedures was begun, which is to be included in the Manual of Maintenance Technical Standards, and will serve to support the Environmental Management System.

CO2Emissions Compensation Programme Carbon Offset

The site provides all the informa-tion relative to the value of carbon dioxide (CO2) emitted by each passenger on each flight, as well as the cost correspond-ing to the compensation of this emission and informa-tion on the project whichis supported and in which the money resulting from each contribution will be invested.

Due to the uniqueness of this programme, transversal to the avi-ation Industry, TAP was distinguished by UNESCO with the Planet Earth Award 2010.

YearsResult

(compensated tons)

2009 (June to December) 2,5082010 (January to December) 4,278

TOTAL 6,788

Voluntary Work

The Environment area, together with TAP's group of Voluntários com Asas (Volunteers with Wings), marked the World Environment Day 2010bycarryingoutjointactionswithsocialsolidarityinstitutions,relativetotheraisingofawarenessontheseparationofwaste,andplaying educational games using recycled materials.



Structuring events

During 2010, the Company continued its efforts to maintain a competitive positioning in the global market, with facts of a structur-ing nature having taken place.

Chronology of the main events

In April 2009, TAP Group launched a tender for the selection of an investment banking institution for the purpose of promoting the sale, in national and international markets, of themajority(50.1%)ofthesharecapitalofthe company SPdH.

The acquisition of the said sharehold-ing occurred in March 2008, by a consortium of three financial institutions (Banco de Investimento Global (BIG), Banco de Investimento, S.A. (BANIF) and Banco Invest, S.A.).

Theobjectiveofthisoperation,fosteredbyTAP, was to create the conditions for the managers of SPdH to promote the necessary changesforsolvingitsoperatingdifficultiesand,inthisway,achieveasignificantimprove-ment in the standards of service offered, not only for TAP but also for the other customers of that ground handling company.

The market conditions inherent to the present economic crisis did not permit, dur-ing the previous twelve months, the sale of SPdH to potentially interested parties to be undertaken.

Thus, in March 2009, and according to the conditions established with the abovemen-tioned banks, the shareholding in SPdH was transferred to TAP, with the operation hav-ing been concluded for the same amount as the acquisition value. At the same time, TAP transferred, on a provisional basis, the con-trolofitsstakeinSPdH(relativetothe50.1%)to an independent company, Europartners. TAP submitted this operation to the authori-sation of the National Competition Authority (AdC – Autoridade da Concorrência).

In November 2009, the AdC issued its deci-sion, prohibiting the concentration operation between TAP and SPdH, due to considering that it could create or reinforce a dominant position of the handling company in ground handling services at airports, and, therefore, thatTAPmustsellthemajorityofthesharecapital of the handling operator, as well as nominate a trustee to act in the interests of

Main events

January

Participation of TAP in the Lisbon International Tourism Exhibition (BTL), during which the Company Loyalty Programme – Victoria – reached one million members.

Under the maintenance contract of TAP–Maintenance and Engineering for two A340 airplanes of the French Air Force, note should be madeofthecarryingoutof10,000flighthours,where the relevance of the operation, considered exemplary, and its reliability at the top of the industry's standards were both highlighted.

February

ThecompanyLojasFrancasdePortugalopeneda new shop, integrated in the new concept Just for Travelers, at Lisbon airport, in an area dedicated exclusively to Non-Schengen passenger departures.

TAP–Maintenance and Engineering participated in the 2nd edition of the conference organised by the Aviation Week in Dubai, of Maintenance Repair & Overhaul Middle East 2010, the largest exhibition of Maintenance and Repair in the Middle East.

March

TAP is the first Portuguese company, in the Tourism sector, to have created an official channel on YouTube – the largest video platform ataworldwidelevel–,withtheprovisionoffilmson various destinations and services such as online check-in, online booking and personalised attendance, amongst others, as well as the Flash Mob carried out at airports in Portugal and Brazil.

the Competition Authority, managing the company SPdH independently from TAP.

In compliance with these provisions, TAP has continued its efforts to sell the position that itwasforcedtoreacquire,themajorityoftheshare capital of SPdH, with the corresponding shares having been submitted to an inde-pendent entity, Europartners, which has an active role in the realization of AdC decision-making. Therefore, and through deliberations of the general meeting of shareholders held on 27th January 2010, three representatives of Europartners were appointed a seat each in the Board of Directors of SPdH, one of whom beingthechiefexecutiveofficer,inthecapac-ity of independent operating manager.

Inordertocomplywiththeordersjustifiedin legal imperatives which rule the handling activity sector and achieve conditions which arefavourabletothedisposalofthemajorityof the respective share capital, SPdH began, in 2010, a thorough restructuring process, so as to restore the equity and thus re-establish thesolvencyandfinancialautonomyratiosin accordance with the standards which are usually acceptable and confer aptitude to maintain the current license of activity, as well as eligibility to apply for its extension, taking effect on 1st January 2012.

For this purpose, SPdH presented the reg-ulator with an economic feasibility plan (business plan), through which it demon-strated the transformation of the current consistently negative results into sustainable positive results.

Key Events


The migration of the booking and inventory system to the Amadeus Altéa platform was implemented, in order to provide better service to the Company's Customers.

April

The Customers were provided with a new application at [ www.flytap.com ] , permitting theautomaticissueofreceiptsforflightscarriedout by the Company – thus further simplifying its relations with Customers.

TAP Cargo participated in the 16th edition of Intermodal, South America, the largest and most important fair of Southern America, in the logistics, transport and international trade sectors.

May

The company TAP–Maintenance and Engineering Brazil received the qualification, attributed by the manufacturer Embraer, as an Embraer Authorised Service Centre – EASC in Brazil.

TAPwas responsible for the returnflight toRome of His Holiness Pope Benedict XVI, on the occasion of his Apostolic Journey to Portugal, using the aircraft A320–200 Columbano Bordalo Pinheiro.

June

Start of operations to Algiers and Marrakech, bothwithafrequencyofthreeflightsperweek.The Company thus reinforced its strategy of growth to Africa, the only sector of the route network with continuous growth since 2001.

July

Inauguration of operations with the offer of threeweeklyflightstotheAirportofViracopos,in Campinas, in the State of Sao Paulo, with the Company's operation to Brazil thus covering a total of nine destinations.

August

WiththeAugustedition,TAP'sin-flightmagazineUP launcheda specific version for iPad, thusbecoming thefirstPortuguesepublication toprovide a format through this mean. UP is the largest vehicle of promotion of the destination Portugal in the entire world, being read, on a monthly basis, by over one million readers.

September

The new site of TAP Cargo is made available, with a more modern image and user-friendly navigation, as a means of strengthening the strategy of communication with the Customer.

November

The process was begun relative to the migration of the former Departure Control system to the new Departure Control system platform (DCS) of Amadeus, with the start-up of operation of the system at the Porto stopover.

December

The new TAP shop was inaugurated in the Centro Empresarial Internacional RIO (RB1), representing a strategic positioning in a region which will be privileged during the process of revitalisation of the entire port area of Rio de Janeiro.

Distinctions and Awards

TAP, S.A.

Best Aviation Company – TAP was chosen as the best aviation company, by the international company Condé Nast Traveller, which valued aspects such as the punctuality,comfort,flightfrequency,networkofdesti-nations,in-flightserviceandsafety;

Trusted Brand – TAP was distinguished, for the 2nd year consecutively, as the brand with the best reputation in environmental issues, by the readers of the Selections of the Reader's Digest;

Punctuality Award in the Medium-Haul Punctuality category – Nomination made by Brussels Airport, in the context of the Aviation Awards,withTAPfiguringamongstthebestEuropeancompanies;

3rd Best Airline Company of Southern Europe – Positioning of TAP in the context of the SkyTrax awards, attributed since 1999, which result from a selection made by approximately 18 million passengers, in 100 countries;

Best Airline Company –Classificationreceived,forthe 7th year consecutively, in the context of the Publituris Travel Awards, which recognises the best companies of the Tourism sector;

European Business Awards – TAP was selected as the national representative, in the context of the 4th edition of this competitive event sponsored by the HSBC Bank, in recognition of the adoption of principles con-sidered fundamental, such as innovation, business excellence and sustainability;

UP as an Essential Read–TheTAPin-flightmaga-zine was distinguished by the British magazine Monocle and was also highlighted by the Chinese publication MINGas one of the best in-flightmagazines of theworld. Recognitions which distinguish Portugal and its national values, as well as the different destinations of the Company, which are widely publicised in its magazine;

International Award for the TAP stand at ABAV – Distinction given in the context of the largest Tourism fair of the Americas, for the creativity and quality ofthedesignoftheproject,whichfocusedonsomeofthemost modern symbolic areas of Lisbon;

World Leading Airline Company for Southern America – Special mention, for the 2nd year consecutively, in the context of the 17th edition of the World Travel Awards;

STAR CEO Award 2010 – Distinction received from STAR Alliance, in the context of the CEO Award 2010, for TAP's contribution to the development of the 2DBarcodeProject,carriedoutinpartnershipwithSTARAlliance;

TAP Cargo, Best Air Cargo Company in three categories (Best Air Cargo Company for Europe, for the Americas and for Africa) – Special mention attributed by the periodical Transportes & Negócios.

Other TAP Group companies

Best Aeronautical Maintenance Company (MRO) of Brazil – Award attributed to TAP–Maintenance and Engineering Brazil by the principal Brazilian magazine specialised in aviation Avião Revue.




Is the theme that celebrates TAP's new signature. In 2010, the Portuguese Mariza, the Angolan Paulo Flores and the Brazilian Roberta Sá gave voice to this song, that is as an "anthem" to the union of the Lusophone cultures. These artists were joined in the choir by some of TAP's employees. "With Arms Wide Open" illustrates the proximity and complementarity between these three people, who share language, culture and history.

“With Arms Wide Open„


Summary of the Performance

its business opportunities, pursued its strategy of consolidation of the connections with the South Atlantic and reinforcement of its growth in Africa, starting operations to the Airport of Viracopos, in Campinas, in the State of São Paulo, and to Algiers and Marrakech.

Also, the ongoing increase of productivity and efficiency,theadoptionofbestpractices,thesimplificationofprocessesandtheintensificationof aggressive sales policies were determinant factors in the Company's policy, as well as the continued development of a policy of innovation, with a view to responding to the Customer's needs and increasing the convenience of the services provided.

progression of GDP or an increase in the value of oil, may place in question the desired recovery.

For the companies of TAP Group, in the presence of the economic scenario described above, where, in addition to the behaviour of the price of oil, once again on an upward path, and hence their great exposure to an unfavourable European context, action was pursued aimed at increasingtheprofitabilityoftheactivitiesoftheirrespective sphere of intervention. In support of thisobjective,incisiveactionwascontinuedonall costs possible, with the implementation of a suitable cost-cutting programme which included adiversifiedseriesofmeasures,tobeenforceduntil 2012, with transversal effects on all the companies of TAP Group.

Likewise, note should be made of the high capacity of the Company, in the development of itsbusiness,torespondwithadjustedflexibility,in the offer of services and level of costs, to market alterations and, in this way, enable the absorption of the losses caused by the various external impacts which have occurred, with this reality being confirmed by its operatingperformance. In this context, the application was continued, until the month of June, of the Contingency Plan, in activity since the Summer period of 2009, and implemented with a view to promoting a rational adaptation of the capacity to the new levels of demand. As of the month of June, after the restoration of the cancelled operation, the Company, seeking to optimise all

After the fall of Gross Domestic Product (GDP) in 2009by-0.6%,followingtheparticularlysevereglobal contraction, 2010 was characterised by the generalised recovery of economic activity, ataworldwidelevel,reflected,bytheendoftheyear,bygrowthintheorderof5.0%.Withdifferentiated rates amongst regions, the evolution was due, above all, to the robustness of the growth of the emerging and developing marketeconomies,benefitingfromtherevivalof world trade, developments in commodity markets and the dynamics of internal demand. In turn, for the advanced economies as a whole, the economic recovery was modest, with a slowdown in the second half of the year due totheturbulenceinthefinancialmarkets,asaconsequence of the increase in sovereign risk, associatedtothesignificantgrowthinbudgetdeficitsandpublicdebt.Inresponsetothestrongglobal demand and, also, due to the imbalances in supply, relative to certain consumer goods, prices,inparticular,ofoil,whichfinallystabilisedin 2010 at a value above 80 USD/barrel, as well as non-energy commodities, increased considerably, to stand at the level of the historic maximumsreachedduringthefirsthalfof2008.

For the Air Transport Industry, after the largest decrease of demand in the history of commercial aviation in 2009, the year of 2010 wascharacterisedbythereturnofairtraffictopreviousprofilesofbehaviour,withthereuptakeof air travel, as well as trade relations between the differentregionsoftheworld.Duringthefirsthalfof 2010, the recovery was based in the regions oftheAsianPacificandAmericas,andbecamemore visible in all regions during the second half oftheyear,albeitwithsignificantlydifferentiatedexpression. However, the opposite occurred in Europe where, in addition to the slow economic recovery, various external impacts interfered with thenormaldevelopmentoftheflightoperation,constituting factors which negatively affected the performance of commercial aviation in the region. In particular, the structural challenges whichleadtotheindustry'sprofitabilitybeinginadequate continued, imposing fragility to the sector, where any alteration, such as a slower

Price of FuelUSD/ton.

0100200300400500600700800900

1,0001,1001,2001,3001,400

109.9

828.7

1998

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1,356.7

Faced with an exposure to a less favourable European context, in addition to the behaviour of the price of oil, once again on an upward path, the high capacity of the Company, in the development of its activity, in corresponding with adjusted flexibility – in terms of the offer of services and costs – to market changes is worthy of mention.


Portuguesa de Transportes Aéreos, S.A.. The company Groundforce Portugal, which adopted, as of 1st November 2005, a special taxation period from 1st November to 31st October, returned to the previous period of taxation in 2010, and recorded a negative net income of EUR -43.6 million, relative to a reporting period of 14 months.

In March 2009, a consortium of three banks (BIG, Banif and Banco Invest) transferred the stake owned in SPDH(50.1%)toTAP,S.A.InApril,TAPGrouplauncheda tender for the selection of an investment banking institution with the mission of promoting the sale, in nationalandinternationalmarkets,ofthemajority(50.1%)ofthesharecapitalofthecompanySPdH.Theobjectiveof the acquisition of the abovementioned shareholding, in March 2008, fostered by TAP, was to create the conditions for the managers of SPdH to be able to promote the necessary changesforsolvingitsoperatingdifficultiesand,inthisway,achieveasignificantimprovementinthestandardsofserviceoffered, not only for TAP but also for the other customers of this ground handling company. The market conditions inherent to the present economic crisis did not permit, during the previous twelve months, the sale of SPdH to potentially interested parties to be undertaken. Thus, in March 2009, and according to the conditions established with the abovementioned banks, the shareholding in SPdH was transferred to TAP, with the operation having been concluded for the same amount as the acquisition value. At the same time, TAP transferred, on a provisional basis, the control ofitsstakeinSPdH(relativetothe50.1%)toanindependentcompany,Europartners. TAP submitted this operation to the authorisation of the National Competition Authority (AdC – Autoridade da Concorrência). In November 2009, the AdC issued a statement prohibiting the concentration operation between TAP and SPdH, due to considering that it could create or reinforce a dominant position of the handling company ingroundhandlingservicesatairports,andthatTAPmustsellthemajorityof the share capital of the handling operator, as well as nominate a trustee to act in the interests of the Competition Authority, managing the company SPdH independently from TAP.

In compliance with these provisions, TAP continues its efforts to sell the positionthatitwasforcedtoreacquire,themajorityofthesharecapitalofSPdH, having the corresponding shares been delivered to an independent entity, Europartners, which holds an active role in the realization of AdC decision making. In this sense, and through deliberation of the general meeting of of shareholders held on 27th January 2010, three representatives of Europartners were appointed a seat each in the Board of Directors of SPdH, one of whom being thechiefexecutiveofficer,inthecapacityofindependentoperatingmanager.

Overall performance of TAP Group

The most important aspects of the overall performance of TAP Group and of the companies that make up its core business in 2010, are as follows:

ρ In the context of the economic scenario described above, the companies of TAP Group recorded a consolidated net income, with minority interests, for the year of the value of EUR -57.1 million, that is, EUR 53.6 million less than in 2009.

ρ Net operating income (before financing costs and taxes) reached the break-even point of EUR -0.4 million, representing EUR 52.6 million less than in 2009.

The following factors contributed to this result:

TAP, S.A. and a group of companies carrying out activities in areas linked to the Group’s core business and in which TAP, SGPS, S.A. has a stake in their share capital.

Regarding TAP, S.A., the company recorded a profitofEUR62.3million.Thisresult,whichwasEUR 2.3 million higher than the EUR 60.0 million registered in 2009 (in accordance with the IFRS), was the consequence of an improvement in net operating income, of approximately EUR 5.5 million, in spite of the penalising effect of the higherpricelevelofjetfuel.

With respect to SPdH–Serviços Portugueses de Handling, S.A. (Groundforce Portugal), established in 2003 from the demerger of the Ground Handling Business Unit of TAP, S.A., TAP, SGPSownsanumberofsharesrepresenting49.9%of the company’s share capital, which includes astakeof6%heldbyPORTUGÁLIA–Companhia

Development of the operating hubs of TAP's route network

The consolidation of the intercontinental hub of Lisbon, which supports the operating network of TAP's routes, was maintained, withasignificantincreaseinthenumberoftransit passengers having been recorded in relation to the previous year, espe-cially passengers travelling to the South Atlantic.

Ten years after the implementation of the strategy to create the Lisbon hub, the total number of passengers in transit through Lisbon exceeded dou-bletheinitialfigure.

On the other hand, the operation in Porto was continued, as the Company’s 2nd operational hub, which began during 2006.

Transfer traffic through the Lisbon hub

Growth since 2000

Europe Europe-North

Atl.

Europe-Mid Atl.

Europe-SouthAtl.

Europe-Africa

Total

0%

-50%

-100%

50%

100%

150%

400%

350%

300%

250%

200%

450%


ρ Regarding operating performance, and due totheadoptionofastrategyofadjustedflexibility to market alterations, always aimed at promoting a rational adequacy of its offer and the effective control of costs, the level of offer of the regular operation increased by approximately 4.4%, withdemandhavingincreasedbyasignificantlyhigherproportion,intheorderof13.6%.The overall passenger load factor thus stoodat74.5%,representing6p.p.morethan in 2009. Following the application of the strategy described above, the choice of consolidating Lisbon as the Company's hub was pursued, connecting Europe to a growing number of destinations situated in Africa and in the South Atlantic, being highlighted, in this region, as the European airline company with greatest penetration in the Brazilian market.

ρ TAP, S.A. recorded a net operating income of EUR103.3million,thatis,5.6%morethanin2009. Operating Revenue and Gains reached a total of EUR 2,180.7 million, representing EUR 222.6 million more than in 2009, and anincreaseof11.4%.TotalOperatingCostsand Losses, excluding fuel, reached EUR 1,430.5 million, that is, EUR 54.7 million morethanin2009,oranincreaseof4.0%,representing an increase lower than that recorded in the operation, which stood at approximately4.4%.

ρ Regarding the performance of the business of TAP, S.A., the Third Party Customer segment of Maintenance and Engineering contributed with a notable performance, having reached a value of EUR 126.5 million, corresponding to an increase of 11.7%relative to2009, reflecting the improvedefficiencyofthesalesprocessaswellastheincreased number of units submitted for intervention.

ρ The Air Transport activity generated a total ofEUR1,986.3million,thatis,12.4%morethanin2009.Thisresultwassignificantlyinfluenced by the behaviour of revenue derived from passenger travel, which reached EUR 1,842.9 million, corresponding to 11.8%more than the value recordedin the previous year. This fact was due to the sharp increase in passenger traffic demand,of13.6%,expressedinRPKs,albeitaccompanied by a certain deterioration in yields. Also contributing to this result was the Air Cargo business, where TAP registered an increase of 27.1% in relation to theprevious year.

Inordertocomplywiththeordersjustifiedinlegalimperativeswhichrulethehandlingactivitysectorandachieveconditionswhicharefavourabletothedisposalofthemajorityoftherespectivesharecapital,SPdHbegan,in2010,athoroughrestructuringprocess,soastorestoretheequityandthusre-establishthesolvencyandfinancialautonomyratios in accordance with the standards which are usually acceptable and confer aptitude to maintain the current license of activity, as well as eligibility to apply for its extension, taking effect on 1st January 2012. For this purpose, SPdH presented the regulator with an economic feasibility plan (business plan), through which it demonstrated the transformation of the current consistently negative results into sustainable positive results.

Regarding the company TAP–Maintenance and Engineering Brazil, S.A. (former VEM), TAP pursued, in 2010, significanteffortstowardsitsrecovery,involvingaprogrammeofre-structuringofsystemsandstandardisationof processes, which are currently entirely altered, and which included the most thorough change in relation to its portfolio of customers. It should be noted that the investment made in this company essentially represents a strategic perspective, permitting the expansion of the maintenance activity into new markets. Hence, by theendof2010,itwasnotyetbeenpossibletoachievefinancialbalance,withAero–LB,acompanyofTAPGroup,majorityshareholderofTAP–MaintenanceandEngineeringBrazil,S.A.,havingrecordedanetincome of EUR -71.8 million.

From an operating point of view

TAP Group Turnover

Duty Free (LFP, S.A.)

5.8%

Maintenance-Third Parties Assistance - Brazil2.2%

Catering (CATERINGPOR, S.A.)0.3%

Air Transport (TAP, S.A.)86.0% 5.4%

Other TAP, SGPS, S.A. Activities

0.3%

Maintenance-Third Parties Assistance - Portugal


TAP Group Key Figures

TAP, SGPS, S.A. (Consolidation)

2010EUR million

2009EUR million

var.

OperatingNetIncome(beforefinancingcostsandtaxes) (0.4) 52.2 -100.8%Pre-tax Net Income (44.4) 7.3 -709.5%Net Income of shareholders of the parent company (57.1) (3.5) -1512.2%

Net Income of TAP, S.A. 62.3 60.0 3.8% Net Income of SPdH–Serviços Portugueses de Handling, S.A. (43.6) (28.2) -54.3% Net Income of Aero LB, Participações, S.A. (71.8) 2.4 -3091.1%

Total Assets 2,086.8 2,024.4 3.1%Shareholders' Equity (including Minority Interests) (264.8) (204.6) -29.4%

Active Staff of the Group (31 December) 13,113 13,397 -284 TAP, S.A. (excluding subsidiaries)* 7,055 6,986 69

Air Transport 4,582 4,489 93Maintenance and Engineering 1,942 1,961 -19TAP Serviços 496 498 -2Other 35 38 -3

SPdH–Serviços Portugueses de Handling, S.A.** 2,382 2,439 -57 Remaining Companies 3,676 3,972 -296

* Not including staff who are not placed and not active** Associate Company

Consolidation methodology

Pursuanttothelegalrequirements,thecompaniesinwhichTAPholds,directlyorindirectly,amajorityofvot-ing rights, which is the case of most, were included in the consolidation through the full integration method. The equity and net income of these companies corresponding to third party shareholdings, are presented in the minority interests headings, respectively, in the consolidated balance sheet under a separate heading of equity and in the con-solidatedprofitandlossstatement.Theinvestmentsinassociatedcompanies(representingbetween20%and50%ofthe voting rights) are recorded through the equity method. A company in this situation is SPdH–Serviços Portugueses de Handling, S.A..

TheattachedconsolidatedfinancialstatementsoftheGroupwerepreparedinconformitywiththeInternationalFinancialReporting Standards adopted by the European Union (IFRS – formerly called the International Accounting Standards – IAS) issued by the International Accounting Standards Board (IASB) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or by the former Standing Interpretations Committee (SIC), in force on the date ofpreparationofthesaidfinancialstatements.


Analysis of the Economic Climate

Heterogeneous economic recovery, and with strong uncertainty regarding its sustainability, as the temporary factors explaining growth disappear, and indicators of a sustained recovery do not appear to be emerging, in various advanced economies.

International Economic Climate

After the fall of Gross Domestic Product (GDP) in 2009by-0.6%,followingtheparticularlysevereglobal contraction, 2010 was characterised by the generalised recovery of economic activity, at a worldwidelevel,reflected,bytheendoftheyear,bygrowthintheorderof5.0%.

With differentiated rates amongst regions, the evolution was due, above all, to the robustness of the growth of the emerging and developing marketeconomies,benefitingfromtherevivalof world trade, developments in commodity markets and the dynamics of internal demand. Especially noteworthy, in this context, are the Asian countries as well as those of Latin America and the Caribbean, in particular Brazil, whose economyisforecasttoexpandbyaround7.5%in 2010, being positioned as the economy with the fastest growth in the entire group of the emerging economies, at a worldwide level.

In turn, for the advanced economies as a whole, the economic recovery was modest, with a slowdown in the second half of the year due totheturbulenceinthefinancialmarkets,asaconsequence of the increase in sovereign risk, associatedtothesignificantgrowthinbudgetdeficitsandpublicdebt.

In response to the strong global demand and, also, due to the imbalances in supply, relative to certain consumer goods, prices, in particular, ofoil,whichfinallystabilisedin2010atavalueabove 80 USD/barrel, as well as non-energy commodities, increased considerably, to stand at the level of the historic maximums reached duringthefirsthalfof2008.

However, in view of some signs of economic recovery, albeit differentiated, the authorities have started removing stimuli from the economy, in accordance with the different regional dynamics, which varies between countries and depends on the robustness of the respective privatesectordemand,aswellasthefinancialconditions observed.

IntheUSA,afterastrongcontractioninthefirsthalf of 2009, economic growth has showed a

sharprecovery,whichfinallystoodat+2.8%by the end of 2010. Notwithstanding some evident pockets of vulnerability, in particular regarding the housing market, in deceleration after the end of some measures of stimulus, economic activity has been sustained by internal demand, with net exports continuing to show a negative contribution. Private consumption has shown a slight recovery, since mid-2009, but has remained weak, in view of the unfavourable context of thelabourmarketandfinancialsituationof families. The positive contribution of the variation of stocks has maintained a high level, and regarding investment (non-residential) there has been some buoyancy, stimulated by external demand, by the recovery of company profits and by the normalisation of the conditions of the financialmarkets.

In the Euro zone, the recovery registered since the third quarter of 2009 has been moderate, with GDP growth having stood at 1.8% in 2010, to a largeextentreflectingthedynamicsof the external component. However, the evolution of economic activity in the Euro zone was not homogenous between the respective countries, which present differentiated values.

Hence, in Germany economic activity has shown the strongest recovery, with the economy hav ing expanded by 3.6%,against a contraction of -4.7% in 2009,with beneficial effects having spread to the other countries of the Euro zone.


In France, economic activity is expected to be positive

in 2010, with an evolution of 1.6%, aftera contraction of -2.5% in

2009, reflecting a deceleration in the second half of the year, as the favourable effects of the incentives

to the economy disappear. In the United Kingdom, it is expected that GDP will have grown by 1.7%,

and in Italy, which having entered into a period of internationalfinancialandeconomic crisis, with weak

growth and competitive difficulties, it is expected

that the economy will have grownbyonly1%in2010.In turn, in Spain, the weak performance of the economy

over the year and which resulted inadeclineof-0.1%bytheendof 2010, contrasted with that of other countries of the Euro zone, showing the extent of the

economic crisis in this country, as well as the impact that the necessary reform process is having on its growth, in the short term.

Added to the uncertainties, regarding economic recovery, are the fears related to the sovereign credit risk

in some countries of the Euro zone, raising a new wave of turbulence in theinternationalfinancialmarkets.Thedifferentials of the interest rates of the public debt of the countries of the Euro

zone compared to Germany have expanded, and reached new maximum levels, in particular in Greece, Ireland and Portugal. As the sovereign riskcrisisintensified,theriskofitscontagionto other countries, institutional sectors and various market segments also increased. In this context, the monetary authorities announced various measures, amongst which budgetary consolidation plans on the part of the governments of the most affected countries, as well as the creation of an European stabilisation fund, to be activated in the case of necessity by countries of the EU with external funding difficulties,whichpermittedsomestabilityinthemarkets at the end of the year.

National Economic Climate

After the sharp decline registered in 2009, of -2.6%, the forecast for economic activity inPortugalpointstogrowthofaround1.3%in2010reflecting,ontheonehand,theimportantgrowth of exports, especially trade flows outside the European Community and, on the other hand, the strong buoyancy of private consumption, in particular the consumption of durables. However, it is expected that investment, of both components, private and public, has maintained its behaviour of contraction, reaching historic minimums, as a percentage of GDP.

However, the dynamics of recovery of economic activity show a pronounced deceleration in the finalpartoftheyear.Extendedtoallcomponentsof internal demand (with the exception of the variation of stocks), and especially of private consumption, this behaviour has beenareflection,namely,ofthereviewoftheexpectations of economic agents, following the measures announced for the State Budget for 2011, as well as the continued deterioration of the conditions in the labour market. In this context, it is important to note that employment continues to register consecutive declines, more than a year after the highest point of the

recession, as a consequence of the progressive decreaseintherateofjobcreationsince2007,aswellasthestrongincreaseintherateofjobdestruction since 2009.

The forecast for inflation stands at 1.4%, avalue close to the forecasts for the Euro zone, after the fall observed in 2009. In terms of correctionsofimbalances,thefinancingneedsof the Portuguese economy, measured by the combined deficit of the current and capital balances, as a percentage of GDP, declined in 2010, only slightly compared to the previous year, to 8.8%, reflecting reductions both interms of the rate of internal saving, currently at historically low levels, and in the investment rate, leading to an unsustainable situation, in view of the continuation of the constraint to the external financingoftheeconomy.

19911990

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Economy GDP Growth

World United States European Union


Theoverallpassengerloadfactor,benefitingfrom an efficient management of the capacity, finally stoodat77.9%,thatis,2.0p.p.higherthanthevaluerecorded in 2009. This behaviour was extensive to the different regions, albeit with differentiated expression, with there having been a slight deterioration, of -0.3 p.p., only in the connections between Europe and Sub-Saharan Africa.

At a worldwide level, 2010, as a whole, was a year of strong recovery in the passenger and cargo air transport markets,whichrecorded,respectively,growthof8.2%and20.6%, in termsof totalpassenger-kilometresand ton-kilometres. It is important to mention the high level of discipline observed in relation to the allocation of capacity, evident in the load factors, which reached78.4%and53.8%,ineachofthesesegments,reflectinggrowthof2.7p.p.and5.2p.p.,respectively.

Underlying this trend, it is important to note the expansionofpassenger traffic in the three largestregions – Asia-Pacific, Europe and North America –respectively,intheorderof9.0%,5.1%and7.4%.The region of the Middle East, based on the strong increase in the capacity of the airline companies of the Gulf, showed the highest rates of growth, with a value around17.8%,whileinLatinAmericaandAfrica,theevolutionstoodat8.2%and12.9%,respectively.

RegardingthefinancialperformanceoftheIndustry,the improved economic conditions, in spite of the European crisis, supporting strong market growth, combinedwith thegreaterefficiency in theuseofthe fleets, were determinant factors in the sharp turnaroundinprofitabilityobservedinalltheregions,with an estimated result, at an overall level, of approximately USD 16.0 billion.

Air Transport

After the largest decrease of demand in the history of commercial aviation in 2009, the year of 2010 was characterised by the return of air traffictopreviousprofilesofbehaviour,withthereuptake of air travel, as well as trade relations

between the different regions of the world. Hence, for the airline companies, at the end of the year

the volumes stood at slightly above those recorded at the beginning of 2008, although the industry's

margins have remained at levels considered fragile, strongly constrained by the permanence of structural

challenges for the sector.

In particular, the airline companies transported approximately344millionpassengers,2.7%morethan

in 2009, with this increase having represented about 9 million passengers transported. In terms of the Industry’s

conventional unit of measurement (passenger-kilometres), according to the AEA (Association of European Airlines), this increase represented 2.6%. All the main regionspresented positive evolutions, with increases in numbers of passenger-kilometres,reaching2.7%inEurope,5.9%intheMid-Atlanticand6.2%intheSouthAtlantic.Likewise,thetrafficflowsbetweenEuropeandSub-SaharanAfricaandtheFarEastincreasedbyapproximately2.4%and2.6%,respectively.

The North Atlantic showed the weakest performance in 2010, with the traffic level standingatonly0.3%above the value

recorded in 2009.

However, these values were significantly affected by various external impacts, in particular the closure of the air space related

to the volcanic eruptions in Iceland in April and May, as well as by the disruptions in the airports, considered unprecedented, caused by

the snowfall in November and December. Also noteworthy, affecting theflightoperations,wasthefrequencyandintensityoftheindustrial

action, in response to the austerity measures related to the recession and its respective impact, especially, in the Euro zone. Hence, in Europe, during thefirsthalfoftheyear,itwasnotpossibletorestorethetrafficlosseswhich occurred in 2009, with the subsequent recovery remaining very weak

during the rest of the year.


Main developments in 2010

Network Strategy

The logic of the Network operation was continued, focused on the consolidation of its connections with the South Atlantic and expansion of the operation to Africa. In the development of this line and as a result of the implementation of a strategy of systematic assessment of opportunities to launch new routes, TAP expanded its Network, with regular operations to Algiers and Marrakech, with these operations currently involving access to ten cities in eight countries, and a total of 55weeklyflightsbetweenPortugalandtheregionofAfrica.Likewise, with a view to meeting the increased demand in Brazil, in July the operation was started to the Airport of Viracopos, in Campinas, in the State of São Paulo.

Strengthening of the sales performance

The Network operation remained centred on a hub logic, with an aggressive effort having been made to stimulate demand. Of particular note, as a result, was the increase ofapproximately11.7%,comparedtothepreviousyear,inconnectiontraffic,withtheairtrafficrevenuederivedfromforeignmarketshavingrepresented77%ofthetotalvolumein 2010, thus strengthening TAP's position as amajornational exporter. This was also the case on the Internet, followingtheincreaseof28.4%intheactivityofbookingthrough the site, there was a strengthening of sales, which alreadyrepresent9%ofthetotalvalueofthemarkets.

Likewise, the effort which has been made in the area ofcustomerloyaltyhasledtoasignificantincrease,ofapproximately12.2%,inthenumberofmembersoftheVictoria programme.

Systematic cost-cutting effort

The application of a strategy of continued growth in the offer of destinations and volume of services, whenever possible reducing the labour force, has enabled the achievement of notableefficiencygainsandthedilutionoffixedcosts,inorderto maintain a competitive position in the market. On the other hand, incisive action has been pursued on all possible costs, with the implementation of a suitable cost-cutting programme whichincludedadiversifiedseriesofmeasures,tobeenforceduntil 2012. Under this programme, developed exclusively with the Company's resources, strongly aimed at improved performance, and with transversal effects on all the companies of Grup TAP, 132 projectswereidentifiedin2010.Alsointhiscontext,followingthe Law of the State Budget for 2011 (Law number 55-A/2010, of 31 December) and Resolution of the Council of Ministers number 1/2011, of 4 January, relative to the creation of conditions to enable overcoming the situation of imbalance of public accounts, it should be noted that the Company will fully apply the abovementioned legal provisions, involving the achievement of decreased operating costs, by aminimumvalueof15%,beinganeffectivereductionof5%inoverallcosts related to gross total remunerations.

With the objective of re-establishing the Company's profitability, the TAP Plan for the three year period 2009-2012 is based on the consolidation of its strategy in a context of limited growth, as well as on the optimisation and increased flexibility of its organisational structure and costs, creating the bases for the Company's future sustainability.

Strategy

Main commitments of the Company within the Plan's time horizonNetwork Strategy i) Maintain the Network logic and strategy, tactically reducing capacity and seeking new market niches;

Strengthening of the sales performance

ii) Launchanaggressiveefforttostimulatedemand,promotingconnectiontrafficfromforeignmarkets,reinforcing Internet sales and promoting the loyalty of its customers in the home market;

Systematic cost-cutting effort iii) Actincisivelyonallpossiblecosts,promotingefficiencygainswhileatthesametimemaintainingthecurrent work environment;

Redefinition of the participated companies

iv) Implementtheprocessofredefinitionoftheshareholdingstructure,concludingthedivestitureofGroundforce and maintaining the sale/partnership effort with TAP–Maintenance and Engineering Brazil;

Organisational transformation v) Re-launch the organisational transformation programme, developing the organisation and its resources, in order to ensure the future sustainability of the company;

Capital structure and risk management

vi) Prepare the Company to face business uncertainties, increasing its cash position and intensifying the hedging programme for the main risks;

vii) Maintain the debt reduction strategy, particularly during the low growth period of the operation.


carried out, note should be made of the constitution, under TAP's Executive Board of Directors, of a Maintenance and Engineering Coordination Committee (CCME), entrusted with the mission of supervising the activity of its two units, locatedinsignificantlydistantgeographicalareas.Also,regarding the Management and Supervisory Committee, whosemainobjectives include,amongstothersrelatedto the fluidity of communication, the fosteringof theappearance of new initiatives for improvements, as well as ensuringgreaterdebateontheCompany'skeyprojects,in2010, new initiatives were presented, which was the case of business opportunities, issues related to organisational dynamics and institutional communication.

In the area of the implementation of the commitments towards corporate sustainability, actions were pursued with a view to the progressive expansion of its respective applicability to all the companies of the Group, with the Corporate Governance and Sustainability Report for 2010 presenting the information relative to this entire group of companies, with the exception of TAP– Maintenance and Engineering Brazil.

Capital structure and risk management

Regarding riskmanagement, the area of the financialrisk of TAP SGPS, as the Company responsible for the strategic coordination of TAP Group, takes on dimensions and implications which are much broader than those of thefinancialmanagementappliedtoacompanywhoseactivityislimitedtoaspecificareaofactivity.Initsstatutorycapacity as the Parent Company of the Group, TAP SGPS assesses,reflectsanddecidesonthemajorguidelinesofits participated companies and takes long term decisions relative to investment and divestment in shareholdings according to their structural relevance for the functioning of the Group as a whole.

The debt repayment plan has continued, in accordance with the established maturity, where the Company has shown sufficientcapacity,usingitsownfunds,torepayitsdebt.

Redefinition of the participated companies

Regarding the shareholding structure, for TAP–Maintenance and Engineering Brazil, 2010 represents the end of a cycle of three years of preparation of the economic viability of the company, which, as a strategic investment, has been characterised by a notably negative component of the Group's balance sheet. Following the process of full transformation, conducted by TAP–Maintenance and Engineering Portugal, involving investment and reorganisation in terms of human capital, business and markets in which the company currently operates, combined with new aggressiveness, its recent performance and the consolidation of its strong strategic positioning has enabled placing the company in a more favourable situation.

Regarding Groundforce, as a result of the transversal application of the cost-cutting process and improved performance of all the companies of the Group, the activity of the company in Faro has been closed. In compliance with the provisions of the Competition Authority, TAP is pursuing an effort to dispose of the control of the share capital of SPdH, a position which it was forced to reacquire, with the corresponding shares having been handed over to an independent entity, Europartners, which plays an active role in the undertaking of AdC's decisions, managing the company SPdH independently from TAP.

Organisational transformation

The organisational transformation programme, in the organisational model component, the management model of TAP–Maintenance and Engineering was altered. With the objective of promoting closer and morefocused supervision of the Maintenance and Engineering operations in both Portugal and Brazil, the management model of TAP–Maintenance and Engineering was readjusted in 2010.Included in the alterations which were


The return of air traffic to previous profiles of behaviour, albeit with significantly differentiated expression in the different regions of the world

For the Air Transport Industry, after the greatest decrease of demand in the history of commercial aviation in 2009, the year of 2010 was characterised by the return of air traffic to previous profiles of behaviour, albeit withsignificantlydifferentiatedexpression in thedifferentregions of the world. In particular was the case of Europe where, in addition to a slow economic recovery, various external impacts interfered with the normal development of the flight operation, constituting factors which negatively affected the performance of commercial aviation in the region. Particular note should be made of the closure of the air space related to the volcanic eruptions in Iceland, the unprecedented disruptions in the airports caused by meteorological factors, the fall intrafficfollowingthecatastropheinMadeiraaswellas the frequency and intensity of the industrial action in response to the austerity measures, related to the economic recession.

Similarly affected by the economic scenario described above, TAP, S.A. ended the financial year of 2010 with a net income of EUR 62.3 million, corresponding

to EUR 2.3 million above that achieved in 2009. This result was the consequence of the notable performance in the operating sphere, which achieved EUR 103.3 million, that is, EUR 5.5 million more than in 2009, where fuel costs increasedby45.8%,with this evolutionrepresenting EUR 164.3 million, of which EUR 141.6 million are attributable to the price effect.

The Air Transport activity generated a total of EUR 1,986.3 million, that is, EUR 218.5 million more than in2009,with this valuehavingbeen significantlyinfluencedby thebehaviourofpassenger income,which reached a total of EUR 1,842.9 million, that is, 11.8%morethanthevaluerecordedinthepreviousyear, as a consequence of increased demand, of the order of13.6%,expressedinpassenger-kilometres(RPKs).Alsocontributing to these results was the income associated to the volume of Cargo and Post transported which reached atotalofEUR124.9million,27.2%morethanin2009.

Performance of TAP Group Companies

TAP, S.A.

€ 2,122.9millionSales and Services Rendered of Air Transport and of Maintenance and Engineering Portugal

91.5%of the Group’s Turnover

€ 62.3millionNet Income of TAP, S.A.


In turn, the aeronautical maintenance activity of TAP–Maintenance and Engineering Portugal, in the Third Party

Customersegment showed a significant performance, with a total of EUR 126.5

million, corresponding to an increase of 11.7% relative to 2009, reflecting theimprovedefficiencyofthesalesprocessaswellas increased number of units submitted for

intervention.

It should be noted in particular that, in the presence of a fuel scenario, once again on an

upward price trend, these results were possible only due to the combined effect of greater rigour in cost management, the permanent increase in

productivity levels, the adoption of the best practices andprocess simplification,and the intensification

of aggressive sales policies. Also noteworthy was the impact of incisive action on all costs possible, with the

implementation of a suitable cost-cutting programme whichincludedadiversifiedseriesofmeasures,tobe

enforced until 2012.

Growing importance of the Lisbon hub in the connection with Europe to an increasing number of destinations located in Africa and in the South Atlantic

Regarding the Air Transport business, note should be made of the growing importance of the role of the Lisbon hub, with particular focus having been placed on the preservation ofitsefficiencyandqualityoftheserviceprovidedtotheCustomer.

In this context, it is important to highlight the impact of the participation of TAP in the STAR Alliance global multi-hubsystem,whichhaspermittedbenefitingfromtheincomingtrafficprovidedbytheothermembers.Itshouldbenotedthat,fiveyearsafterTAP'sintegrationinthisglobalAlliance, with this participation considered a reinforcement by the actual Alliance, the Company has pursued the implementation of its niche strategy, connecting Europe to a growing number of destinations situated in Africa and in the South Atlantic, where it is distinguished as the leading European carrier to Brazil.

Bytheendoftheyear,thejointfleetofTAP+PGAcomprised71airplanes,makingitpossiblefortheCompanytofulfilitsstrategy to respond more fully and better to the expectations of its Customers, while seeking to optimise all its business opportunities. The Company transported a total of 9,089 thousand passengers, corresponding to 651 thousand more than in 2009, with increases having been recorded in most sectors of the network, with the exception of Mainland

In the context of the Portuguese economy, the importance of TAP continued its consolidation, which was reflected in different areas

ρ The expression of the vol-ume of employment created in the Country;

ρ The significance of its contribution to the volume of national exports;

ρ The impact on national tourism, with a significant volume of traf-fic to Portugal, throughout its entire opera-tion network.

Main Indicators of TAP, S.A. 2010EUR million

2009EUR million

var.

Operating Revenues and Gains 2,180.7 1,958.1 11.4%Operating Costs and Losses 1,953.4 1,734.4 12.6%Operating Net Income 103.3 97.8 5.6%Net Income 62.3 60.0 3.8%

Total Assets 1,876.0 1,823.9 2.9%Total Equity 52.7 (3.6) 1583.2%

Active Staff (31 December)* 7,055 6,986 69Air Transport 4,582 4,489 93Maintenance and Engineering 1,942 1,961 -19TAP Serviços 496 498 -2Other 35 38 -3

TAPfleetcomposition(average) 55.4 54.4 1.8%Flight Hours (Sched. oper. using own aircraft) 229,703 221,472 3.7%Departurepunctualityupto15'(%) 71.2 79.9 -8.7 p.p.Regularity(%) 98.0 98.7 -0.8 p.p.

* Not including non-placed and non-active staff


Portugal, the Autonomous Regions and the Middle Atlantic.In this context, it is important to note the effect of the operation of new markets, whose behaviour proved to be decisive to compensate the decline which took place in the traditional European markets, strongly affected by the environment of crisis, as well as the reduction in the number of passengers, and increase in competition. Likewise, note should be made of the significanceofthegrowthinAfrica,followingtheopeningofnew routes, as well as the behaviour of the more traditional destinations. With a determinant impact on the achievement of the results, note should be made, moreover, of the operation toBrazil,where,asaresultofthegrowthofapproximately26%(inRPKs),theoperationnowrepresents42.2%oftheentirenetwork.

At the end of the year an announcement was made of the expansion of the operation network, in 2011, with the opening of six new destinations in Europe (Dusseldorf, Athens, Bordeaux, Manchester, Vienna and Dubrovnik), of Bamako (Mali), of Accra (Ghana) and S. Vicente (Cape Verde) on the African continent, of Miami in the USA and Porto Alegre in Brazil.

Service quality – a permanent objective

Likewise, since the improvement of the quality of Customer service is a priority and permanentobjective, it is importanttomention,amongstotherinitiatives,thecontinued offer of the Branded Products concept, and also the differentiation of the Ground Service, in all of the airports of the Company's Network, as well as TAP's Personalised Assistance service, offering greater comfort and speed during boarding and landing phases.

Strengthening of TAP's contributions to national exports and to the Country's Tourism

On the other hand, the Company has strengthened the position of its contribution to the volume of national exports, with it being especially noteworthy that, in 2010, TAP achieved total sales and services rendered on markets abroad of EUR 1,782.8 million, thatis,EUR261.8million,representing17.2%morethanin2009.Alsonoteworthywasthecontributiontonationaltourism,withthesignificantexpressionofthetraffictoPortugal, of its entire operating network.


€ 1,986.3millionAir Transport Sales and Services Rendered


4,582Air Transport Staff(31st December)

The mission of TAP Air Transport is to develop busi-ness as an international airline, ensuring that it is the best option for those using passenger and cargo air transport services, one of the best companies to work for and one provi-ding its investors with appropriate levels of return.


2009 2010

1,7681,986

+12.4%

Air Transport Revenues – Sales and Services RenderedEUR million

Traffic Growth (RPK) in TAP and in AEA companiesEvolution since 2000

MarJan

0%

50%

100%

150%

200%

May Jul Sep Nov

TAP AEA

MarJan

0%50%

100%150%200%250%300%350%400%450%500%

May Jul Sep Nov

South Atlantic – TAP Europe – TAP

Africa – TAPSouth Atlantic – AEA

Europe – AEA

At the level of the Industry, during the first part of the year, it was not possible to recover the losses in traffic of 2009, and, when, in the second half of the year, economic growth was re-established, the recovery remained at significantly low levels, with the companies of the AEA (Association of European Airlines) having recorded growth in the order of 2.6%.

Air Transport

Growth in the Air Transport Activity

To TAP, in spite of the continued recessive environmentofthefirstmonthsoftheyear,added to the fact that the operation was strongly affected, during the months of April and May, by the closing of almost all European airports due to the cloud of volcanic ash from Iceland, the growth in demand proved to be significantlyhigherthantheaverageidentifiedforthesector,standingatapproximately13.6%,expressed in passenger-kilometres (RPK).

Strict compliance with an aggressive commercial policy enabled TAP to achieve, by the end of 2010, total sales and services rendered of EUR 1,986.3 million in its Air Transport activity, a value which represents an increaseof12.4%relativetothepreviousyear.

The air transport business, the main activity of TAP Group, represented, in 2010, 86% of the Company's total turnover.


Main aspects of the commercial policy During 2010, the Company maintained its path towards continuous striving for the strengthening of product quality and search for the most appropriate solutions for Passenger travel, aimed at growing Customer satisfaction and constant differentiation in relation to the competition. In the development of this policy, special attention was given to the following aspects:

Strengthening of TAP's presence in Brazil and Africa and the adjustment of schedules

After the decline of the world economy and trade flows in 2009, with strong reflection on traffic volumes, the recovery showed strong regional differences, in particular Europe where the rate of recovery has been low.

In view of the signs of some dynamics of recovery, the Company continued with prudent optimism, and developed its strategy maintaining the strict and effectivemanagementofequipmentandresourcesasitsprincipalobjective.

Note should be made, in this context, of the continued application, until the month of June, of the Contingency Plan, in activity since the Summer period of 2009, and implemented with a view to promoting a rational adaptation of the offer to the decline in levels of demand, following the intensification of the international economic and financial crisis. As of the month of June, the operation developed with the restoration of the cancelled operation, with the exception of a lesser number of routes in Europe.

The logic of the operation was continued, with the maintenance of the importance of the strengthening of the role of Lisbon airport, as the main operating centre, in a hub logic, ensuring service to the connection traffic. Complementarily, the Porto hub operation was maintained, as the 2nd operational hub, in order to meet the volume of traffic from the north of the Country.

In the development of this route, the operation focused on the consolidation of the connections with the South Atlantic and expansion of the operation to Africa, with the Company having sought to optimise all present business opportunities, namely, the promotion of the launch of operations to new destinations.

For this purpose, note should be made, of the strengthening of the strategy of growth regarding Africa, with the expansion of the network, in June, of regular operations to Algiers. Also in June, the route to Marrakech was initiated, with the operations in this region currently involving a network of ten cities in eight countries, and a total of 55 weekly flights between Portugal and this continent. Likewise, with a view to meeting the increased demand in Brazil, in July the operation was started to the Airport of Viracopos, in Campinas, in the State of São Paulo. With this operation, a total of 70 weekly flights was reached, for the group of nine destinations served in that Country, with TAP, once again, reaffirming its position as the leading airline company in Brazil. It is also important to note the increased connections between Portugal and Spain, one of the main economic partners of Portugal, consolidating a positioning as the principal company linking the Iberian Peninsula.

Intensification of Customer relations – VICTORIA Programme

The platform of the customer loyalty programme enables Victoria members

to consult and manage their account, and also provides a Miles Shop, where members may purchase, extend and transfer their miles, with new functionalities being under

development which should be concluded in 2011. At the same time, the effort has been intensified in the Micro, Small and Medium-sized

Enterprise segment, which has been provided, since March 2010, with a new online platform at [ www.tapcorporate.com ], where it is possible

to access the tap | corporate Fly customer loyalty programme, manage and consult the respective accounts, and also request the issue of bonus or

learn about the latest TAP novelties.

Online booking engines for bonus tickets are currently under development, encouraging the use of this means, as the preferred channel for contact with TAP. It should be noted that 2010 also represented a year ofconsolidationfortwoimportantprojects,theCarbonCompensation Programme and a personalised search tool, Power Choice.

Embark on Freedom of Choice commercial model. 1 Flight, 5 ways to travel

In 2010, TAP continued to offer the model launched in June 2008, corresponding to a new commercial strategy, founded on product segmentation, offering greater flexibility and variety of choice, and based on quality and price differentiation, in

accordance with the motivation of each Customer.

The five new products created: tap | executive, tap | plus, tap | classic, tap | basic and tap | discount offer the passenger the choice between five ways to travel and five classes of service: one executive class and four economy classes, with the underlying concept being

in line with current market trends. The new products on offer are applied on all TAP flights, with the exception of tap | discount, which is available only for medium haul-flights.

http://www.tapcorporate.com

Differentiation by the quality of the service provided, also, in the Ground Service

In an effort to consolidate the strategy of service differentiation, TAP pursued, in 2010, theofferofadiversifiedrangeofservices,forCustomers who value greater comfort and convenience in their travel, in addition to better service:

Premium Customer Centre at Lisbon Airport

An area offering passengers faster and more efficient service prior to boarding, providing differentiated check-in, as well as the possibility to dealwithanyissuerelatedtothejourney,availableto Executive Class Customers or holders of Victoria Programme Gold cards and TAP Corporate cards.

Offer of Green Way to Premium Customers

Priority security control and X-ray treatment, facilitating and ensuring faster access to the departure lounge. This TAP Fast Track service, which uses the Green Way concept, complements the service improvement introduced with the creation of the Premium Centre, and is available at Lisbon, Porto, Faro and Funchal.

Premium Boarding

Access to the exclusive area at the boarding gate, offering the possibility of boarding at the desired time and, for long-haul flights, transport on exclusive buses to the plane (when the boarding is notcarriedoutbyjetway),withthisfunctionbeingprovided in order to achieve a differentiated service in all phases of customer service at Lisbon Airport.

TAP Personalised Assistance

Attendance, with guaranteed excellent and personalised service, aimed at meeting the different needs of Customers, at Lisbon, Porto and Funchal Airports, for the purpose of optimising the ground services before and after boarding. The booking process is carried out exclusively on the web at [ www.flytap.com ], through an intuitive form.

Offer of car parking

Facility available at Lisbon, Porto, Faro and Funchal, for up to two days, to Premium, Executive class, Victoria Programme Gold Card, TAP Corporate or TAP Amex Platinum Customers.

ValetXpress

Personalised parking system available, also, for Premium Customers, at departures, in Lisbon and Porto, with a welcome service and the offer of valet parking, in the exclusive area of ValetXpress.

Lower marketing costs

Following the general trend in the Air Transport Industry, TAP has continued with its policy of reducing marketing costs.

Project of Change to a new price and space management paradigm

With the objective of increasing theCompany's revenue, through a more dynamic management of prices and space, reacting coherently to no-frills companies, TAP pursued readjustments to theproject'soperations in2010. Of particular note was the alteration of the management logic, relative to the optimisation of the Company's inventory, which is now directed towards maximisation at the segment level.

Innovation and Simplification of business

In the development of a business innovation and simplification strategy, for the purpose of reducing complexity along the service chain and creating more convenient conditions for Customers, the implementation of several initiatives was continued.

Of importance, in this context, was the implementation of the Common IT Platform, resulting from the participation of TAP in thisSTARAllianceproject,consistingoftheuse of a common platform for the Booking, Ticketing, Inventory and Departure Control system. Compared to the previous system used

by the Company, the new platform is more flexible in response to market dynamics and to the growing needs faced by the aviation business. In this way, it enables swiftness in the implementation of projects which arecommon to the partners of the STAR Alliance, synergies scale, cost reduction and significant improvements in business operations.

Of note, in this context, amongst others, is the implementation of two new systems, the Web Check-in and the Self-service Check-in, which have allowed for the provision of new facilities for TAP Customers, in particular, the facilities for groups Check-in.

Improved ground services –In-flightReadingCounter,inPorto

Strengthening of the reading counter service for TAP passengers boarding at Porto.

Promotion of National Tourism

Through the establishment of partnerships with bodies in Portugal, various tourism-related entities and companies were supported and promoted by TAP in 2010 which, through advantageous offers to its Customers, acted as an important entity in promoting national Tourism.

Also noteworthy, was the recognition of the role of TAP's in-flight magazine, UP, which is theonlymajorPortuguesemagazine,editedin Portuguese and English, and a pioneer in its provision in iPAD format.

In 2010, the magazine UP became the first CarbonoZero® in-flight magazine of the world, and is also the first monthly publication in Portugal to compensate for the greenhouse gas emissions associated with its production and printing, thus providing continuity to TAP's sustainability policy

Strategic commercial partnerships

Various strategic commercial partnerships were pursued in 2010, particularly, in addition to the existing partnership with Avis, the expansion to new markets, in the context of the website [ www.flytap.com ], he online insurance service, through Mondial Assistance, as well as the implementation of the hotel booking service, Booking.com.




Medium-haul network

Medium-haul traffic represented, in 2010, 40.3%, of the total Route Network, when expressed in passenger kil-ometres (RPKs), representing a decrease of 2.8 p.p. relative to 2009.

ρ In the Autonomous Regions the strict analysis of the operation led to the suspension of flights, affecting operations with lower passenger load factors, following the decline in traf-fic which occurred in particular to the Autonomous Region of Madeira, after the natural catastrophe which devas-tated the region. Likewise, an identical procedure was also implemented in the Azores, due to the contraction experi-enced in demand, as a consequence of the current economic crisis. Thus, the offer for this sector of the network decreasedby2.2%,withdemandhav-ing fallen, significantly (-6.8%),withthe overall passenger load factor hav-ing declined by 3.3 p.p., to 64.7%.The Autonomous Regions recorded a weightof4.6%,thatis,1p.p.lessthanin 2009.

ρ In Europe in a general manner, and during the periods of lower demand, the night-stop operations were can-celled or significantly reduced, due to their high cost, and also because, at the same time, alterations were made to the long-haul operation (see the long-haul network). This region, rep-resenting 35.1% of total demand,is the 2nd most important sector in TAP's network. However, also taking into account the demand of Mainland Portugal and the Autonomous Regions, the European region accounted for 40.3%oftheCompany'stotaldemandin 2010. The increased supply in this sectorofthenetwork,ofaround2.8%,was lower than the increase in demand, whichfinallystoodat8.4%.Asacon-sequence, the overall passenger load factor increased by 3.5 p.p. to stand at68.1%.

Route Network

In the Company's Route Network, in 2010 TAP pursued its strategy of providing an offer ofqualityservices,adjustedtoitsCustomer'sneeds, aimed at meeting their expectations.

For the entire network, the level of supply of the regular operation increa-sed by approximately 4.4%, relative to an increase in demand of 13.6%. As a consequence, the passenger load fac-tor increased by 6 p.p. to 74.5%. The total number of passengers transpor-ted reached 9.1 million (+7.7%), with passenger income having come to a total of EUR 1,842.8, corresponding to an increase of 11.8% relative to 2009.

During the operation, over 100 thousand services were provided. Furthermore, it should be noted that the Company was present in over 103 thousand flights operated by other companies under code-sharing agreements, thus increasing by47.3%relativeto2009.TheCompanyflew approximately 230 thousand hours with its own aircraft and approximately 51 thousand hours with Portugália air-craft,reachingatotalof3.6%morethanin 2009. The number of kilometres covered corresponded to 164.7 and 28.0 million, respectively.

Carried PassengersScheduled Flights

Traffic (RPKs)by Route Network SectorScheduled flights

Million passengers

Capacity, Trafficand Load FactorPassenger-Km and %

Thousand million

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

9.18.48.7

7.86.9

6.46.25.65.35.4

2000

5.3

ASKs RPKs Load Factor

Madeira and the Azores4.6%

Europe35.1%

Africa11.3%

NorthAtlantic4.0%

MidAtlantic2.2%

SouthAtlantic42.2%

MainlandPortugal0.6%

0

5

10

15

20

25

30

60%

65%

70%

75%35

20042003200220012000 2005 2006 2007 2008 2009 2010


ρ In view of the reduction of the offer attributed to the Mainland Portugal networksector,intheorderof2.5%,and since demand increased slightly by 0.4%,therewasanincreaseintheover-all passenger load factor of 1.6 p.p.. The representativeness of this network sec-torfellto0.6%.

Improved in-flight service

Launch of a new service – Express Moment –, which provides light meals, at board-ing time, during domestic flights of short duration. The application of this modern concept, corresponding to new market trends, which values the components of convenience of schedules, flexibility, sim-plicity and price, as well as speed and fluidity of attendance, is in line with the practice followed by international companies in shorter flights, in the context of an increas-ingly more competitive industry, where TAP continues to offer the best product in the market, along these lines.

Long-haul network

Long-haul traffic accounted for 59.7% of the total Route Network in 2010, repre-senting 2.8 p.p. more than in the previous year, as a consequence of the expansion of the Company's operation in the South Atlantic region.

ρ In Africa, 3 weekly flights between Lisbon and Algiers were launched in June, for the purpose of serving the business traffic between these two countries.

AlsoinJune,theLisbon-Marrakechoperationwasinitiated,with3weeklyflights,as a form of diversifying the operation and offering a greater range of options in Morocco.

Demandincreasedby7.6%,whiletheoperationincreasedby1.7%,thusena-bling an increase in the operation's passenger load factor of 3.9 p.p.. The representativenessoftheregion,intheentirenetwork,stoodat11.3%or0.6p.p. less than in 2009.

ρ Demand aimed at the North Atlantic sector of the network increased sharply,byaround10.5%,whiletheofferfellby5.4%,whichenabledincreasingthepassengerloadfactorbyapproximately11.5p.p.,to80.2%.The weight of this traffic in the total network dropped very slightly in rela-tionto2009,standingat4.0%.

ρ In the Mid Atlantic,demandfellby12.1%,enablingareductionoftheofferby15.4%,toincreasethepassengerloadfactorbyapproximately2.6p.p.,tostandat68.8%.Itsrepresentativeness,inthetotalnetwork,fellby0.6p.p.,tostandat2.2%.

ρ In the South Atlantic region, the flight schedules to Brazil were altered during the periods of lower demand.

Also, as a means of cost reduction and, at the same time, in order to boost connections, the departures to Rio de Janeiro, Sao Paulo and Brasilia were altered from the morning to the evening (from 9h00 in the morning to 23h00). This alteration enabled the cancellation ofnight-stopflightsfromEurope,whilemaintaining,however,all the Europe/Brazil/Europe connections. In July, 3 weekly flightswerealso launchedbetweenLisbonandViracopos (Campinas), as an alternative airport to Guarulhos, and which presents a lower level of congestion.

Theincreasedsupplyforthisregion,ofaround11.0%,waslowerthantheincreaseindemand,whichfinallystoodat26.1%.Asaconsequence,overallpassengerloadfactorincreasedby9.9percentagepointsto83.4%.

Reinforcement of the leading position in Brazil

The South Atlantic was the most representative sector of theroutenetwork,reaching42.2%,4.2p.p.morethanin2009, hence continuing to exceed the size of the Europe network sector.


Collaboration with partner companies

On the other hand, efforts were made to intensify the code-sharing agreements with partners in thecontext of the STAR Alliance and non-aligned, with the good collaboration between TAP and its strategic commercial code-sharing partners being particularly noteworthy. The follow-ing outline the main developments reflecting the changes made, namely:

Regarding LOT (LO), the existing agreement was strengthened with the introduction of seven domestic destinations in Poland, operated by the Polish carrier. With the Spanish carrier, SPANAIR (JK), the agreement was also strengthened through the expansion of East European points, served by JK, from Madrid or Barcelona. Also noteworthy was the maintenance of the code-sharing agreement with the ALITALIA GROUP (which acquired AIR ONE, a former partner of TAP). This permitted strengthening the flights and destina-tions inside Italy with the TP code (14 cities), operated with aircraft of the Italian carrier. It is important to mention the continued intensification of the cooperation with the national partner, SATA INTERNACIONAL (S4), through its continued expansion of routes between the Autonomous Regions and Europe and North America.

The intensification of the relationship with STAR Alliance member companies con-tinued, in particular with the signing of the code-sharing agreements with AIR CHINA (CA) and CONTINENTAL AIRLINES (CO). Through the agreement with the Chinese partner, TAP now offers, with its own code, Peking and Shanghai, in AIR CHINA aircraft, from Europe. With the North American partner, CONTINENTAL, TAP now places its code on flights between Portugal and the United States, as well as to 20 destinations inside the USA and to Mexico City, via Newark/New York, in CO aircraft. In addition to this fact, it is also important to mention the expansion of the code-sharing with TAM, through the growth in the number of shared code destinations in Brazil. Note should also be made of the increased connections with the Egyptian carrier EGYPTAIR (MS), between Portugal and various cities in Egypt, via points in Europe, operated by MS.

In Canada, TAP now offers Vancouver with its own code, with this city cur-rently being an integral part of the code-sharing with AIR CANADA (AC).

Change on previous yearRegion Traffic Volume

(Thousand Passengers)Capacity

(ASKs)Traffic(RPKs)

Load Factor

Mainland Portugal 590 -2.5% 0.4% 54.8%Madeira and the Azores 947 -2.2% -6.8% 64.7%Europe 5,267 2.8% 8.4% 68.1%Africa 603 1.7% 7.6% 71.9%North Atlantic 175 -5.4% 10.5% 80.2%Mid Atlantic 80 -15.4% -12.1% 68.8%South Atlantic 1,427 11.0% 26.1% 83.4%TOTAL 9,089 4.4% 13.6% 74.5%


PORTUGAL

Mainland PortugalBrussels Airlines, Continental Airlines (since October), Egyptair, Lufthansa, Sata International, Swiss, TACV, Turkish Airlines, Ukraine International, US Airways

Madeira and the Azores Austrian Airlines, Sata International

EUROPEAustria Austrian Airlines, Brussels Airlines

BelgiumAustrian Airlines, Brussels Airlines, LOT–Polish Airlines, Ukraine International (until March and from October), United Airlines

Bulgaria Lufthansa

Croatia Croatia Airlines, Lufthansa

Czech Republic Lufthansa

Denmark Lufthansa, Sata International

Estonia LOT–Polish Airlines (since October)

Finland Lufthansa

France Aegean Airlines, Brussels Airlines, LOT–Polish Airlines (until March), Sata International

GermanyAegean Airlines, Air China (since August), Austrian Airlines, Brussels Airlines, Croatia Airlines, LOT – Polish Airlines, Lufthansa, Sata International, Thai Airways, United Airlines, US Airways

Greece Aegean Airlines, Lufthansa, Swiss

Hungary Lufthansa

Ireland British Midland, Sata International

ItalyAegean Airlines, Air China (since August), Alitalia (since September), Austrian Airlines, Croatia Airlines, Egyptair (since August), LOT–Polish Airlines

Latvia LOT–Polish Airlines (since October)

Lithuania LOT–Polish Airlines (since October)

Netherlands LOT–Polish Airlines, Sata International (from March to October), United Airlines

Norway Lufthansa, Sata International (from March to October)

Poland LOT–Polish Airlines

Romania Lufthansa

Serbia Spanair (since October)

Slovakia LOT–Polish Airlines (since October)

SpainAegean Airlines, Air Canada (from March to October), Air China (since August), Austrian Airlines, Croatia Airlines (from March to October), Sata International (since March), Spanair, Thai Airways

Sweden Brussels Airlines, Lufthansa, Sata International

SwitzerlandAustrian Airlines, Croatia Airlines, LOT–Polish Airlines, Sata International, Swiss, Thai Airways, Ukraine International, United Airlines

Turkey Turkish Airlines

Ukraine Ukraine International

United Kingdom Air Canada, British Midland, Brussels Airlines, Lufthansa, Sata International, United Airlines

AFRICACape Verde TACVEgypt Egyptair

South Africa South African Airways

NORTH ATLANTICCanada Air Canada, Sata International (since March)USA Air Canada, Continental Airlines (since October), Sata International, United Airlines, US Airways

SOUTH ATLANTICBrazil TAM

EASTChina Air China (since August)Hong Kong LufthansaSingapore LufthansaThailand Thai Airways

* Code-sharing operation

Cooperation and Partnership Agreements* 2010


Carried TonnesBy Route Network Sector

Madeiraand the Azores5%

Europe31%

Africa13%

NorthAtlantic8%

MidAtlantic2%

SouthAtlantic37%

MainlandPortugal4%

noteworthy was the creation of a cargo flight charter service to transport cargo of high weight and volume, through exclusive air freight flights, in an initiative to respond to Customer logistics requirements. This type of operation, where the destinations of Angola, Senegal and Venezuela were the most frequent, expands the regular operation through exclusive air freight flights, which already existed between Germany and Portugal.

By continuously investing in the quality of its modern fleet and respective technically equipped holds, TAP continues to guaran-tee quality in the transport of perishable cargo and live animals, in accordance with the requirements of passengers and institu-tions dedicated to animal life

Particular note should be made of the improved operationality of the New Cargo Terminal at Lisbon Airport, as a decisive factor towards the notable increase which has occurred in the quality of the service provided to Customers, both in the area of Exports and Imports. Also regarding the quality of the service, note should be made of the close contact that the Company has maintained with IATA, whose recommendations it follows rigorously, participating in the e-freight,project.Currently, TAP–Cargo participates in important newITprojects,namelyinthecontextofthenewcustoms requirements, as well as the ICS (Import Customs System), ECS (Export Customs System) and SDS (Summary Declarations Systems).

Finally, it is important to highlight the signing, in 2010, of the contract for the installation of the new Bookings and Revenue Management sys-tem, as an investment aimed at improving the quality and profitability of the business, as well as ensuring a suitable response to the IT challenges for the sector.

Cargo

During 2010, TAP experienced a rapid and consistent recovery of business in air cargo, with the volume of cargo and mail trans-ported by TAP–Cargo having reached, this year, a new historic maximum

This fact was mainly due to an offer of quality logistics of transport in the in the Europe-Africa-Latin America triangle, supported by an efficient service, made through a giratory platform, in Lisbon. The growth in the cargo flows of Northern America, as well as the com-plementarity of the platform in Porto were, also, of relevant importance. These facts, arising from a correctly delineated strategy, enabled taking advantage of the effects of the economic recov-ery of the sector, at a worldwide level. Particular note should be made, due to its greater rel-evance, of the growth in cargo volumes from Europe for destinations in Brazil, as well as Brazilian exports to Portugal.

In the ongoing endeavour to ensure Customer satisfaction and new business opportunities, TAP continued to develop its constant-temperature controlled transport activity. Very sensitive vac-cines and medicinal products transported in the denominated Cool Containers were the most frequent in this specialised line of service. This priority boarding service, classified as Must Go Cool, has expanded the diversified range of serv-ices which are already available: Must Go Turbo, Must Go Petroleum, Must Go Wearing, Must Go Fish, Must Go Meat, Must Go News and Must Go Production Line.

In the communication sphere, and with the objectiveofprovidingaseriesofnewfacili-ties of interest for the Customer, TAP–Cargo promoted, during 2010, the full renewal of its site, which currently also presents a more func-tional and appealing design. Complementarily, the Company strengthened the customer attendance teams of its Call Centre and cargo complaints treatment, which showed signifi-cant improvements both in terms of attendance time and quality of the solutions produced. Also

NEW PROJECTS

ρ TAP–Cargo site reformulation

ρ Cargospot – New Bookings and Revenue Management system

ρ ICS, ECS and SDS – New Customs information systems

ρ Cool Containers – Constant-temperature controlled transport

ρ TAP–Cargo Charters – Charter air freight service

The Mission of TAP–Cargo is to provide a reliable service for the collection, transport and delivery of goods and parcels on the aircraft of TAP and its partners, in a timely manner, suited to its Customers' needs and at com-petitive prices.

Cargo and Mail TrafficMillion RTK

100

150

200

250

300

350

400

2008 2009 2010

376

306

-13.6%

22.9%

354

Variation

Cargo and Mail RevenueEUR million

0

30

60

90

120

150

2008 2009 2010

125

98

128

Variation

-23.1%

27.2%


e_commerce

A strategy of coverage in various market segments, whether final Customers, corpo-rate Customers or Travel Agents

In the development of solutions to promote the customer loyalty of the B2C, B2B and B2T (Travel Agents) segments, priority has consistently been given to process automation and the pro-vision of information, through the Company's sites on the Internet. The activity of online book-ingthroughthesitehasgrownby28.4%,andgenerated sales revenue in the order of EUR 196 million, corresponding to approximately 820 thousand passengers. It should be noted that the Internet currently represents a signifi-cantdistributionchannel,responsiblefor9%of total market sales, where the Brazilian and Portuguese markets are the most representative in this channel.

In 2010, the FLYTAP portal, present in 25 markets, was also made available in Romania and Greece, and this booking engine is now also available in Russian, Hungarian, Czech, Polish and Greek, thus expanding the provision of this booking func-tionality to new markets. Complementarily, the insurance service, through Mondial Assistance, has been extended to new markets, namely to the markets in Germany, Spain, Finland, France, Hungary, Ireland, Italy, Poland and the Czech Republic. The hotel booking service Booking.com has also been implemented, which now serves all markets. In particular, in relation to Brazil, a new partnership has been developed which will enable expanding the forms of payment in this market, as well as facilitating and increasing the agility of the entire online bookings and sales process.

In the Affiliation Programmes, efforts have been developed to expand the online presence and stimulate new contacts.

2010 marks the inevitable presence and focus of TAP on the social media channels, such as Facebook, Twitter and Youtube, where the Victoria Programme is greatly highlighted

This channel regularly launches new products, campaigns and promotions, amongst others. Furthermore, a book-ing engine has also been provided on Facebook, as well as the possibility of making the check-in through the Internet, and the Virtual Auction has been re-created with an exclusive design for this channel. Note should also be made of the implementation, in all the sites, of an application which enables sharing the most rel-evant contents on the main social networks.

Opening of new markets on the site

Implementation of the hotel booking service of Booking.com

Presence in the social media channels (Facebook; Twitter and Youtube)

Establishment of a partnership to expand forms of payment and

foster the agility of the booking process, in the Brazilian market

Online Bookings

34,10273,955

131,696164,594

428,645

550,575

2004 2005 2006 2007 2008 2009 2010

116.9% 78.1%

25.0%

83.4%42.0%

28.4%

Variation

Online RevenueEUR thousand

Variation

14,47431,665

57,68071,268

111,539

155,622

195,720

2004 2005 2006 2007 2008 2009 2010

118.8% 82.2%23.6%

56.5%39.5%

25.8%301,888

■

■

■

■


Monitoring of the accomplishment of the service levels provided by the Handling Agents

Three new Stopovers were opened (Algiers, Marrakech and Viracopos) and two were closed in Europe (Pamplona and Charles de Gaulle) over the year. Regarding relations with the Handling Agents, the negotiation of new contracts were pursued, and compliance with service levels was actively monitored as a form of exerting pressure, aimed at improving their quality.

Assistance team – a ready-to-act structure in order to minimise the impact of situations of overcrowding in the airport

In 2010, the cloud of ash, caused by the Icelandic volcanic eruption led to chaos in airports and consequently also affected TAP passengers. At that time, every help possible was useful, and it was found that it is possible to minimise the impact of a situation of overcrowding at the airport if the most immediate needs of the passen-gers were met, such as, for example, through the distribution of water and food. In reality, this involves the provision of humanitarian assistance to passengers, putting into practice the solidarity that these situations deserve.

The experience, carried out by a team of TAP volunteers, composed of mem-bers of the Care Team, which helped to respond to the situation of waiting queues at the airport over those days, had positive results and confirmed the Company's necessity to be able to provide this ready-to-act structure, if nec-essary. Thus, a challenge was launched to the Employees to be part of the new structure which was created – the TAP Assistance Team –, exclusively toattendpeakoperatingsituationsinairports.Participationinthisprojectis voluntary, where the volunteers may, or may not, be in an active situa-tion of work.

MAIN FUNCTIONS:

ρ Manage operations at Lisbon airport, with a view to improving their punctuality and regularity;

ρ Manage passenger attendance in Lisbon, in all aspects (check-in, transfers and baggage, amongst others);

ρ Guarantee the provision of a service of recognised quality to passengers, in TAP network airports, ensuring, in advance, the resolu-tion of any possible irregularities;

ρ Coordinate the implementation of the service levels, practices and guidelines, for the different ground services;

ρ Promote the initiative, development and implementation of improve-ments in service quality, which are recognised by Customers.

Customer Service

The mission of the Customer Service Department is to guarantee the provision of a service of recog-nised quality to TAP passengers, anticipating any possible irregulari-ties and ensuring proactivity in their resolution.


Departure Punctuality (15 min)

2006 2007 2008 2009 2010

71%

80%75%

59%60%

Left-behind luggageper 1,000 passengers

2006 2007 2008 2009 2010

15.215.2

19.9

27.8

21.0

Participation in external projects

ρ Co-leadership of the Lisbon airport per-formance improvement work group (AIMS Project),aimedatimprovingthequalityofthe service provided to passengers, con-veying motivation and effective teamwork. The 3rd AIMS meeting was held in 2010, involving over fifty employees of the differ-ent entities – ANA, TAP, Groundforce, SEF, Customs and AOC, where there was great participation in the debate, in the context of a functional restructuring of this Programme, on the establishment on new work modes.

ρ Collaboration in baggage handling perform-ance improvementprojects (BIP/RFID), inpartnership with the STAR Alliance and IATA

ρ Active participation in the IATA (STB) Fast Travel Programme, a working group constitutedwiththeobjectiveof improv-ing the passenger's experience, through the provision of a series of self-service options, duringthepassenger'sjourney,promotingcost-cutting for airline companies.

Punctuality

Punctuality at departure up to 15 minutes fell, thus countering the trend of improvement observed during the previous years. This evolu-tion was significantly influenced by the cloud caused by the Icelandic volcano, which, by paralysing European air traffic, forced mass cancellations by airline companies, with serious impact on costs related to irregularities. 2010 was also a year marked by various strikes of air traffic controllers and Handling Agents, which contributed to disturb normal compliance with flight operation schedules.

Baggage

Notwithstanding the problems caused by the Eyjafjallajökullvolcaniccloud,theperformanceofLisbonHubimprovedbyabout5.6%,inrela-tion to the previous year, with the value relative to the entire network remaining at the same level.

FAST TRAVEL

An IATA project aimed at providing a series of self-service options

Punctuality significantly influen-ced by a vast number of external factors, such as the Icelandic volcano and industrial action, in response to austerity measures.


Fleet

After the year of 2009 which was significantly marked by decreased demand, there was a recovery of passenger occupancy rates during 2010. In spite of the adverse economic context and the economic austerity measures decreed by the Portuguese government, over the last quarter, the operation regis-tered an increase over the last year, with the same fleet, which was achieved through a more efficient use of the aircraft. This trend should continue during 2011, with plans for a new increase in the operation, in terms of the level of the offer as well as in the number of destinations. Moreover, in spite of the cost of fuel having exceeded the budgeted value, the increased capacity of adaptation of the operation enabled TAP to achieve a record result.

At the end of the year, the Groups TAP fleet, composed of the fleets of TAP and PGA, used 71 airplanes in its network, where there were no alterations in the resources available as of January 2010

TAP'sfleet,composedof55airplanes(39medium-hauland16long-haul),presented,in2010,anaver-age age of 9.5 years, slightly higher than the 8.9 years of 2009, but in line with the average age of the fleetinpreviousyears(9.4in2008,10.2in2007and9.6in2006).Likewise,PGA'sfleet,composedof16 airplanes (2 airplanes under ACMI of OMNI), also did not undergo any alteration during the year under analysis.

Fuel Saving

The TAP Portugal Fleet

TheFuelConservationproject,whichcelebratedits5thanniversaryin2010,continuedtopro-duce very positive results, leading to total savings of USD 57 million, in the period between July 2005 and June 2010. At the end of 2010 the cost of fuel showed a trend of growth which might lead, in 2011, to high values, identical to those during 2008. The financial pressure caused by the continuous increase in fuel cost, combined with the growing concern for the environment and the beginning of the implementation, in 2010, of the EU-ETS (Emission

Of the total 55 airplanes comprising TAP's fleet, in operation, as at 31 December2010, 37 were owned by the Company and 18 were under a regime of operating leasing.

ρ Owned by the Company 15 A319; 5 A320; 2 A321; 11 A330 e 4 A340;

ρ Operating leasing4 A319; 12 A320; 1 A321 e 1 A330.

Composition (Number of Aircraft on 31 December) Units Average

AgeOwnership Rental 2011

Dec-09 Dec-10 Additions Options

MEDIUM-HAUL

A319 19 19 11.6 15 4

A320 18 17 6.9 5 12

A321 3 3 9.5 2 1

LONG-HAUL

A340 4 4 15.7 4 0

A330 12 12 7.9 11 1

TOTAL 56 55 9.5

Average Daily Utilization (Block Hours / Day)2005 2006 2007 2008 2009 2010

MEDIUM-HAUL

A319 10.45 10.62 10.39 10.90 10.40 10.18

A320 10.48 10.55 11.08 11.51 10.45 10.60

A321 12.18 11.79 12.38 12.04 10.85 10.88

LONG-HAUL

A340 15.70 15.74 13.87 12.90 10.97 13.40

A330 – 16.00 15.24 15.16 13.56 13.83

A310 14.44 13.90 13.48 6.78 – –

TAP Fleet Financing

0

2

4

6

8

10

12

14

31 December 2010

Average Fleet Age

2005 2006 2007 2008 2009 2010

Long-Haul fleet Medium-Haul fleet

Total fleet

Operating Leasing33%

Company Ownership67%


Trading Scheme) reaffirm the strategic importance ofthefuelsavingproject,whichrepresentsanessen-tial tool for the future good performance of the Company, in the context of an increasingly more competitive and demanding market. It should be noted that the operating context over last year was extremely adverse, being market by the eruption of theIcelandicEyjafjallajökullvolcano,whichimposedsignificant operating constraints, as well as by the restrictions on the use of the European air space, as a result of the strikes of the air traffic controllers, in addition to the poor atmospheric conditions in vari-ous regions of Europe, during various periods. This combination of exceptional factors penalised TAP's performance in relation to previous years, with fuel savings having reached 14,122 tons, a value lower than the approximately 20,000 tons registered in 2009. The table above presents the breakdown by fleet and the corresponding savings (avoided fuel andemissions)achievedunderthisprojectin2010.

Note should also be made, in 2010, of the implemen-tation, in TAP, of the emissions and ton-kilometre reporting system, under the EU–ETS Emissions Trading Scheme. The EU–ETS has implied an altera-tion of procedures and an upper level of efficiency in the management of operating data, in order to increase the quantity of data available. This increase of representativeness of data will also benefit the entire operation, since the increased analytical capacity will enable a significant inforcement in effi-ciency. The working group continued to develop methodologies and tools to monitor the participa-tion in fuel saving policies and follow its evolution. This work, which included the migration and expan-sion of the supporting database in 2010, and which has been under development since 2008, involving the Operations Engineering area, Flight Data Reading Station and the company Megasis, should be con-cluded by mid-2011.

In2011,themainobjectivesarethecontinueddis-seminationoftheFuelConservationproject,throughvarious initiatives, for the purpose of recovering and surpassing the efficiency and saving levels achieved in 2008 and 2009, as well as the study of new pos-sibilities to enable the continued guarantee of higher efficiency levels.

The Portugália Fleet

PGAmanagesitsownFuelConservationprojectinternally,through coordinated work between the Flight Operations and Maintenance and Engineering Departments. In this context, a fuel policy was created, characterised by a series of fuel consumption optimisation measures, which have beenfine-tunedcontinuouslyovertheyears.However,the effective reduction of fuel consumption is possible only through the commitment of full involvement, val-orising the systematic sum of small gains. Based on this principle, we highlight some of the measures which were implemented:

ρ Efficient practices in aircraft operation; ρ Programme of periodic washing of aircraft; ρ Weight reduction (new painting, replacement

of carpets, windshield connection elements – titanium versus stainless steel);

ρ Concordance of the panels and polishing of the fan blades of the engines.

In order to control the measures referred to above, methodologies and tools have been developed to monitor participation in the policies and follow the evolution of the level of Key Performance Indicators (KPIs). The company, together with TAP, is collecting a database to allow for swift analysis on the measures which are being applied.

In 2011, it is expected that the imple-mentation of new measures, and the fine-tuning of the measures imple-mented last year, will represent cost economiesofapproximately0.6%ofthe budgeted value for 2011, in terms ofefficiency(Kg/BH),equivalenttoa CO2 emission reduction of about 1,153 tons.

Fuel (ton) CO2 (ton)

A340 2,176 6,856A330 2,162 6,812A321 968 3,048A320 3,764 11,856A319 5,052 15,913

TOTAL 14,122 44,484

FUEL CONSERVATIONPROJECTSavings achieved in terms of fuel and avoided emissions in 2010

STAR Alliance

STAR Alliance: the first global Alliance

STAR Alliance, constituted in 1997 by a group of five international renowned airline compa-nies, is currently the foremost and most highly distinguished Alliance of companies, truly glo-bal, as well as the largest Alliance present on the market. The companies comprising the Alliance offer their Customers a wide global network, based on a multi-hub system which enables establishing the best connections possible. By the end of 2010, a total of 27 operators offered a range of over 21,000 daily flights, to 1,160 destinations, in 181 countries.

Improve the flight experience – a commitment of the Alliance

Underlying the commitment of the Alliance to improve the flight experience of its pas-sengers are two fundamental concepts, identified as capable of generating benefits for its Customers: (1) A Customer of any member-company of STAR Alliance is a Customer of all member-companies, receiving identical expe-riences in the service provided (partnership concept); (2) Global reach of the Alliance sup-ported by connections between the different hubs of the member-companies (hub and spoke operating concept).

Advantages for the members of the Alliance

Enabling cost reductions due to the economies of scale and efficiency which are generated, the commonprojectsofSTARAlliancealsopermit,in terms of the product, achieving significant improvements for the passengers. In this context, TAP has maintained considerable activity, partici-pating and intervening in the implementation of

STAR AllianceREGIONS Main hub airports

EUROPE

Adria Airways LjubljanaAegean Airlines AthensAustrian Airlines Vienna Blue1 Helsinkibmi London (Heathrow)Brussels Airlines Brussels Croatia Airlines ZagrebLOT Polish Airlines WarsawLufthansa Frankfurt, MunichScandinavian Airlines Copenhagen, Oslo, Stockholm Spanair Madrid, Barcelona Swiss Zurich, Geneva, Basel TAP Portugal Lisbon, Porto Turkish Airlines Istanbul, Ankara

AFRICA

Egyptair Cairo Ethiopian Airlines * Addis Ababa South African Airways Johannesburg

NORTH ATLANTIC

Air Canada Toronto, Montreal, Vancouver, CalgaryContinental Airlines Newark, Houston, Cleveland, Guam

United AirlinesChicago, Denver, San Francisco, Los Angeles, Washington, D.C.

US Airways Charlotte, Philadelphia, Washington, D.C., Phoenix

MID ATLANTIC

Avianca–TACA * Bogota, San Salvador, San Jose, Guatemala City, LimaCopa Airlines * Panama City

SOUTH ATLANTIC

TAM Sao Paulo

ASIA

Air China Beijing,Chengdu,ShangaiAir India * Mumbay, Delhi, Kolkata, Chennai All Nippon Airways Tokyo, Haneda, OsakaAsiana Airlines Seoul Incheon Singapore Airlines Singapore Changi Thai Airways Bangkok, Chiang Mai, Phuket, Hat Yai

OCEANIA

Air New Zealand Auckland, Los Angeles, Hong Kong

*tojoinsoon

21thousanddaily departures

1,160destinations

181countries

More than


many initiatives. Thus, in 2009, TAP was one of the first member-companies to launch its mobile portal – the tap mobile portal. It is important to note the initiatives such as the STAR Alliance Upgrade Awards, the Common IT Platform or the strategy of moving the Alliance companies into a single common area, the Move Under One Roof project,aswellasmanyothersofajointnature, namely, in the context of procurement and purchases.

Also in terms of innovation, the STAR Alliance is the first Alliance of airline companies to pro-vide various products with fares on the Internet, where all Circle Fares may now be booked and acquired on its website. With a user-friendly booking engine accessible in various languages, booking may now be made in any part of the world, with the tickets being issued automati-cally, through electronic means, in spite of the fact that the vast number of destinations offered and the complexity of the multiple ticket fares implies that its automation is not an easy task. This option of online booking for Circle Fares follows the successful launch of Book & Fly, offering the possibility of planning, book-ing and acquiring Round-the-World tickets, through the Alliance website. Also of impor-tance, along the same lines, was the creation of the Brazil Air Pass, a product which, cover-ing the entire domestic network of the company TAM, may be acquired by all customers who are not resident in Brazil, in combination with an international ticket of any member-company of the Alliance operating to that country.

STAR Alliance governance model

The governance of the STAR Alliance is com-posed of two boards, the Chief Executive Board and the Alliance Management Board, with responsibilities, respectively, at the level of the definition of the strategic guidelines and approval of the Business Plans, and regarding directing and supervisory functions. Additionally, there are five Sounding Boards, established to provide guidance in specific areas, namely, in Sales, Network, Marketing and Technology. Finally, there are also nineteen Advisory Groups, with the mission to advise and participate in the creation and development of products.

Future members

In 2010, the candidature of Ethiopian Airlines was approved unanimously, which thus becomes the third STAR Alliance operator in the African Continent. The acceptance of this company is an integral part of the STAR Alliance strategy for Africa, a region where, according to market surveys carried out by the Industry, the second largest rate of growth of air traffic is forecast, over the next few years, as a result of increased demand, arising from the eco-nomic growth fostered by greater political stability, and where the Alliance will now have three important hubs – Addis Ababa, Cairo and Johannesburg.

Also accepted unanimously were the applica-tionstojointheAlliancemadebytheairlinecompanies Avianca–Taca and Copa Airlines, thus concluding a strategic process which sought to strengthen the brand of the Alliance in the Latin American economies, benefitting from strong and rapid growth.



TheobjectiveofTAPServices,createdin2004,isthepro-vision of supporting and management services for the other Business Units and companies of TAP Group, based on an organisational model of shared services, founded on a strategy of collaboration or traded processes.

In the development of its activity, the Business Unit con-tributestotheimprovedprofitabilityofitsCustomers,with an autonomous management structure, designed topromoteefficiency,thecreationofvalueandreduc-tion of costs, under an assumption of better quality of service and transparency.

Involving the provision of financial services, human resources, procurement and warehouses, administrative, audit and legal services as well as other support activities, TAP Serviços offers, in the development of its activity a platform of sustai-ned growth providing a broad group of benefits:

ρ Allowing the Business Units and companies of the Group to focus on their core activity;

ρ Significantly decreasing costs, through econ-omies of scale, reduction of duplications and the use of best practices, thus enhancing the efficiency of processes;

ρ Development of specialised competences;

ρ Considerable improvement of the service levels offered, due to the higher operational efficiency of the management systems, through the standardisation of processes, reduction of operation times, greater access to information and better service ratios and response times;

ρ Improved strategic management, through the concentration of qualified resources, a faster and better grounded decision-making process, effective management of the avail-able resources, the sharing and exchange of know-how and better alignment of resources with the mission.

Over 2010, the Business Unit contin-ued the intensificationof theprocessof the continued improvement of its performance, supported by appropriate information technologies, in an attitude of permanent innovation, search for excellence and use of best practices. In this context, particular note should be made of the Best Practices Plan, Reduction of Consumption, to be implemented over 3 years (2010 to 2012). This initiative is directed, in addition to the indispensable awareness-raising towards the best behavioural practices, to the search for the besttechnicalsolutionsandmostefficientsys-tems and equipment.

Likewise, the effort in the alignment of concepts was also continued, extended progressively to the offer of services to the different businesses of the Group. Also noteworthy, with benchmarking objectives,wastheparticipationofTAPServiçosinthe XIII Meeting of the Shared Services Club, an event which addressed the holding of thematic clubs for the specificpurposeofthesharingofpracticesandexperi-ences between Club members.

During the implementation of the processes, TAP Serviços maintainsprotocolsforthesharingofclearlydefinedresponsibilities with its Customers, with agreements on services levels and performance indicators having been established as well as the regular follow-up of Customer satisfaction levels. In 2010, the Customer satisfaction ques-tionnaire, in digital format, available at the Customer Portal, recordedaparticipationrateofabout74.4%.

The overall satisfaction index observed, of 3.1 (scale of 1 to 4), showedagrowingevolution,reflectingtheeffortmadeinthecontinuous improvement of the performance of TAP Serviços, bothintermsofefficiencyandquality,andregardingthemulti-plicity of competencies involved in the development of its activity.

The mission of TAP Serviços is to develop its activity of providing support and management services, contributing to improved profitability for its Customers, through competitive positioning and high standards of quality and effectiveness, with the objective of continuous improvement and operating excellence.

TAP Serviços


In this context, the following developments are highlighted as the most important:

Finance

During 2010, several long-term financing operationswereundertaken,involvingfinan-cial leasing or based on underlying assets. The Group's short-term operations were also renewed or renegotiated.

Among the long-term operations, it is worth pointingoutafinancingoperation,withoutcol-lateral,aswellasfinancialleasingoperations,involving a total of 9 medium-haul Airbus air-craft.Theexecutionofthecontractedfinancingoperations, combined with the amortisations of debt for the current year and the operating cash flowoftheGroup,enabledthereinforcementofthe cash position and the amount of cash assets withfinancialinstitutionstobeincreasedoverthe course of the year.

Duringtheyearunderanalysis,severaljetfuelhedging operations were also undertaken, in addition to the operations already contracted in the previous year and with reference to 2010, withtheobjectiveofreinforcingthelevelofpro-tection against the price of fuel.

Human Resources

During 2010, a wide-ranging series of initiatives was implemented, with emphasis on:

ρ The implementation of the Communication Portal of TAP Group, in partnership with the Public Relations area of Air Transport Business Unit, responsible for the aggrega-tion of information and contents, namely mentions, daily clippings, Flash Information, TAP newspaper, newsletters, STAR Alliance information, international information and media library.

ρ The process relative to cabin crew (Stewards and Flight Attendants) reached an advanced stage, having been suspended at the initia-tive of the trade union, which considered that the necessary conditions for an agree-ment were not in place.

In addition, within the framework of the labour dispute and legal advice area, various legal suits were terminated with the cases won and/or agreements reached between the parties, with the success rate remaining at a very high level, in relation to the total number of cases concluded and, above all, in relation to the respective values involved.

The promotion of actions aimed at closer coor-dination between the Business Units of the Company and other companies of TAP Group was also maintained, taking precautions against and solving situations that could result in regula-tory offence procedures or legal suits.

ρ The implementation of the Home Page of TAP Group, whose applied solutions seek to meet the needs of TAP Group, fulfilling the followingobjectives:

ρ Encourage the general use of a single institu-tional extranet of TAP Group;

ρ Achieve the homogenisation of the various forms of the intranet at the Company, via logi-cal organisational criteria, without the loss of identity of each company/business unit;

ρ Promote the offer of new functionalities that are transversal to the entire Organisation, in a collaborative portal oriented towards the sharing of information.

ρ The creation/implementation of electronic forms and digitisation of printed forms of TAP Group, with the aim of satisfying the needs of the Organisation, through the centralisation and systematic computerisa-tion of the forms that are indispensable to the requisition process of the Administrative Services of Human Resources. The reduction of the effort and time spent with the asso-ciated manual treatment, permitting the fulfilmentofprocessstreamliningobjectives,in addition to improved levels of productivity and quality, was thus assured;

ρ Finally, it is worth noting the implementation of the availability of information relative to the Clock-in System on the intranet/extranet, presenting all the punching carried out by the employee, for a specific period of time, as well as holiday periods and schedule type;

ρ In 2010, within the scope of the Recognise Programme, 47 Employees from several Company areas were acknowledged.

In the Labour Relations Area, emphasis is on the continuation of the negotiations with the various trade unions, with a view to reviewing the Labour Agreements:

ρ The process relative to Pilots was concluded, with the publication of the new Labour Agreement celebrated with SPAC;

Labour Dispute– Risk and CostEUR thounsand

Total Risk Total Cost

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1,285

119

3,033

285

1,905

95

868

52

503,515

706

3,833

641

2,352

439

8,589

157

164,124

1,1131,369

46

Over recent years, the Legal Advice and Labour Dispute area has won an average of 99.5% of the value of its causes. In 2010, the good performance was repeated, with TAP having won 96.7%.


Logistics

There were continuous efforts aimed at opti-mising the purchase of necessary goods and services for the different companies of the Group, providing support to the weighing up of the quality/price combination options. In addi-tion,therewasanintensificationofcombinedpurchases with STAR Alliance partners.

In the Request Management area, the year wasmarkedbytheconclusionoftheprojectto connect the support information system to the caterers of Lisbon and Porto, allow-ing for online inventories, direct requests for replenishment from caterers, as well as direct deliveries of material at the respective warehouses.During2011,thisprojectwillbeextended to other stopovers.

In the Warehouse area, it is worth pointing out the conclusion of the integration of the uniform management system with the support informa-tionsystem,stillinthefinaltestingphase,withits entry into full production scheduled for the 1st quarter of 2011.

The Customs Office continued to provide its usual support, in related matters, to the various business areas of TAP and Group com-panies, with emphasis on the Maintenance and Engineering Business Unit and the company LFP–LojasFrancasdePortugal,S.A.asmaininternal Customers.

Administration and Management of Physical Resources

The plan of activities for 2010 of the Administration and Management of Physical Resources area (ARF) focused on two vectors:

1. Disclosure, training and develop-ment of the corporate culture in the Environment, Risk Prevention and Security/Safety areas;

2. Development and improvement of the execution, quality control and infor-mation sharing processes with service providers, which operationalise acti-vities that the ARF is responsible for (canteen, crèche, office machinery, archive custody, microfilming, digitalisation, insur-ance, maintenance of the premises and equipment and security of the premises).

Atthesametime,significantstepsweretakento extend the responsibilities of the area,

transversal to the Group, by streamlin-ing communication channels with the Associated Companies. Information was thus shared regarding projects,environmental indicators, integration of energy and water consumptions and sharing of solutions under development at Campus TAP, namely those included inCostReductionprojects.Fromamongthese,theprojecttosubstitutetraditionalillumination is noteworthy, since it will permitsavingsof6%intheannualenergyinvoice, in addition to a reduction of 242 ton/year of CO2.

In vector 1 it is worth mentioning the carrying out of environmental awareness and training actions for a universe of 334 employees. In this context, it is also important to point out the par-ticipation of passengers in the Voluntary CO2 Emissions Compensation Programme, an initiative that, having begun in 2009, continues to positively surprise TAP and IATA.

Also noteworthy is the attribution, by the International Union of Geological Sciences of UNESCO, of the 2010 Planet Earth Award, in the Most Innovative Sustainable Product category, in recognition of the CO2. Emissions Compensation Programme (more details available in Environmental Perspective of the Sustainability Report of TAP).

Inaddition,inthisvector,theRiskPreventionareacarriedoutfiveemergency exercises, involving risk sectors such as the Nursery, the companyGroundforce(Back-OfficeandHangar3)andProfessionalTraining. The result of the good collaboration between the areas, in the elaboration of the Internal Emergency Plans, was also clearly evident in the results of the exercises, which involved approximately 400 employees. This process is included within the scope of the risk minimisation processes oftheCompany,with96%oftheinternalemergencyplansand50%ofATEX Manuals (Protection Against Explosive Atmospheres) implemented, which brings the total number of employees that attended training actions (in classroom and e-Learning) in 2010 to 1,100.

In the same year, the Operational Security area also consolidated security training on an e-Learning platform, having extended access to the foreign Stopovers, with training provided to a total of 502 employees. In the Premises Securityarea,7,181newidentificationcardsforemployeesoftheTAPuniversewereproducedanddistributed,inaccordancewiththeproposedobjective.

Voluntary CO2 Emissions Compensation ProgrammeYear 2010

Objective(Ton CO2)

Result(Ton CO2)

Deviation

3,500 4,278 22.2%


eliminated. This process is expected to result in the optimisation of maintenance, as well as in the increased productivity of the service provider.Theprojectsandworksundertakenin2010weremainlythe result of the adaptation of the installations to national and com-munitylegislation,withrespecttofirepreventionandotherrisks,aswell as hygiene and safety in the workplace, and to the regulations concerning the thermal characteristics of buildings, energy systems and the environment.

Legal Office

InadditiontothenormaldutiesperformedbytheOffice,emphasisis placed on the continuation of the corporate restructuring process.

In this context, the company TAP TOURS was extinguished by merger. Regarding the company SPdH–Serviços Portugueses de Handling, S.A., the works necessary to comply with the Decision of the Competition Authority (of 19-11-2009) were undertaken, whose deadline was, in the interim, extended.

Several analyses were also conducted with a view to the restructuring of this company.

Internal Auditing

Within the scope of the risk monitoring and management policy, the contractualisation undertaken was monitored, with the Plan of Activities, whose elaboration involved the participation of the differentheadsofdepartments,havingbeensubjecttoperiodicrevi-sion, with the aim of rethinkingpriorities. In TAP–Maintenance and Engineering Brazil, a local Auditor was admitted, under the direction of the Audit Department, with the works undertaken covering inven-tory control, in physical terms, salary processing control, adaptation to function and control of invoicing for third parties.

In the face of new challenges, arising from benchmarking and, in addition, of the growing complexity of the Company's business, new routines in the monitoring of the Representations – Continuous Audit Projecthavebeenimplemented.Theaimofthisintegratedprocess,from a Cost Reduction viewpoint, is to continuously monitor, with greaterefficacy,theuseoftheresourcesavailable,withoptimisationof internal control and minimisation of the risks involved, as well as the costs of the audit processes.

Theprojecthasbeenimplementedinaccordancewiththefollowingphases:(i)Identificationandminimisationoftherisksinvolvedinthebusiness process; (ii) Improvement of the internal control of each Branch outside headquarters/Associated Companies; (iii) Extension of best practices to other entities, when feasible; (iv) Optimisation of the average period of elaboration of audit reports.

Inaddition,withtheaimofprovidingthebestpracticesidentifiedin the benchmarking of the function with its counterparts of the

The Insurance Management area developed a continuous process with the Human Resources areas, of TAP and the Associated Companies, concerning the analysis and deepening of the risks (non-aviation) transferred to insurance companies,withtheobjectiveofimprovingthediagnosticsofriskstobetrans-ferred, assessing the best market proposals, as well as contributing towards the risk coverage policy of TAP Group.

In vector 2, it is important to mention – involving seven companies and approximately 500 employees – the development of a set of work measures and processes, with the aim of sharing Company policies with its service providers. Information is therefore shared in terms of environmental indi-cators and programmes, corporate ethics procedures and cost reduction programmes,withthedefinitionoftargetsandstrategiesalignedwiththeobjectivestobeachievedin2011.TheCompanywillalso,asaresult,monitor the evolution of the results of the programmes developed by providers in the TAP Campus or in any other of its areas.

Thedemandfortransversalsupportservices,suchasofficemachin-ery,archivecustody,microfilminganddigitalisationincreased18%,indicating that the acquisition of these services from insourcing pro-viderspresentsamorecompetitivecost(60%lessonaverage)thanthat incurred by resorting to external suppliers. In terms of services asawhole,productivityregisteredanincreaseofabout10%.Thisbehaviourwassignificantlyinfluencedbyaprogressivecompu-terisation of processes, namely the digitalisation of the entire documentary information of the Talk to Us (Fale Connosco) area. In this way, redundant circuits were reduced and paper documents were immediately archived (about 40 thousand processes/year).

The use of the Canteen registered, from the last quarter of theyearonwards,an8%increase,incomparisonwiththefirstninemonths,atrendwhichisexpectedtocontinue,following the improvement efforts undertaken, as well as due to the economic and social situation of the Country.

TheCrècheregisteredanincreaseinsupplyof20%,resulting from the increase in its capacity, via the use of an additional external room (Champagnat College), for children of 4 years of age. In this way, the admis-sion of babies to the nursery doubled (an area in which the solutions provided by the market are clearlyinsufficient).

In the Insurance area (aviation branch), it con-tinues to be advantageous the negotiation of policiesjointlywithotherairlines.Inadifficultperiod and with several constraints, for both the aviationandinsurancesector,a10%reduction,to 2010/2011, in the value of the respective pre-mium was achieved during the renegotiation of the aviation insurance policies (hulls, liabili-ties, spares, war).

The Installations and Equipment area reflectedthegoodresultsofthestrategypursued in 2010, with the improvement of the organisation of the curative and preventative equipment maintenance process, from planning to quality control. The number of equipment under maintenance was 6,600 units, of which about 5,900 is under pre-ventative maintenance, such that it was considered fundamental to work with Maintenance and Engineering in the revision of the maintenance plans contained in the maintenance manage-ment contract celebrated with the external provider, enabling obsolete equipment or unsuit-able maintenance plans to be

Evolution of no. of Audits carried out2009 and 2010

2009 2010

250

200

150

100

50

0

70 67

1415 121233

57

9 4 3 3 3 3 1 1 6 4 4 62733

182205

Air T

rans

port

M&

E

SPdH TP

S

MEG

ASIS

UC

S

LFP

CAT

ERIN

GPO

R

PGA

TAP

M&

E BR

AZIL

OTH

ERS

TOTA

L


Evolution of the efficiency of TAP Serviços with the growth of its Customers' activity2000–2010

108.8%

60.0%

130.6%

Number of Aircrafts

Numberof Stopovers

RevenuePassenger-Km

Human Resourcesof TAP Serviços

+ 99.8%

- 34.3%

transport sector, the Company has been promoting participation in training actions, through the specialised centre (NASTIR – IPAI), within the scope of the Portuguese Internal Audit Institute – IPAI, as well as intervention in conferences, forums and workshops for sharing experiences and improving professional methodologies to be used, both from an IT (ACL) and procedures viewpoint.

Taking the concern of the external supervisory bodies and of the regulatory bodies on board, a new relevant focus was given to the monitoring and control of the transver-sal contractualisation processes in Group companies, involving the analysis of procedures, with respect to their transparency and to identify potential incompatible internal and external situations, involving the corporate bodies of the service provision companies. The year of 2010 was a challenge from the viewpoint of the new accounting and tax legislation framework, which led to a reinforcement of training within the scope of the Accounting Standardisation System (SNC – Sistema de Normalização Contabilística) and preparation relative to the new Social Security and VAT codes, in order to adequately respond to growing internal requests for opinions on aspects of tax legislation, asaresultofthisnewcontext.Aspecificfocuswas placed on the monitoring and analysis of the reliability of the information and implementa-tion of new ticket issuing systems, as well as on the promotion of security procedures, with a view to the mitigation of the risk of fraud.

Strategic Planning and Performance

In the context of the TAP Serviços business model, aimed at the con-solidationofaculturedrivenbythefulfilmentofobjectives,variousprocedures were continued in the Strategic Planning and Performance

area, structured to provide support to the organisation’s strategy.

In 2010, support thus continued to be provided to the TAP Serviços business unit, in the relationship with its Customers, as well as in the

development of the Costing, Pricing and Invoicing Model of the Devices rendered by the Business Unit. In a similar manner, during the year moni-toring of compliance with the Service Level Agreements (SLA) with the

different Customers, business units/companies of the Group was main-tained,adaptingthemtoanyspecificitiesapplicable.Themeasurementof performance, a procedure that constitutes one of the factors that characterises the practice of the Business Unit, was carried out systemat-

ically, with the disclosure of a set of reports directed at the various levels ofmanagement,onthefulfilmentofobjectivesandontheoperationalperformanceofeacharea(efficiency,cost,efficacy,timesandquality)

The area continued to develop its mission, by providing advisory services to the Board of Directors, whenever requested and proactively, combin-ing the know-how of the TAP Business Units, preparing analyses and issuing opinions of a qualitative and quantitative nature. In addition, it

continued to prepare benchmarking studies and analyses, relative to the air transport business, performing in terms of competitive intelligence, whichtranslatedintothecapacitytodefine,collectandanalyseinfor-

mation to support decision-making.

Overall Satisfaction

4

3

2

1

0

2005 2006 2007 2008 2009 2010

Knowing and accompanying the evolution of Customers (internal Customer) perceptions on the services offered by the Company has made an important contribution to the improvement of TAP Serviços procedures.

4 – Very Satisfied3 – Satisfied2 – Disatisfied1 – Very Disatisfied


€ 126.5millionsRevenue with Sales and Services rendered from Maintenance to Third Parties


1,942Maintenance and Engineering Staff (31st December)


Maintenance Workforce(000) Man-Hours

2005 2006 2007 2008 2009 2010

1,518 1,4971,4591,4071,3991,418

Other Works Third Parties TAP

EUR million

Revenue from Sales and Services Rendered from Maintenance to Third Party Costumers

2009 2010

113127

+11.7%

Note: Values in accordance with the IFRS(International Financial Reporting Standards).

Change of culture and processes in order to respond to a more demanding market

2010 showed some improvements in the results, notwithstanding the growing difficulty in the attraction of new customers. The improvement resulted essentially from the achievement of better sales margins, namely, in materials and the mainte-nance of engines of Third Party Customers, through the effect of more favourable conditions in the acquisi-tion of the units. In reality, the value of activity for Third Party Customers, in sales and services rendered, stood at a value of approximately EUR 126.5 million, represent-inganincreaseof11.7%relativetothepreviousyear.ThemaintenancecostsofTAP'sfleetdecreasedinrelationtoboth the expected values and those of the previous year, as aresultoftheimplementationofmoreefficientprocesseswhich led to economies, in particular the increased interval of hours between minor "A" inspections. A slight decrease was recorded in terms of hours of production, compared with thepreviousyear,ofapproximately1.4%,essentiallyduetothe9.2%decreaseintheincorporationofhoursofworkforTAP'sfleet.Inturn,thevaluerecordedforworkforThirdPartyCustomersincreasedbyapproximately7.2%,inlinewiththeachieved results.

Start-up and implementation of an SMS (Safety Management System)

In a year when the maintenance activity did not show consistent signsofrecovery,theattentionwasdirectedtowardstheidentifica-tionandadoptionofprojectswhichshouldenable,intheshortterm,achieving improvements in terms of the value offered to the customer, efficiencyandproductivity.Inthisperspective,theimplementationofan Operational Safety Management System (SMS) was initiated, which represents an evolution of the concepts of Safety and Quality manage-ment, relative to the current practice in a traditional Quality Management System, also enabling, in addition to the diagnosis and analysis of situa-tions of risk, the prognosis of potential dangers, as well as their respective mitigation and control, guiding and strengthening the focus of priorities of an approved maintenance company and in this way permitting the offer, toCustomers,ofserviceswhichareadjustedtotheirspecificprocedures,regardingsafetyandquality.Thebeginningoftheprojectinvolvedthecon-stitutionofaCoreTeam,withtheobjectiveofcentralisingthedefinition,application and control of the respective implementation plan. Various initial

The mission of TAP Maintenance and Engineering is to provide maintenance and engineering services for aircraft, engines and components, for the Company and external Customers, guaranteeing a high level of quality and actively contributing to uphold the high safety standards required by the Aeronautical Industry, to ensure safe conditions for people and goods and protection of the environment.

Maintenance and Engineering


training actions on SMS were also carried out, as well as a series of dissemination sessions, with preliminary versions of the SMS Manual and respective procedures having been drawn up. At the same time, the Commitment of the Senior Management was also drawn up and approved,comprisinganobjectiveandsuccinctdescriptionofthecommitment assumed by the Senior Management of Maintenance and Engineering in this process, and the Safety Policy was published, stating SafetyasthefirstpriorityofTAP–MaintenanceandEngineering.

Under the implementation plan, the initial evaluation was made of the state of the Safety Culture at the end of the year, by the company Baines Simmons, based on the online collection of the anonymous questionnaire SCORE®, composed of 93 personalised questions for all aeronautical mainte-nancepersonnelwhichrecordedasignificantparticipationoftheEmployees,andreceivedatotalnumberofanswersthatwashigherby23.5%oftheobjectivedefinedasessential.During2010,thepracticesofinvestigationofoccurrences were also updated, with the respective investigation reporting model having been modernised. Using the information available for reactive analysis,thesystematicclassificationoftheriskoftechnicaloccurrenceswasstarted,thusenablingthefine-tuningoftheriskmatrixinuseatTAP–Maintenanceand Engineering.

Project of continuous improvement

Pursuing the objective of the simplification of processes, theOrganisationalTransformation area was created, composed of three Employees from various areas ofMaintenanceandEngineering,withthemissiontoleadandmanagetheprojectsto be developed, in direct collaboration with the target areas. After recognition of the criticalareas,thebestmarketpracticesareidentified,aswellastheirapplicabilitytotherealityofMaintenanceandEngineering.Theprojects,which,onaverage,lastbetween4 and 6 months, are developed in accordance with the LEAN methodology, involving the mapping of the different phases of a process, with a view to the elimination of any actionswhichconstitutewaste,namely,waitingtimes.Ofthetenprojectsdevelopedinthe areas of Aircraft Maintenance, Components, Engines and Logistics, four have already been concluded: Dispatch of Material, Visual Management, Follow-up of Purchases and A-Check A340 in 24 Hours.

The Dispatch of Materialproject,developed in theareasofEngineMaintenanceandLogistics,hasresultedinasignificantreductionoftheaverageleavingtimeofpartsfromtheEngine workshop for repair outside. The Visual Managementproject,developedintheareaofEngine Maintenance, has resulted in the creation of a visual management tool to facilitate the organisation and planning of daily work, as well as to ensure the exchange of information in due time and the reliability of the shared information. The overview of the processes, provided by the tool, enables the assessment of the mutual implications in the development of the different tasks, which is of the greatest importance in an activity based on shift work. In the context of the Follow-up of Purchasesprojectatoolhasbeendevelopedwhichenables,amongotherfacilities,improving the supplier assessment procedures, monitoring the status of the orders and reduc-ing the time of the acquisition process. The A-Check A340 in 24 HoursprojectwasdevelopedinAircraftMaintenancewiththeobjectiveofdecreasingthedowntimeofthisaircraft,duringminorinspections.Thedevelopmentoftheprojectresultedinbenefitsbothfortheoperator,throughthereduction of aircraft downtime, and for maintenance, enabling the release of space in the hangar, as well as labour for other activities.

The development of the process of continuous improvement, with very positive results, operationally andfinancially,isalsoreflectedfavourablyintheorganisation,enablingthetransferofknow-howand,principally, promoting cultural change and adaptation to the new market reality, at an overall level.

New area of negotiation in purchases

Cost-cutting is a concern which is transversal to all areas and companies of TAP Group and, while the opti-misationoftheacquisitionofgoodsandserviceshasrepresentedanobjectivewhichisalwayspresentintheactivity of TAP–Maintenance and Engineering, in July the Negotiation area was created, integrated in the Logistics Department of this Business Unit. It should be noted that the volume of acquisitions of goods and services of Maintenance and Engineering represents an important value in the costs of this unit, standing at an annual total ofEUR150million.Themissionofthisnewareainvolvesensuringtheidentificationandexhaustiveuseofallsaving

Evolution in the concepts of management of safety and quality, focusing on a culture of con-tinuous improvementConsistent with the forecasts of the international analysts, the effect of the crisis in the aviation sector continued, in terms of maintenance com-panies, during 2010.

In this context, the strategy of Maintenance and Engineering has focused on the anticipation of the obstacles which might occur, acting inaccordancewithalinedefinedforthefuture,insteadofareac-tive and short term position. In this perspective, the pillars of its action have been based on the start-up of the implementation of an Operational Safety Management System (SMS), as well as the necessary organisational alterations for the creation of a culture of Continuous Improvement.

In a strategic perspective, 2010 represented the year which marked the start-up of the implementation of an Operational Safety Management System in Maintenance and Engineering, representingadefinitivesteptowardstheachievementofthefollowing level of the existing Quality Management System, corresponding to an evolution in the concepts of Safety and Quality management, relative to those practiced in a tradi-tional QMS (Quality Management System). In addition to the diagnosis and analysis of situations of risk, the SMS also enables the prognosis of potential dangers, as well as their mitigation and control. Hence, the focus of priori-ties of an approved maintenance company is thus guided and strengthened, in this way permitting the offer, toCustomers,ofserviceswhichareadjustedtotheirspecificprocedures, regarding safety andquality.This system, being created in TAP–Maintenance and Engineering, will be integrated directly in the SMS of TAP Portugal and will comply with the requirements and recommendations of ICAO, EASA and IOSA.

From an organisational point of view, 2010 was also marked by the introduction of a series of alterations with theobjectiveofmaximisingproductivityand the use of the existing assets, promoting a change of attitude with a view to achieving, in the future, a culture of continuous improve-ment, at an overall level. In this context, as a result of the work developed over the year, two areas were created in the Business Unit structure, the Organisational Transformation area and the Negotiation area.

The Organisational Transformation area seeks to ensure, through the application of appropriate methodology, the con-tinuous improvement of the processes of the different areas, thus optimis-ing the services which are developed and contributing to ensure higher standardsofqualityandefficiency.The Negotiation area was created within the Logistics Department, with the mission to exhaustively identify the opportunities of saving, in terms of technical pur-chases which are indispensable to the activity, ensuring com-pliance with the requirements of the operation and the quality requirements of this Business Unit, and ensuring the execution of the best purchasing and negotia-tion practices.


opportunities in terms of the acquisition of raw materials, products, equipment, consumer materi-

als, rotational components, repairs and other services which are indispensable to the maintenance activities. The mission should also include ensuring compli-ance with the requirements of the operation, as well

as quality, through the analysis of the supplier markets, purchasing patterns and needs of the operation, using the best purchasing and negotiation techniques.

Maintenance of engines reduces costs and improves efficiency and in-house

repair capacity

For Engine Maintenance, the year maintained the outlook of significantreductioninworkhours,althoughthenetincomeshowed notable growth, through the effect of the provision of services, namely, for Third Party Customers and also due to the achievement of better margins. This increase in net income was the

result of a considerable effort in the reduction of production costs. Forthispurpose,projectswereimplementedforvariousprocesses,in particular for the repair of combustion chambers, for the repair of honeycomb structures using vacuum brazing, and for the repair of

components using HVOF (High Velocity Oxy Fuel), with the alterations made having resulted in a decrease of external subcontracting byover20%intermsofvolume,andbyover17%intermsofvalue,without increasing the staff and with a favourable repercussion on the respectiveproductivitylevel.Inthecontextofefficiencyandorgani-sation,variousprojectsaimedatimprovementweredeveloped,usingLEANtechniques,ofsignificantimpactonthesustainedreductionof

Turnaround Time (TAT), generating, as a consequence, an increase in capacity and cost reduction. In a commercial perspective, note should be made of the signing of a four-year contract, under a regime of exclusiv-ity, with Ukraine International Airlines, for the maintenance of the CFM56 engineswhichequiptheBoeing737fleet,representingan importantupgrade in relations with this Ukrainian company, begun in 2007. In the meantime,theprojectfortheexpansionoftheworkshop,involvinginstalla-tions and new equipment for the Cleaning and NDT areas, was concluded and

is pending approval.

Maintenance of components approved as ARF (Authorised Repair Facility) of the APU (Auxiliary Power

Unit) manufacturer

In the area of component repair, which is highly vulnerable to the appearance of new technologies, due both to the diversity and levels of complexity and

investment involved, new workshop solutions were implemented (new test-beds andtools)foravarietyofequipmentoftheA320andA330fleets,thusexpandingthetechnicalcapacitytosupportthefleetsofbothTAPandThirdPartyCustomers,at lower costs levels. In view of the high value of the equipment in question, as well

as the cost of repair normally associated to these units, special mention should be madeoftwoessentialprojects:theupgradeoftheIDG(IntegratedDriverGenerator)test-bedandconclusionoftheinstallationandcertificationofthenewAPU(Auxiliary

Power Unit) test-bed, with these developments also representing an important factor of differentiation, in terms of the attraction of new customers, in this activity area.

Regardingthefirstproject,itssuccessfulconclusioncurrentlyenablesthetestingoftheAPUandIDGelectricalgeneratorsofTAP'sentirefleet,withsignificantreductionsin repair costs. Regarding the secondproject, the certification achieved representsan important milestone, where Hamilton Sundstrand, a manufacturer of this type of


Aircraft maintenance prepares for the growing needs of an intensively used fleet

The Aircraft Maintenance area ensured the total maintenance of TAP'sfleet,carryingoutatotalof326inspections,correspondingtoalowerfigurethanthatoftheactivityofthepreviousyear.Thisdecrease, which took place essentially in terms of minor inspec-tions, was basically the result of the manufacter's approval con-cerninganincreasementinthenumberofflighthoursbetweeninspections, which increased from an interval of 600 FH (Flight Hours)to800FHinWideBodyfleetsandto750FHinNarrowBodyfleets,inthiswayenablingareductioninfleetmaintenancecosts. Furthermore, work was carried out relative to the phase-out oftwoairplanesofTAP'sA320fleet.TheOperatingDispatchtech-nicalreliabilitystoodat98.95%fortheoverallvalueofthefleets,continuing the trend of improvement recorded over the past 4 years.

From a strictly technical point of view, note should be made of the replacementoftheRIB5,inanairplaneoftheA320fleet,madeforthefirsttimewithouttheuseofanAirbusteam,withcostsanddowntime considerably lower than those budgeted by the manu-facturer. This fact is even more remarkable since it is extremely uncommon for a maintenance organisation to carry out an operation of this complexity through the exclusive use of its own resources. During 2010, improvements were made to the Cabin Interior workshop, with the creation of a Clean Room, which ena-bles repairs in larger and more complex composite structures than had been the case up to date, thus avoiding the subcontracting of this type of work outside, considered extremely costly. In terms ofmajorinspections,theshareofThirdPartyCustomerscurrentlystandsatabout25%,withthemaintenancehavingbeenensuredto SATA, WHITE, FEDEX and AIR ARÁBIA MAROC aircraft. The maintenance of the two A340 of the French Air Force continues to beentirelyensured,withadispatchreliabilityof99.73%,repre-senting a higher level than the previous year and which was, once again, highly praised by this Customer.

Under the agreement of the provision of assistance to TAAG, started in 2009, EASA certification was obtained for Line MaintenanceinB777aircraft,inLisbon,withthefinalphaseofcertificationbeingunderwayfortheGRU(SaoPaulo)andGIG(Rio de Janeiro) stations in Brazil, thus contributing to the main-tenance of this company in the list of operators authorised to flyoverEuropeanairspace.Stillinthecontextofcertifications,TAP–Maintenance and Engineering in Lisbon, also obtained EASAcertificationforBasicMaintenanceofA330aircraft,with

unit, having attributed the Components Maintenance area with an approval as its ARF (Authorised Repair Facility), a condition

which, in addition to permitting repairs in units, under the guarantee, in representation

of the manufacturer, also enables access to repairs which are not advertised and belong to

it. The new equipment provides the area with the total capacity to repair and test the APU (APIC APS3200 model) which is currently re-equipping TAP'sA320FAMfleet.

Note should also be made, in this area, of the Project of Continuous Improvement, with the start-up of two pilot projects –Anticipating Material and Planning Priorities – involving the adoption of the best practices

of the Industry, as well as the use of visual management tools to control the work in progress, with a view to achievingsignificantimprovementsinproductivityand,

consequently, in the reduction of the delivery deadlines of the units.

The Components Maintenance area has an intervention capacityinapproximately70%ofthecomponentsofTAP'sAirbusfleet,andalsoprovidestotalsupporttovariousThirdParty Customers, namely, SATA and the French Air Force (FAF).

Of all the interventions carried out in both segments, TAP and ThirdPartyCustomers,approximately81.5%wasguaranteed

in-house. In terms of activity, the number of interventions, in aircraft units, stood at the same level as the previous year, withapproximately71.0%correspondingtounitsofTAP'sfleet.Therewasanincreaseof4.3%,relativetothepreviousyear,inthenumber of interventions in units of Third Party Customers, with

this segment continuing to be an important portion, corresponding to22.1%ofthetotalworkofthelabourforceofthisarea.


Quality certification TAP–Maintenance and Engineering received the IOSA audit (IATA Operational Safety Audit) during which no non-conformity was recorded. Likewise, there were various renewal audits by accredited entities, such as the Bureau Veritas audit (ISO 9001 and EN 9110 standards), the IPAC (Portuguese Accreditation Institute) audit of the CalibrationsLaboratory,aspartofthecertificationundertheNPENISO / IEC 17025:2005 Standard and, in November, the usual annual quality audit of the FAA (Federal Aviation Administration). This audit is essential for the annual renewal of the FAA Repair Station approvalcertificate,whichtheBusinessUnithasheldsince7July1983. Apart from being a prior condition for the carrying out of maintenanceworkforAmericanoperators,thiscertificationisalso a source of prestige for TAP–Maintenance and Engineering in the MRO market.

Noteshouldalsobemadeoftheobtainingofthecertifica-tion by Egypt's Civil Aviation Authority, which will enable the achievement of maintenance contracts of operators based in that Country. Also during 2010, other quality audits were made by the aviation authorities and their customer opera-tors, essential for the maintenance of various approvals within the scope of its activity. In order to support the Marketing and Sales efforts of the Business Unit, in the attraction of new customers, it is expected that there willbeaneed,in2011,toprepareandobtaincertifi-cation from aviation authorities of other countries, with various possibilities currently being under study. It is expected that the transition will begin from the current ISO 9001 and AS 9110 standards to new ones, with the respective updating of procedures and manuals, in anticipation of the renewal audit of Bureau Veritas. During 2011, the procedures of TAP–Maintenance and Engineering will also be reviewed and updated, in order to be adequate to the 3rd review of the ISARP of IOSA.

National and International Certifications

PORTUGAL IPAC (Inst. Port. de Acreditação): NP EN ISO / IEC 17025:2005

PORTUGAL / UE INAC / EASA: EASA Part-145

INAC / EASA: EASA Part-M Subparts G e I (CAMO)

INAC / EASA: EASA Parte-147

FRANCE French Air Force / DGA: AQAP 2120 / ISO 9001:2008

EU EASA: EASA Part-21 Subpart J (DOA)

USA FAA: 14 CFR Part 145

INTERNATIONAL IOSA: IATA

Bureau Veritas: NP EN ISO 9001:2008 / AS EN 9110:2005

RR Trent 700 engines, which enabled carrying out work for IBERWORLD.

One of the strategic objectives of Maintenance andEngineering is to continue to represent an attractive main-tenance option for its internal customer, TAP. For this purpose, variousprojectsweredeveloped,namely theCabin Appearance project with a view to improvement in terms of the passenger cabin during the more thorough "C" inspections, under which interventions have already been made to 10 airplanes. Likewise, a Reduction of Turn Around Time has been achieved in the minor "A" inspec-tions of A340 aircraft, which has fallen from 36 hours to 24 hours, well in line with the Company's commercial inter-ests, with respect to the minimisation of aircraft downtime.

Guaranteed career development and renewal of staff

The average number of staff in 2010 was 1,963 employ-ees,some0.3%abovethe levelofthepreviousyear,having reached 1,942 employees as at 31 December 2010, corresponding to 19 less employees than at the end of 2009. During the year, 122 employees left the Company while 96 were recruited, and 180 employees were made permanent staff members (excluding direct admittance into the permanent staff). In 2010, a total of 615 training sessions were carried out, over a total of 108,454hours,inclassroomsandon-the-jobsituations,covering a total of 8,705 trainees, corresponding to a level ofopportunityof95%.Inrelationtothepreviousyear,thistrainingprogrammeincreasedby39.9%intermsoftraineesandby7.9%intermsoflevelofopportunity.


2010wasmarkedbytheimplementationoftheCITPProject(CommonInformation Technology Platform), with the integration, in March, of the TAP Booking and Inventory functionalities in the Amadeus Altea system and with the migration of the TAP stopovers to the new passenger con-trol and boarding platform, started at the end of 2010, with the Porto stopover.Themigrationofthelaststopover,expectedforthefirsthalfof2011,willfinallyconcludeaprojectwhichwillallowTAPtoadoptnewprocesses as well as explore, in a more effective manner, the advan-tagesandsynergiesresultingfromhavingjoinedtheSTARAlliance.Thefinalisationofthisprojectwillalsomarktheconclusionofthe1stphase of the implementation of the new services oriented architec-ture, aimed at enabling the meeting, in a faster and more effective way, of the growing demands of the commercial aviation business.

AlsoofparticularnotewasthefinalisationofthefirstphaseoftheCOSMOSBrazilproject,whosemainobjectiveistheinte-gration and standardisation of the maintenance processes between the Portuguese and Brazilian units. In this context, new solutions were implemented to support the operating and audit processes of aircraft maintenance quality and for the management of technical manuals. At the same time, andinaccordancewiththeoverallplanoftheproject,activities took place for the renewal of its technological infrastructure and information technology equipment.

The production of Key Performance Indicators and the provision of the information in the form of dash-boards and reports constituted one of the main tools supporting the decision-making of the Company's management, requested by a growing number of areas, in the context of the Group. For this purpose, a notable effort was made in the consolidation of information, quality of the data as well as in the construction of a single vision of information to support decision-making. New indicators, reports and dashboards were created associ-atedtothefinancialandanalyticalinformationon bookings and boarding, of the Victoria pro-gramme, crew, fuel and CO2. emission rates. As a consequence of the increased number of requests,inthiscontext,asignificantinvest-ment was made in the processes of support to and development of the information and projectmanagementarchitectures.

The Documental Management consolidated the developments which,havinginitiallypromotedtheacquisitionofaspecifictool,alsorespondedtoasignificantincreaseinrequests,withaviewtooptimis-ingandaddingfurtherflexibilitytodocumentalprocesses,intheentireCompany. In this context, special attention was given to its integration with various other systems which already existed in TAP, amongst which, in particular, the DOV Portal, intranet, complaints management sys-tem and the operating systems of TAP–Maintenance and Engineering, permitting greater integration and optimising the entire procedural component associated to daily operations. The digitalisation of docu-ments constituted another important initiative, with a procedure having been developed for the daily entry of thousands of documents, in this platform.Alsoincludedinthisinitiativeweretheflightprocessesandthe correspondence with the Speak to Us (Fale Connosco) unit, increas-ing the resident documental collection. In terms of the documental and information exchange lifecycle there are permanently an average of12,000activeworkflowswhichproduceandprovideinformationtoandfromemployees.Themainobjectivesoftheseprojectscontinuetobe focused on the interconnection and management of the information which circulates in the business processes transversal to the organisa-tion,andwhichareverylargelysupportedbyofficialdocumentation,requiring control and security. Documental Management is currently a fundamental source of support in the demonstration of the required conformities, in the context of the various audits carried out at TAP.

Also noteworthy were the technological updates carried out in the SAPsystems,withthisprojecthavingtakeplaceatthesametimeasthe technological migration of the SAP system of TAP– Maintenance and Engineering Brazil to the Lisbon data processing centre. This is atechnologicalevolutionwhichcurrentlypermitsbenefitingfromthe functionalities existing in the last version available on the market, in both Maintenance and Engineering units. This also permitted the implementation of the electronic bill of sale functionality for TAP– Maintenance and Engineering Brazil, a development which, apart from enabling the implementation of a legal requirement, represents a significantproceduralandtechnologicalleap,fortheBrazilianopera-tion.Furthermore,varioussignificantdevelopmentswerecarriedoutinSAP,inparticulartheintegrationofnewfinancialareas(VenezuelaRepresentation and the mergers of AP TOURS and Reaching Force), and the evolution of the Treasury solutions; the expansion to the entire TAP GroupoftheSupplierCockpitsystem,thusincreasingtheefficiencyofthe entire invoice approval process inside the Group; the conclusion of the renovation of the Clock-in system and respective time collec-tionclocksand,finally,theimplementationofaCaterersManagementPortal, in order to optimise and centralise the management of these suppliers, in national stopovers.

Information Systems and Technological Development


Most representative developments in progress at the Company

TAP, S.A.

AIR TRANSPORTCommon IT Platform (CITP) Operationalisation, on 14th March, of the Booking, Ticketing and Inventory system;

Operationalisation of the Departure Control system, started for the Porto stopover, as a pilot stopover, on 9th November, followedbytheLisbonstopover,on7thDecember.TheCITPprojectwillbeconcludedin2011,withthemigrationofthelast stopover still using the former system;

PROS (Revenue Management) The creation of a new interface with the booking system has permitted altering the system's optimisation logic.

ATHOSBusiness Inteligence Project

Creation of models for various clusters of information, namely: Operation (Crew, Fuel, ATC costs, ETS, AGS); OCC (Punctuality,Baggage);Production(Traffic);Marketing(VictoriaProgramme);

CARGOSPOT Start-upoftheimplementationprojectofthenewCargo,MailandRevenueAccountingsystem;

Fast Travel Beginningoftheanalysisphaseofthisproject,promotedbyIATA,aimedatensuringgreaterconveniencetothepassengerduringthejourney,andincludesthefollowingservices:Documentcheck;Bagsreadytogo;Flightrebooking;Self-boarding;Bagrecovery.

TAP–MAINTENANCE AND ENGINEERING

DEVELOPMENTS OF THE INTEGRATED INFORMATION SYSTEMS PLATFORM – COSMOS

DRACO (Directive Airworthiness Control System)

Implementation of Phase II;

GENESIS V2 (General Engine Shop Information System)

Under development;

SPACE (System for Planning and Control of Aircraft Maintenance)

The Short Term Planning module is under development;

SCORPIUS (System for Control, Ordering and Procurement Inventory)

Module for the management of customer complaints;

New website of TAP–Maintenance and Engineering

Signing of the contract with AIRBUS ForthesupplyofRFID(RadioFrequencyIdentification)solutionsfortheEngineareaandstart-upofitsdevelopment;

Various developments in the platform associated to CAMPUS-TAP–Maintenance and Engineering

Namely accesses to applications in the area of Quality, online Intervention requests, link to TAP– Maintenance and Engineering Brazil, transfer of inspection protocols, amongst others.

DEVELOPMENTS IN THE CONTEXT OF THE PROCESS OF REORGANISATION OF TAP– MAINTENANCE AND ENGINEERING BRAZIL

Start-up of the COSMOS platform implementation project

TAP–Maintenance and Engineering Brazil SAP Upgrade and Migration;

Implementation of the NF-e modules (Electronic Bill of Sale);

Start-up of the implementation of the new micro-computer equipment.

OTHER DEVELOPMENTS

ADP 2010 Assessment of Performance and Potential, via an online platform;

ADP TAP–Maintenance and Engineering Brazil Assessment of Performance and Potential for TAP–Maintenance and Engineering; Brazil.

TAP SERVIÇOSSAP Introduction of new functionalities derived from technological updates;

Traffic Revenues Implementation of the new allocation system;

Conclusion of the 1st phase of the refund management system.

Communication in the context of the Group Renovation of the intranet, including the implementation of the Communication Portal

Travel Office Portal Conclusionofthe1stphaseoftheproject,developedwiththeobjectiveofoptimisingandautomatingtheprocessofman-agement of travel facilities requests;

Assessment of Performance Start-up of the implementation of the tool to support the process;

Confirmation of Fuel Invoices Beginningoftheprojectfortheimplementationofasolutiontosupportfinancialandlogisticsprocesses.

SPDH–Serviços Portugueses Handling, S.A.

INFORM Activitiessupportingtheimplementationoftheproject,expanded,in2010tovariousareas;

Alteration of the fiscal year Restructuringofthedifferentmodulesofthesupportinginformationtechnologysystem(financial,logisticandHR),aswellas the system of indicators.

PORTUGÁLIA–Companhia Portuguesa de Transportes Aéreos, S.A.

BSC – Balanced Scorecard System Implementation of indicators and reports on the activity;

Campus PGA Replacement of the existing intranet;

NetLine Crew / ILOG Rules ParticipationintheprojectwhichwillenableanautomaticcontroloftherulesrelativetoCrewManagement.


During 2010, the new Human Resources Management model was consolidated in TAP Group which, aimed at the optimisation of resources, through the use of synergies of scale and the standardisation of the procedures associ-ated to this function, is based on two structural pillars: a functional team of Human Resources managers – Human Resources Business Partners and a central team of specialists – Shared Services of HR Specialists.

Likewise, during the year, the strengthening of the alignment of the HR policies with the strat-egy of the organisation, and the continuation of a policy of innovation of processes, were main-tainedaskeyobjectivesoftheGroup'sHumanResources function.

In this area, special note should be made of the aspects of transversal character, covering, in this focus, processes as well as the implemen-tation of tools using Information Technologies (HR). The strong investment carried out, aimed at the optimisation of the management, as well as the reduction of the cost of adminis-trative task services, per employee, also aimed to promote decreased dependence between the Human Resources services and employees, through a greater degree of employee auton-omy, thus making the employee responsible for theuseofandbenefitprovidedbythesystems.

The following were of particular importance in this context:

ρ Implementation of the Communication Portal of TAP Group: Concentration, in a single dedicated space, of institutional information and communication, internal and external, relative to the Group (part-nership established between the Human Resources area and the Communications and Public Relations area).

ρ Implementation of the Home Page of TAP Group: The solutions seek to meet the Group's needs, encouraging the gen-eral use of a single institutional intranet of TAP Group;

ρ Implementation of Electronic Forms and Digitalisation of Printed Forms of TAP Group: Increased efficiency of approval processes and responses to Employees;

ρ Implementation of the Clock-in System on the Intranet: Clock-in System, included in HR electronic system, with new functionalities, greater reliability and sim-plified treatment of attendance data;

ρ Strengthening of the e-Learning training system, with intensification of the offer of e-Learning training actions.

reductions in the companies UCS and Megasis, of 6 and 2 Employees, with 13 having been the result of the extinction of AP Tours, through merger with TAP, S.A. in June 2010. There was alsogrowthinthecompaniesCateringpor(+4),LFP(+44)andPGA(+3).

By the end of the year, TAP, S.A. accounted for 53.8%oftheGroup'stotalnumberofemploy-ees, SPdH–Serviços Portugueses de Handling employed 18.2% and theOther Companies28.0%.TheaveragenumberofactivestaffofTAP Group, excluding the Other Companies, reached a total of 9,407 employees, of whom 560werelocatedabroad.Thisfigureislowerthanthatfor2009,by162employees,reflect-ing the staff reductions across the Company.

TAP Group Staff

As at 31 December 2010, TAP Group (TAP, S.A. and other participated companies) employed a staff of 13,113 workers, 284 less than as at 31 December 2009. This fact was essentially due to the reductions of employees in the other remaining companies as a whole as well as in the associated company SPdH–Serviços PortuguesesdeHandling.Themostsignificantalterations in TAP, S.A. took place in the staff of the Maintenance and Engineering, and Air Transport Business Units, with a reduction of 19 and an increase of 93 employees, respectively. The total staff of TAP, S.A. (7,055 employees) increased by 69 persons, with alterations hav-ing taken place Flight Deck Crew staff (-7 Pilots, +38 Flight Attendants and Stewards) andGroundStaffofAirTransport(+62Employees).The staff of the other companies (3,676 employ-ees) decreased by 296 employees, largely due to the reduction of 326 Employees in the com-pany TAP–Maintenance and Engineering Brazil. Whileof lesser significance, therewerealso

Human Resources

TAP Group StaffSituation on 31 December 2010

Employees % Total Variation

Ground Staff, Portugal 918 7.0% 5.5% 48

Ground Staff, Abroad 543 4.1% 2.6% 14

Total Air Transport – Ground Staff 1,461 11.1% 4.4% 62

Cabin Crew 2,319 17.7% 1.7% 38

Flight Deck Crew 802 6.1% -0.9% -7

Total Air Transport Flight Crew 3,121 23.8% 1.0% 31

Air Transport Staff 4,582 34.9% 2.1% 93

Maintenance and Engineering Portugal Staff* 1,942 14.8% -1.0% -19

TAP Serviços Staff 496 3.8% -0.4% -2

Other Staff of TAP, S.A. 35 0.3% -7.9% -3

Total TAP, S.A.** 7,055 53.8% 1.0% 69

Total SPdH, S.A.*** 2,382 18.2% -2.3% -57

Remaining Companies 3,676 28.0% -7.5% -296

TOTAL TAP, SGPS, S.A. 13,113 100% -2.1% -284

* Includes staff Abroad, of a total of 25 and 19 employees, in 2010 and 2009, respectively.** Not including non-placed and non-active staff *** Associated Company

02,0004,0006,0008,000

10,00012,000

Active Staff on 31 December

2006 2007 2008 2009 2010

Ground Staff, Portugal Flight Crew

Ground Staff, Abroad Total Staff - Dec 31

Total - Average Staff

Number of Employees (SPdH, S.A. and TAP, S.A.)

Employees of TAP Group companieson 31 December

34.9% Air Transport 6.1% Flight Deck Crew17.7% Cabin Crew11.1% Ground Staff

14.8% Maintenance and Engineering 3.8% TAP–Serviços 0.3% Other Staff of TAP, S.A.18.2% SPdH, S.A.28.0% Remaining Companies

53.8% TAP, S.A.(excl. Participated Comp.)


Training

The development of Training at TAP takes places along two different lines:

ρ Initial Training: withtheobjectiveofpreparingnewEmployees for their integration into the Company and workplace, aimed at the correct and suitable jobperformance;

ρ Continuous Training:withtheobjectiveofmain-tainingtheproficiencyof itsEmployees,aimedat ensuring the quality and safety of the service performed;

AtTAP,theTrainingprocessincludesbothSpecificTechnical Training (initial and continuous) and TransversalTraining.Thefirstaspectisdirectedattheperformance of duties in each Area of the Company, corresponding to any needs encountered as well as compliance with national and international rules for Commercial Aviation. In the second aspect, the actions are chosen carefully in order that they mightalsobeofbenefit to theEmployeeand theCompany. In order to minister this Training (apart from on-the-jobtraining),TAPhasaProfessionalTrainingCentre in a specific building, with fully equipped Training Classrooms, Workshops, Laboratories, Technical Training Classrooms, a Classroom for Distance Training (e-Learning), Mock-ups and Flight Simulators. This Training model adopted by the Company is based on the use of internal Trainers, for motivesrelatedtothestrictspecificityofitscorpo-rate reality. Likewise, the internal development of thee-LearningTraininghasbeenintensified,withallthe Training being designed by internal Trainers, duly supervised by a technical and pedagogical team.

New Opportunities Initiative

Maintaining its commitment to the constant enhancement of the value of its Employees, TAP continued, in 2010, with the process of operationalisation of the New Opportunities Initiative, which continued to be developed as an itinerant scheme by the New Opportunities Centre (CNO) of Eça de Queirós Secondary School, since the Company is included in theEducationLetteroftheareaofinfluenceofthatCNO.

In 2010, the enrolment was as follows: 84 Adults in Elementary Education and 353 Adults in Secondary Education. By the end of the year, 22 Adults in Elementary Education and 21 Adults in Secondary Education lev-els had concluded the process and received Certification.

School-Company relationship

Another aspect of the Vocational Training responsibility consists of the coordination of the Curricular Internships, developed in different Areas of the Company. Upon the request of Schools, or through the ini-tiative of TAP, in 2010, 92 Curricular Internships were carried out.

02,0004,0006,0008,000

10,00012,000

Active Staff on 31 December

2006 2007 2008 2009 2010

Ground Staff, Portugal Flight Crew

Ground Staff, Abroad Total Staff - Dec 31

Total - Average Staff

Number of Employees (SPdH, S.A. and TAP, S.A.)

Employees of TAP Group companieson 31 December

34.9% Air Transport 6.1% Flight Deck Crew17.7% Cabin Crew11.1% Ground Staff

14.8% Maintenance and Engineering 3.8% TAP–Serviços 0.3% Other Staff of TAP, S.A.18.2% SPdH, S.A.28.0% Remaining Companies

53.8% TAP, S.A.(excl. Participated Comp.)

TAP Group Volume of TrainingTAP, S.A. TAP Group

2009 2010 Var. 2009 2010 Var.

Training Actions 1,220 2,492 104.3% 2,943 5,009 70.2%

Participants 12,598 17,672 40.3% 23,761 32,944 38.6%

Training Hours(000)

243.7 303.7 24.6% 557.4 669.7 20.1%


With regards to the remaining shareholdings held by TAP, SGPS, S.A., it is important to men-tion the development of activity in areas related to the main businesses of the Group – Air Transport and Maintenance and Engineering – which work through their services to enable a better con-trol of the service chain, as well as the increase in competitive advantages promoted through the effects of synergies. The selection criteria for these investments was based on the assumption that the development of the respective activities contributes to the strengthening of the Group’s main businesses, through returns on the capital invested, held by TAP, directly or indirectly, wholly or only as part of the share capital of that group of companies.

With the fundamental objective of supervis-ing the management of some of its subsidiaries, which are non-aviation companies, TAP also has a company which functions as a holding company, TAPGER–Sociedade de Gestão e Serviços, S.A..

Similarly to the trend in the Industry, TAP holds itsfinancialinvestmentsinthefollowingareas:Catering, Information Systems, Airport Shops and In-flightSales;Health-CareServicesandGroundHandling Services.

In May 2010, the company Reaching Force, S.A. was extin-guished through merger by incorporation into its only shareholder TAP, SGPS, S.A.. This company was originally created as a vehicle company for the purpose of acquiring astakeofstrategicinterestinVARIG(Brazil).Thisprojectmaterialised in the acquisition of the Brazilian company AERO-LB which, in turn, acquired Varig Manutenção, currently TAP–Maintenance and Engineering Brazil. ThemissionofReachingForcehasthusbeenfulfilled,and there is no longer any reason to maintain it. Also of importance was the disposal of TAP's indirect stake in Air Macau Cª Lda., with the company SEAP having been extinguished as a consequence.

The company Air Portugal Tours, following the adop-tion of more up-to-date instruments with greater efficiencylevels,wasextinguished,throughmergerwith TAP, S.A., on 4th August 2010.

Other Activities of TAP Group

Other TAP Group shareholdings on 31 December 2010 (EUR thousand)

Stake of TAP (%)

Amount of TAP Share

Capital

Net Income

Portugália, S.A. 100 15,000.0 (6,143)

AeroLB, Participações, S.A. 100 27,544.8 (71,799)

TAP–Maintenance and Engineering Brazil, S.A. 98.64 207,057.7 (73,104)

TAPGER–Sociedade de Gestão e Serviços, S.A. 100 2,500.0 4,054

Catering Cateringpor–Catering de Portugal, S.A. 51 1,785.0 1,589

Airport Shops and In-flight Sales LFP–LojasFrancasdePortugal,S.A. 51 280.5 7,354

Information Systems Megasis–Soc. de Serviços e Engenharia Informática, S.A. 100 500.0 144

Health-Care Services UCS–Cuidados Integrados de Saúde, S.A. 100 500.0 n/a


Communication An attitude with transversal effects on all the companies of TAP Group



Chairman Alda Maria dos Santos Pato

Secretary José Carlos Magalhães Ferreira

Board of Directors

Chairman Fernando Abs da Cruz Souza Pinto

Member Fernando Jorge Alves Sobral

Chief Executive Officer Luiz Filipe Plácido Lapa

Member Manoel José Fontes Torres

Member Michael Anthony Conolly

Audit Committee

Chairman Luís Miguel Tavares de Almeida Costa

Member Maria de Fátima Castanheira Corte Damásio Geada

Member Maria Paula Rodrigues da Costa

Chartered Accountant

PricewaterhouseCoopers & Associados, SROC, Lda.

Registered Office

Aeroporto de Lisboa, Rua C – Edifício 70

1749-078 Lisboa

Tel.+351218425500

Fax +351218425625

Email: [ [email protected] ]

[ www.portugalia-airlines.pt ]

Share Capital EUR 15,000,000

Taxpayer no. 502 030 879

Main Activity

Air transport.

Portugália–Companhia Portuguesa de Transportes Aéreos, S.A.

In 2010, Portugália (PGA) completed 20 years of existence. Two decades of history with very different periods but, always of growth and adaptation to the changes. This commemoration, on 7th July, was marked with the launch of the company's new website, which communicates the company's new reality and its focuses on the ACMI market, of aircraft maintenance services and training. This is intended to be an interactive tool for positioning on the civil aviation market.

During 2010, PGA continued the process of consolidation of the business model resulting from the restructuring which took place in 2007, and maintained since July of that year: flight capacity provider of TAP Group, under the Wet Lease contract with the company Transportes Aéreos Portugueses, S.A.. In 2007, the company was integrated in TAP Group, directed towards a new core business. During 2010, PGA continued to valorise the Group's synergies and operating matricesidentifiedinpreviousyears.Thecompanymaintainedtheoperationwiththesamefleet,composed of six Fokker 100 and eight Embraer 145, with a capacity of 97 passengers and 49 pas-sengers, respectively. The average Flight Hours per day continued higher than that recorded by similar European companies operating with the same type of aircraft, a performance which was possible only through improved productivity, always combined with safety. The IOSA audit (IATA Operational Safety Audit) is expected in 2011, being an audit that PGA has passed with distinc-tion since 2005, complying with the approximately 900 established requirements, without which it could not continue registered at IATA.

In 2010, the investment in People continued, through programmes of development of the respec-tive technical, social and management skills, which are essential to sustain the business competitive advantage. Management processes and practices were also promoted, contributing to satisfac-tionatworkandtotheEmployees'dedicationtoachievePGA'sobjective,intheperspectiveofconsolidation of the Human Resources Policy in TAP Group. The recognition of excellent perform-ancebytheEmployeeshasbeenencouragedandpromotedbythecompanywhich,forthefirstyear, participated in TAP's Sympathy and Recognise programmes. The Sympathy Programme is based on allowing passengers/customers to positively distinguish Employees with whom they have direct contact, with twelve members of the Cabin Crew Service having been distinguished by passengers. In the Recognise Programme, four Employees were praised for their exceptional work,withdirectimpactonthecompany'sfinalresult.ThepromotionofEmployeeHealthalsorepresented one of the measures which were developed. The Health Insurance now includes two newareasofcoverage:stomatologyandartificialeyes.Alsointhiscontext,PGAjoinedtheSaúde+ Programme promoted by the company UCS.

UndertheprojectofGoodPracticesandcontinuousimprovement,HumanResourcesimple-mented the sending of the pay slip to the Employee's e-mail address, permitting administrative andfinancialgains,theeliminationofpaperaswellasdatasecurity.Theclock-insystemfortheGround Staff – TempusNET was upgraded, facilitating its use and simplifying the processing of attendance data and, meeting the needs of the operating area. Furthermore, the Regulation on Professional Careers of the Ground Staff was completely implemented. The total number ofEmployees,asat31December2010,was534,with68%beingintheFlightOperationsDepartment(FlightDeckCrewandCabinCrew),20%intheMaintenanceandEngineeringDepartmentand12%inothersupportingareas.Ofthetotalnumber,42%arewomenand58%aremen.Itshouldbenotedthat42%oftheEmployeesarelessthan35yearsold,and47%havemore than 10 years of active service. The average age is 37 years.

Operating performance

Therehasbeenanincreaseof3%intheblock-hoursflowncomparedwith2009,relatedtothepilots'strikewhichoccurredduringthisyearandadecreaseof5%,relativetothebudgetarisingmainly from the cancellations of operations due to the cloud of volcanic ash (from the Icelandic volcano,Eyjafjallajökull)andstrikesoftheATC(AirTrafficControllers),namely,inSpain.

Maintenance and Engineering

Followingtheprocessinitiatedin2009,certificationwasobtainedforthestructuresworkshop,cabin interiors and the scope of the battery workshop was enlarged, thus expanding the offer of services.Theprojectsinthetrainingarea,incoordinationwithTAP'sTrainingCentre,continuedtobeapriority.Inthecontextofinternaltraining,contactswithATECwereinitiatedforthedefinitionof a programme for the training of Aircraft Maintenance Technicians and a transversal behav-ioural training programme. Within TAP Group, in coordination with the TAP's Training Centre

mailto:[email protected]

http://www.portugalia-airlines.pt


and Maintenance and Engineering Department, basic training courses were given for Aircraft Maintenance TechnicianswithAandB1certificationlevel.Thisprogrammehadgreatimpact,involvingapproximately10%oftheavailablelabourinthelabourplanprogrammedforworkonPGA'sfleet.Therefore,inviewofthe additional work, use was made of subcontracted labour as well as the provision of overtime. In contrast, thistrainingensurespresentneedsintermsofpersonnelaswellascertification,andalsocorrespondstoaninvestmentforthefuture.For2011,theinstallationofgreaterworkshopcapacityhasbeendefinedforwheels,brakes and electrical material.

Regarding the optimisation of processes and cost reduction, the introduction of the Crew Concept will lead to improvements in the service rendered, releasing the Aircraft Maintenance Technicians for work which is more specialisedandwithgreateraddedvalue.ThisprojectimpliesimprovedcoordinationbetweentheFlightandMaintenance areas, as well as greater demands on the handling provider (Groundforce) in Lisbon and Porto. For this purpose, an apron supervision sector was created to function in PGA's hangar, including the assess-ment of the provider's service quality, also in coordination with TAP's stopover (Customer Attendance Service). Regardingcontractualmatters,noteshouldbemadeofthereview,startedin2009,ofveryimportantandmajorcontracts in terms of costs, such as is the case of the contracts relative to component maintenance (EUR 2 million peryear).Inadditiontothesignificantimpactintermsofcostreduction,thischangeofserviceprovideralsoledtoimprovementsinthequalityoftheservice,since,intheFokkerfleet,precautionsweretakenagainsttheprob-lems arising from the existing obsolescence and penalties. This programme will continue in 2011 with the Embraer fleetcontractsforBrakesandComponents,thusleadingtoexpectationsofmorefavourablefinancialconditionsand improved guarantees and services provided. The total impact will be analysed at the end of 2011. Regarding the possibility of the provision of services by TAP–Maintenance and Engineering Brazil, a visit was made and a proposal prepared, with the potential business thus brought inside the Group being about EUR 1 million/year (maintenance of landing gear and other Embraer 145 components), phased over 4 years.

Quality

Safety: The monitoring of the Industry's requirements continued with respect to the improvement of the safety man-agement system, in compliance with the internal requirements and those of the international and national regulating entities. The ongoing evolution in this area resulted in the development of new processes, with the appropriate means being implemented.

Flight Staff: The constant dedication to the improvement of Customer service quality was maintained, within the parameters requiredbyTAP.ThenumberofcomplaintsmadebyPassengersofPGAfleetTAPflightsisanindicatorthatthecompanyisonthe right path towards providing a Service of Excellence to the Passenger.

Environmental Policy: In the context of the integration of aviation in the greenhouse gas emissions trading scheme (EU ETS), PGA monitors the CO2 emissions of its aircraft and tons per kilometre. The latter, carried out only during 2010, permits the applica-tion of a free quota of emission permits for the period between 2012 and 2019. The monitoring process is managed autonomously by PGA, with TAP being responsible for the reporting for the two companies to APA (Portuguese Environment Agency). Moreover, demonstrating,onceagain,itsenvironmentalawareness,thecompanyjoinedtheMore Value programme in May 2010. This pro-gramme consists of the sending of the organic waste from the canteen to Valorsul Organic Treatment and Valorisation Plant, for transformation into organic compost for agricultural purposes, without chemical additives, producing electrical energy from the combustion of the biogas resulting from the composting process.

Jet Fuel: PGAmanagesitsFuelConservationprojectinternally.ThroughtheworkcoordinatedbytheFlightOperationsDepartmentand Maintenance and Engineering Department, the fuel policy was created characterised by measures to optimise fuel consumption, withongoingfine-tuning.However,theeffectivereductionoffuelconsumptionispossiblyonlythroughthecommitmentoffullinvolve-ment, valorising the systematic sum of small gains, a principle which has guided the implementation of various measures.


SPdH–Serviços Portugueses de Handling, S.A.

The Strategy – continuous improvement of service quality

2010 was marked by the phase of consolidation of Service Quality, where Corporate Customers Satisfactionimprovedfrom77%to81%,aswellasthatofPassengerCustomersfrom78%to84%.Itwas also the year of the full implementation of the new Groundforce management, where the struc-turebasedonwelldefinedKeyProcesses,andtheirrespectiveindicators,becameanintegralpartof the company's culture. While the global economic recovery is still a distant promise, in addition to thecancellationofhundredsofflightsduetothenaturalphenomenawhichoccurredinEurope,thecompany managed to achieve strict control of the programmed costs, with this effort having been reflectedinarecoveryoftheloss,ofoverEUR5.5million,inrelationtothepreviousyear.

Quality – a strategic factor in development

Groundforce perceives Quality as one of the strategic factors in the development of the organi-sation, considering the Customer, external or internal, as the point of convergence of all its efforts. With this commitment, the company assumes a Policy of the Integrated Management of Quality, complying with and stimulating the Integrated Management System, in the areas of Quality, Safety and Security, Health and Safety at Work, as promoting ethical behaviour and social responsibility, with a view to the path towards Excellence.

Under this Policy of the Integrated Management of Quality, the ISO 9001:2008, ISAGO/IATA, OHSAS18001:2007andCargo2000(C2K)Certificateswhichhavebeenobtained,follow-ingtheobjectivesdefinedfor2010,aswellastheInvestorsinPeople,EnvironmentandSocialResponsibilitycertificates,tobeobtainedintheshorttermandtheEFQMModelofExcellence,to be obtained in the medium term, will certainly enable achieving the entirety of the good practices, which are essential to ensure operational excellence. Groundforce pursues an orien-tationbasedontheseprinciples.ThecompanyisanISO9001:2008certifiedentity,itisproudtobepartofthefirstgroupofEuropeanhandlerstoreceive,inalloftheStopoversinwhichitoperates,theISAGOIATAcertification,areferenceinthesector,andachieved,on23August2010,theCargo2000(C2K)certification,fortheperiodof3years,contributingdecisivelytotheestablished standard of Excellence.

ConcerningSafetyandHealthatWork,in2009theNP4397:2008/OHSAS18001:2007certifica-tionprocessbegan,andasignificanteffortwasmadeover2010inordertomeetthenecessaryconditionsforthiscertification,which,whenachieved,willrepresentamilestoneofthegreat-est importance for Groundforce.

Complementarily, Groundforce, convinced that the extent of the success of companies is increasingly based on the interests of the different stakeholders, started, in October 2010, theNPENISO14001:2004andSA8000certificationprocess,withtheintegrationofSocialResponsibility in its Management Practices, in this way establishing the desirable balance between economic, environmental and social performance. In 2010, the process of implemen-tation of the EFQM Excellence Model was initiated in order to increase the company's Operating Efficiencyandimprovethebalanceofthestakeholders,withtheobjectivefor2011havingdefinedasthecompany'scandidaturetotheAPQ(PortugueseQualityAssociation).

The Business – commercial attitude as a factor of differentiation

In the context of the development of sales, 25 contracts were renewed and 6 new customers wereattracted,reflectingtheclearandfaircommercialattitude,which,bypromotingacleardifferentiation of the service provided, leads Customers to attribute their preference to the com-pany. In the Sales process, technical and organisational interfaces are established in order to control the allocation of resources. With the development of a progressively more competitive and demanding market, knowledge on Customer requirements is of extreme importance. For this purpose, careful and attentive management of all the services complementing the core activity, frequentlydefinedinaccordancewiththespecificneedsofeachCustomer,invariablycontributesto the Customer's satisfaction. Services which are already consolidated, such as the Blue Lounge, Groundcare, Baggage Delivery and Personalised Assistance, enable the provision of an integrated offer and which is progressively more complete. In the area of increased revenue, a Turnover MaximisationProgrammehasbeenpreparedwiththemainobjectiveofboostingturnover,inaneffectivemanner,combiningbenefitsforcorporateCustomers,andalwaysincluding,tothegreatestextentpossible,specificproducts,inordertoaddvaluetotheoffer.Noteshouldbe


Chairman Alda Maria dos Santos PatoDeputy Chairman Carlos Pedro Silva Secretary Carlos Pedro Silva

Board of Directors

Chairman Luís Manuel Miguel Correia da SilvaChief Executive Officer Fernando Alberto Mesquita de MeloMember Carlos Gomes NogueiraMember José Manuel Fragoso de SousaMember Luís Manuel da Silva Rodrigues

Statutory Auditor

Permanent PricewaterhouseCoopers & Associados SROC, Lda.

Registered Office

Edifício 25–6°, Aeroporto de Lisboa1700-008 LisboaTel.+351218918700Fax +351218918701

Email: [ [email protected] ][ www.groundforce.pt ]

Share Capital EUR 500,000Taxpayer no. 506 651 649

Main Activity

Provision of ground handling services for air transport.


http://www.groundforce.pt


Attended Passengers in Lisbon million

2008 2009 2010

10.39.710.0

TAP Third Parties

Third Parties Variation

Total Weighted Attended Movements in Lisbonthousand

2008 2009 2010

52.751.554.6

TAP

-5.7%

2.2%

made of the current trend of the airline companies of the charging of items, as an addition to their basic ticket price, and therefore as a means to increase the respective revenue. Groundforce, as a handling agent, should be the principal mobilizing agent of this policy, and strictly follow these practices of its Customers,sincethispolicywillalsobereflectedintheachievementofadditionalrevenue.

The Organisation and Human Resources – People are Groundforce's competitive factor

Groundforce has gradually consolidated a series of good practices of Human Resources, in accord-ance with the key principle that Motivated, trained and productive people provide a quality service, which in turn is transformed into customer satisfaction, and as a consequence brings the company sustained development, which will create value for the shareholders and for people.

Regarding Communication, particular note should be made of initiatives such as the Newsletter Investors in People, which provides information to the Employees on the good practices of manage-ment which have been consolidated in Groundforce, as well as the Quick Reference on the Skills of Leaders, summarising the behaviour inherent to the Leaders of Groundforce, and Open Doors, an ini-tiative which seeks to ensure that all Employees have more direct access to the Department of Human Resources, whenever necessary. Concerning Training, special importance is given to training in the Management of Change, aimed at the senior management positions, with a view to stimulating posi-tive leadership and fostering the search for excellence, as well as Customer satisfaction and Customer Service, directed towards the development of skills, in the area of behavioural and communication techniques as well as the Trainers Meeting, in all of the Stopovers in which Groundforce operates. Regarding the Assessment of Performance, the process has been restructured, covering the character-isticsoftheCompetencesandObjectivesofeachoneoftheKeyProcessesofthecompany'sBusinessModel. For the middle and senior management structure, the 360º Assessment has been implemented for personal development, enabling assessment by part of a group of people, namely the leadership, peers and direct Employees, in addition to the middle or senior manager. Note should also be made of the Employee Satisfaction Assessment Survey, greater control, rigour and discipline in the management ofresources,thereviewofthePortfolioofSkills,aswellasthereadjustmentofthePlanningProcess.

Thenumberoffulltimeequivalentstaff(FTE)decreasedby7.9%,(2,579FTEin2009to2,374FTE in 2010), in relation to the average of the previous year.


In 2010, the Company assisted 87,415 movements, 15.7 million passengers and 112 thousand tons of cargo.

Regarding service quality, Groundforce has improved its operating performance, both in terms of number of baggage items left behind, which decreased from 26 in 2009 to 20 in 2010, and in terms of baggage delivery times, having achieved, in 2010, an average time of 20 minutes in the delivery of the firstpieceofbaggage.NoteshouldalsobemadeoftheslightdecreaseofGroundforce'spunctualityindex,from99.1%in2009to98.9%in2010,asaconsequenceofvariousnaturalphenomena,suchas the eruption of the Icelandic volcano and the poor weather conditions in Europe, as well as various strikesofairtrafficcontrollersintheEuropeanairspace.

Economic performance

TurnoverreachedEUR115.1million,representingadecreaseof0.3%inrelationtothepreviousyear.Thisevolutionreflectedthegeneralperformanceofthemarket,inwhichGroundforcePortugalreg-istered a slight loss in market share (-3 p.p.).


TAP–Manutenção e Engenharia Brazil, S.A.

For the development of its activity of overhaul of Aircraft and Components, TAP–Maintenance and Engineering Brazil has two Maintenance Centres, situated in the city of Rio de Janeiro (GIG) and in Porto Alegre, covering a total area above 370,000 m2.

Thecompanyhasaproductivecapacityabove1,600,000MHyear,andhasbeencertifiedbythemain international certifying bodies (EASA; FAA; TCCA; ANAC) to carry out the general overhaul of all aircraft models of the Airbus family (except A-380); Boeing and Embraer (Authorised Service Centre), in addition to over 17,000 P/Ns of aeronautical components (Engines; Landing Gear; Accessories).

IntheareaofthereformulationofitsCustomerportfolio,aimedatitsexpansionanddiversifica-tion, the company faced challenges which led to a reduction of revenue of R$ 151.9 million, to R$125.6million,equivalentto17.3%.Thedeclinewasmainlyduetothegeneralrecessionoftheaircraft maintenance and engine overhaul industry, a deterioration in the company's image which begantobeinvertedonlyattheendoftheyear,thelossofthecustomerWebjetandalsothesalesof material having been lower than that expected.

However,in2010therewasasignificantdecreaseinfinancialcosts,arisingmainlyfromtheadherencetoREFIS,whichledtoareductionofthefinesontaxliabilities.Thenegativenetincomedecreased from R$ 56.3 million in 2009, to R$ 42.8 million in 2010.

In December, a provision was constituted for the restructuring of the staff, of the value of R$ 5 million, relative to indemnities payable. The situations covered by this provision will generate a reduction in staff costs in the order of R$ 17 million in 2011, without loss to the productive capa-city. Furthermore, the company proceeded with the creation of a new cost-cutting programme, including measures of waste reduction, contract renegotiation, change of suppliers, change of the administrator of the employees' pension fund, and various other actions, which are expected, overall, to lead to a decrease of costs of the value of R$ 18.5 million.


In 2010, TAP–Maintenance and Engineering Brazil, S.A. continued its process of development of actionswiththeobjectiveofimprovingitsoperatingperformance.

Following the decrease in the level of activity, there was an increase of costs related to idle labour, from R$ 49.3 million in 2009 to R$ 92.2 million in 2010. The workshop business unit presented anidlelabourforceof71%,whichwasthehighestcontributiontothecompany'stotalaverage,standingat57%.

Likewise, in the logistics area, efforts are being pursued with a view to the sale of the material in stock, whose balance, as at December 2010, stood at R$ 227.8 million. For this purpose, constant contactsaremaintainedwithpotentialcustomersandsignificantnegotiationsofbatchesarecar-ried out, with more attractive prices for current customers.

Thecontroloftheresultsgeneratedforeachbusinessunitofthecompanyhasbeenfine-tuned,withaviewtoacceleratingtheprocessofimprovementincontractprofitability.Planshavebeenmade for the following months regarding the review of cost distributions, as well as the updating of the administrative costs of importance in the formation of retail prices.

During the second half of the year, thorough work was carried out to analyse and diagnose the general situation of the company for assessment and immediate implementation.

Board of Directors

Chairman Luís Manuel da Silva RodriguesMember Nestor Mauro KochMember Maria Teresa da Silva Lopes

Executive Directors

President and Executive Director Nestor Mauro KochVice-President and Executive Director, Administration & Finance Glaucia LoureiroVice-President and Executive Director, Operations Valter Fernandes

Registered Office

Estrada das Canárias, 186221941–480 Rio de Janeiro / RJ BrazilTel.+552133832782Fax +552133832047

Email: [ [email protected] ]

Shared Capital R$ 568,022,848

Main Activity

Aircraft Maintenance and Engineering.


Results

In 2010, the company presented losses of R$ 167.4 million.

The consolidation of the debits of REFIS, forecast for next year, will gener-ate a reduction of tax liabilities of R$ 124.1 million, in this way enabling areductionoftheannualfinancialcostsofthevalueofR$14.5million.

Outlook

Based on the forecast results, it is expected that over the next three yearsitsnegativefinancialandoperatingsituationmaybereversed.At the same time, studies are being carried out, together with TAP–Maintenance and Engineering Portugal, aimed at the capitali-sation of the loan contracts, with its Controller.

Thesalesstrategyfor2011aimed,amongstotherobjectives,atreducing the idleness of the hangars unit. Regarding produc-tion for 2011, the company plans to reduce the idleness, by December2011,to20%oftheavailablecapacity,thusclosingtheyearwithanaverageidlenessof35%.


TAPGER–Sociedade de Gestão e Serviços, S.A.

TheobjectiveofTAPGERisthesupervisionofthemanagementofitsparticipatedcompanies,par-ticularlytheirrespectivefinancialandeconomicperformance,andtheprovisionofassistanceandsupporttothecompaniesLojasFrancasdePortugal,S.A.andCateringpor–CateringdePortugal,S.A.,inspecificareas,asestablishedundertheJointVentureAgreementandtheTechnicalServiceAgreement, respectively.

In the General Meetings for the approval of the accounts for 2009 of the associated compa-nies, pursuant to Order number 11420/2009, of 11 May 2009, of the Secretary of State for the Treasury and in the context of TAP guidelines, a statement was read on the remunerative policy and assessment of the performance of the management for the companies of TAP Group, which thereafter became conditioned to the future guidelines that TAP, SGPS would receive from its shareholder.

Likewise,incompliancewithDecree-Lawnumber225/2008,of20November,whichqualifiesthecompanyLojasFrancasdePortugal,S.A.(LFP)asanentityofpublicinterest,obligingthealteration of its Supervisory Body, in the respective Annual General Meeting, held on 30 March 2010, where its Articles of Association were amended, thus enabling, in the Supervisory Body, the replacement of the Statutory Auditor by an Audit Board and a Chartered Accountant or a Chartered Accountants Firm (SROC), which is not part of the Audit Board.

TheNuanceGroup(UK),apartnercompanyinLFP,notifiedTAPGERonthesaleofshareholdingsof its indirect shareholder, Noel International S.A., representing a change of control, which under no circumstances collides with the terms of the Nuance/TAPGER partnership, in LFP.

Through letter of 17 June 2010, B.V. NATIONALE LUCHTVAARTSCHOOL (NLS) exercised its right to acquire the rest of the 2,200 shares that TAPGER still owned in the share capital of Academia Aeronáutica de Évora (AAE), with AAE thus leaving the TAPGER universe. The call option, as well as the respective price had been established in the version of the Shareholders Agreement, in force since 1 July 2008.


Chairman Alda Maria dos Santos PatoSecretary José Carlos Magalhães Ferreira

Board of Directors

Chairman Fernando Abs da Cruz Souza PintoMember Mário Marmelo Castanheira GuilhermeMember Michael Anthony Conolly

Statutory Auditor

Permanent PricewaterhouseCoopers & Associados SROC, Lda.

Registered Office

Aeroporto de LisboaReduto TAP, Edifício 25 – 8°1704–801 LisboaTel.+351218415978Fax +351218416666

Share Capital EUR 2,500,000Taxpayer no. 503 986 798

Main Activity

Provision of commercial consulting and man-agement services, studies and preparation of contracts and support to international trade operations.


LFP–Lojas Francas de Portugal, S.A.

For LFP, 2010 represented a notable year, from various perspectives. The company obtained its best result ever, having fully recovered the turnover lost in the previous year. The sustained growth in the number of passengers in the main national airports constituted a determinant factor for the growth of the company's sales. Likewise, note should be made of the expansion of the busi-ness development to include Madeira airport, through the opening of four shops in October, following an international public tender. This initiative thus consolidated the position of LFP in the Portuguese airport panorama, with the company currently being present in all the international airports in our country. In the year that LFP celebrated its 15th anniversary, this is, without any doubt,amilestoneofspecialsignificance.

Regarding the total number of passengers who boarded, for all Portuguese airports, which reached3millionpeople,therewasanincreaseof9.4%,whileinTAP,the7.5millionpassengerstransportedgrewby7.8%.Asaresultofthemanagementmeasuresandcriteriaintroducedinthe recent past, LFP has managed to obtain higher rates of growth, and ended the year with total salesofoverEUR134million,representinggrowthof12.5%,inrelationtothepreviousyear.Strongly contributing to this excellent performance was not only the overall increase of passen-gers in Porto and Faro airports, but also, and mainly, the sharp increase of long-haul passengers, atLisbonairport.TheIn-flightSalesbusinessalsocontributedtothegrowthofsales,havingrecordedaverysignificantincreaseintheinter-continentalpassengersegment.

As a result of this positive sales behaviour, the company was able to reach the end of 2010 with earningsbeforetax(EBT)ofEUR10.2million,whichrepresentsanincreaseof22.7%,relativethevaluerecordedfor2009.Likewise,asignificantimprovementwasalsoachievedinthedifferentoperatingandfinancialratios,inparticularagrowthintheEBITDAmargin,from7.7%to8.2%,with this value currently standing at EUR 10.9 million. This increase is even more remarkable, con-sideringthat2010representedthefirstyearofoperationundertheoperatinglicensesnegotiatedundertheconditionofanincreaseintheprofitabilityoftheairportentity.Alsocontributingtothese results were the measures of optimisation and streamlining of the management, initiated in previous years, namely, the increase in operating margins, additional revenues and, principally, the strict cost control.

This notable growth in results, as well as the speed of the company's recovery from 2009, a less positiveyear,demonstratesitsgreateragilityandflexibility,wherebythecompanyisnowpre-pared to face the challenges of the future concerning changes in macroeconomic circumstances, as well as new prospects of growth, should these take place.


Chairman Peter Christopher WoodSecretary Anabela Gomes Lopes

Board of Directors

Chairman Luiz da Gama MórChief Executive Officer Nuno Filipe Martins do AmaralMember Alex Anson Member Andrea BelardiniMember Luís António Domingos Fernandes Silvério Monteiro

Audit Board

Chairman José Vieira dos ReisMember BenjaminHarmstorfMember Maria de Fátima Castanheira Corte Damásio Geada

Chartered Accountant

PricewaterhouseCoopers & Associados, SROC, Lda.

Registered Office

Aeroporto de Lisboa, Rua C, Edifício 10, Piso 01700–008 LisboaTel.+351218415685Fax +351218415373

Email: [ [email protected] ][ www.lfp.pt ]


Main Activity

OperationofAirportShopsandIn-flightSales.SalesEUR million

20012000

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 20102008 2009


http://www.lfp.pt


Megasis–Sociedade de Serviços e Engenharia Informática, S.A. The attention of Megasis remained, as always, focused on providing support to the companies of the Group, where priority is given in its action to the provision of services related to informa-tiontechnologies,withthenecessaryqualitytopursuethestrategicobjectivesoftheGroup.

During2010,variousprojectswerepursuedinareasconsideredfundamentalforthebusinessof the companies of the Group, in particular:

ρ Theprojectforthemigrationofthebookingandpassengerboardingsystems,namedtheCITP – Common IT Platform, for the Amadeus Altea system. The migration of the book-ing system took place during the first quarter of 2010, which was followed, at the end of the same year, by the initiation of the migration of the passenger boarding system, which should be concluded during the first semester of 2011;

ρ TheconclusionofthefirstphaseoftheCOSMOSBrazilproject,whosemainobjectiveisthetechnological and application transformation of the maintenance unit TAP–Maintenance and Engineering Brazil, as a form of ensuring the adequacy of the operating and busi-ness management processes to the best practices, which are already followed by TAP– Maintenance and Engineering Portugal;

ρ The improvement of the services provided to TAP's Customers, with particular incidence on the areas of the Call Centre and electronic services;

ρ TheimplementationofcollaborativetechnologieswiththeobjectiveofincreasingtheCompany's communication and productivity.

Internally, and with a view to increasing the level of satisfaction of the companies of the Group through the technological support provided, in 2010 Megasis developed a series of initiatives aimed at strengthening three fundamental pillars in order to maintain the consistency and sus-tained development of the Group's information system:

1. Operational excellence of the technological infrastructure; 2. Flexibility of the application architecture;3. Integration of the information and processes, through the creation of a service driven

architecture. Particular note should also be made of the strengthening of the structuring of the relations between Megasis and the companies of the Group, in business centres with competences and know-how capable of contributing, in a very evident and proactive manner, to the improve-mentofthebusinessprocessesandqualityofthefinalserviceprovidedtotheCustomers.

Tofinalise,itshouldalsobepointedoutthatMegasishasmetitscommitmentstotheshare-holder, by boosting productivity based on the increased quality and quantity of the services offered and, concomitantly, maintaining the Company’s levels of competitiveness.



Board of Directors

Chairman Michael Anthony ConollyChief Executive Officer Eduardo Jorge Dias RodriguesMember Maria dos Prazeres Nunes Ramalho Monteiro

Statutory Auditor

Permanent Deloitte e Associados, SROC, S.A.

Registered Office

Aeroporto de Lisboa, Reduto TAP, Edifício 191704–801 LisboaTel.+351218416888Fax +351218416344

Email: [ [email protected] ][ www.megasis.pt ]


Main Activity

Provision of services in the area of the develop-ment and maintenance of computer software.

Users of TAPNet services

20062002 2003 2004 20052001 2007 2008 2009 2010

Total Users

7,000 8,000

14,300

3,250 3,950

5,150

12,700

10,100

8,500

2,750

e> activity (search)

2008 2009 2010

thousand

31,408

39,352

52,361


http://www.megasis.pt


CATERINGPOR–Catering de Portugal, S.A.

Theaviationcateringactivityisdirectlyrelatedtotheevolutionofairtraffic,inparticularintheairportstructureinwhichitissituated,aswellastheprofileofthetransporterswhichoperatetherein and constitute its potential market.

Inspiteofvarioussignificantexternaldisturbances,ofmeteorologicalandsocialnature,theyear under consideration showed a considerable increase in terms of production and turno-ver, determined essentially by the growth of the main Customers, especially TAP, as well as the attraction of the Angolan national carrier, TAAG. Consequently, a sharply positive variation in theactivitywasrecorded,ofapproximately10%inthenumberofmealsand4%intheflights,inrelationto2009,withparticularincidenceonlong-haulflights.

The company also developed actions to improve control and simplify its internal processes, as well as greater integration in the Customers' value chain, by providing and making available new andmoreefficientservicestomonitortheoperatinginformation,plansandloading,supportedby innovative IT functionalities.



Board of Directors

Chairman Luiz da Gama MórChief Executive Officer Mário José Santos de MatosMember Sílvio Canettoly

Audit Board

Chairman Maria de Fátima Castanheira Corte Damásio GeadaMember Miguel de Azeredo PerdigãoMember PricewaterhouseCoopers & Associados, SROC, Lda

Registered Office

Aeroporto de Lisboa, Rua C, Edifício 591749–036 LisboaTel.+351218547100Fax +351218547199

Email: [ [email protected] ][ www.cateringpor.pt ]

Share Capital EUR 3,500,000Taxpayer no. 502 822 112

Main Activity

Preparationandsaleofin-flightmealsaswellas provision of services and logistics support to aircraft.

Number of meals 2010 2009 var. (%) var. abs.

TAP 7,741,374 7,054,887 9.7% 686,487

Other companies 1,559,109 1,371,087 13.7% 188,022

TOTAL 9,300,483 8,425,974 10.4% 874,509

Number of flights attended 2010 2009 var. (%) var. abs.

TAP 41,870 40,528 3.3% 1,342

Other companies 8,913 8,154 9.3% 759

TOTAL 50,783 48,682 4.3% 2,101

1,314

6,2331,250

6,9091,406

7,5851,274

8,611

1,371

8,4261,559

9,300

8.3

36.07.7

37.58.1

40.07.7

42.3

50.0

8.2

48.78.9

41.9

50.8

Number of Mealsthousand thousand

Number of flights attended

TAP Other companies TAP Other companies

4,920 5,658 6,1787,337 7,055 7,741

27.7 29.8 31.9 40.5

2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010


http://www.cateringpor.pt


UCS–Cuidados Integrados de Saúde, S.A.

In line with what appears to be a general trend in healthcare services, namely in those outside the State National Health Service, in 2010 there was a moderated decrease in overall activity, in terms of number of appointments, supplementary diagnostic tests and therapeutic action. While this phenomenon will need to be re-assessed in a longer term perspective, it has cur-rently encouraged an even more attentive monitoring of the activity, always with the concern ofensuringthepermanentadequacyoftheprofileofservicesprovidedtotheneedsofTAP'scustomer.

However, the activity of UCS and the range of services it provides to the Group go far beyond the direct provision of clinical action. The prevention and health promotion interventions, of longer term scope and extent, as well as the intense permanent consultancy activity, with spe-cial incidence on support to decision-making and aviation operations, are two areas where the activity of UCS has consistently grown and consolidated.

Hence, in 2009, UCS had already initiated the Saúde+ Programme,withtheobjectiveofestab-lishing an overall Education and Health Promotion Plan (PEPS) for the employees of TAP Group, complementing and expanding the prevention actions in the context of occupational health with an all-encompassing structure and with actions also extended to the respective families. Thisplan,theactualfieldimplementationofwhichstarted-upin2010,systematisedinacon-certed manner the prevention strategies relative to health that UCS proposes to the employees of TAP Group, mobilising and optimising the existing resources.

Theprojectcoverssevenimportantactionprogrammesinthefollowingareas:nutrition,physi-cal exercise, cardiovascular health, reproductive health, mental health, oral health and cancer screening. In the development of this initiative, which focuses on direct communication with the workers, carried out in an attractive manner, UCS intends to expand knowledge on health issues, and encourage the adoption of healthy behaviour and lifestyles. In this case, we high-light, as notable examples, the interventions in the context of the refectory, the promotion of footpaths in the Company, the prenatal courses and the screening for risk factors, all of which wereimplementedwithsignificantimpactduring2010.

In another context, UCS provides a Permanent doctor's consulting room to the Group, as well asrepresentation,beforethirdparties,inhealthincidences,definingandsupervisingmanage-ment strategies, relative to public health factors, of impact on the safety and continuity of the operations. The management of health information in the Group and respective external inter-faces, constitutes yet another interrelated activity.

The permanent technical consultancy supports TAP's different Business Units, Public Relations, the stopovers of the TAP World and the operation in general, providing solutions to over 750 requestsperyear,ofwhichapproximately30%implyongoinginterventions.


Chairman Anabela Gomes LopesSecretary José Carlos de Azevedo Magalhães Ferreira

Board of Directors

Chairman Michael Anthony ConollyChief Executive Officer Maria Helena Arrobas do Carmo Paiva PeixotoMember Orlanda do Céu Silva Sampaio Pimenta d’ Aguiar

Statutory Auditor

Permanent Deloitte e Associados, SROC, S.A.

Registered Office

Aeroporto de Lisboa, Edifício 35Apartado 84261804–001 Lisboa

Tel.+351218436300Fax +351218436310

Email: [ [email protected] ][ www.ucs.pt ]


Main Activity

Providing out-patient health-care (medical appointments, complementary diagnostic tests and treatment); implementation of safety, hygiene and health at work activities; medical certificationofpilotsandairtrafficcontrollers;consultancy in the organisation and management of health-care services.

20012000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2002 2003 2004 2005 2006 2007 20102008 2009

Medical Appointments

Clinical ActivityComplementary Diagnostic Therapeutic Acts

Clinical Acts


http://www.ucs.pt



Risk Management

The process of risk management

As a structured and disciplined approach aligning strat-egy, processes, people, technologies and knowledge, risk management is integrated in TAP's entire business process. Itsobjectiveistoidentify,assess,manageandmitigatetheuncertainties and threats faced by TAP's businesses in the pursuitofitsobjectivesofcreationofvalue.

Always taking into account the need to focus the Audit activityintermsofrisk,significantefforthasbeendedicatedto the risk assessment procedures implemented transver-sally in the Group. The operating risks have been worked in accordance with an ERM (Enterprise Risk Management)

methodology, which follows the COSO (Committee of Sponsoring Organizations of the Treadway Commission) model closely, regarding the activities linked to Maintenance and Engineering and Air Transport – Flight Operations, and the dynamics of the activities and handling, as well as the identificationandscrutinyofbusinessrisks,whichinvolvesthe planning and organised, systematic and consistent assessment of business risks, taking into consideration the opportunities and threats, identifying the strengths and weaknesses and covering the activities developed within the Company at all levels:

ρ At the level of the Entity/Company; ρ At the level of the Departments; ρ At the level of the processes of the Business Units.

Risk identification and systematisation

Assessment and attribution of the degree of criticalness and priority of the risks

Identification of the causes of the risks

Assessment of the risk management strategies

Development of an action plan

Monitoring and reporting

Activity and Processes subject to Auditing

Risk

Ass

essm

ent

CO

SO M

od

elSW

OT

Anal

ysis

Act

iviti

es

deve

lope

d at

th

e Co

mpa

ny

Entity

Departments

Business Unit Processes


Risk factors and their management

Operating risk (Security | Safety)

Security – Model of action whereby the possibility of damage, to people and goods, is low and maintained at an accept-ablelevel,throughacontinuousprocessofidentificationofsituations of potential danger and the management of the respective associated risk.

Risks of economic and financial nature

Risk monitoring and control systems, and consequent impacts, arisingfromthebehaviourofthefinancialmarketsandoftheeconomy.

Information technology risk

Aprocesswhichidentifiestheweaknessesofandthreatstothe information systems used by organisations to process their business, and decides which measures to adopt to reduce the associated risk, taking into consideration the respective cost/benefitrelationship.

Fire risk – prevention

Risk Prevention Management System. Includes the evaluation offireandexplosionrisks,theinternalemergencyplans,themanuals for protection against explosive atmospheres (ATEX Manuals), training of Company Employees and an internal audit plan.

Maintenance and Engineering risk

At TAP–Maintenance and Engineering, Risk Management is inherentandintegratedintheresponsibilitiesdefinedinthecontextoftheaeronauticalcertificationsandaccreditationsheld (1) which are compulsory to guarantee the continuity of its activity.

(1) EASA Part 145 (Maintenance Organisations); EASA Part M (Continued Aeronavigability); NP EN ISO 9001:2008 (Quality Management Systems), among others.

Health and safety at work risk

Risk management system linked to the professional activity. Basedonthe identificationandassessmentoftheoccupa-tional risks with impact on health and safety at work, respective

valuation as well as the imple-mentation of control measures.

Management of the financial risk General aspects

The management of financial risk continues to be conducted and super-vised by the Group, covering its many andcomplexaspects,andistheobjectof ongoing coordination between the Management and the Financial Department. The assessment of the accept-able levels of risk in the different areas and alternative forms of protection against them is a key decision-making area which has strong potential impact on the Group's results and stability, and it is a permanent and very demanding challenge to ensure that the Group is safeguarded against the diversity and dimen-sion of the economic shocks caused by market behaviour. In particular, 2010 witnessed histori-cally unique behaviour in the public debt markets, with extremely strong impacts on the availability of funding to enterprises in Portugal and Europe in general, as well as growing instability in the com-modities markets, especially in the oil markets, where pricesincreasedgraduallyovertheyearandsignifi-cantlyduringthefinalphaseof2010.

Market risk

Over recent years there has been a sharp transformation in the physiognomyoftheglobaleconomy,withsignifi-cant alterations in the dynamics and relative economic weight between the developed countries and emerging economies, with the latter having recently shown higher average growth and a stronger level of resistance to the eco-nomic crises than the economies of Europe, USA and Japan. Growthof10%inChina(9%in2009)and7.5%inIndiaandBrazilin2010(5%and0%in2009),contrastyetagainwiththeratesof2.8%intheUSA(-2.6%in2009)and1.8%fortheEuropeanUnionasawhole(-4.2%in2009).Ingeneralterms, the economies of the former third World, in Asia, Latin America and Africa, many of which are important producers of commodities,andwithsignificantdemographicgrowthratesandaveryyoungpopulationwithincreasingqualificationlevels,haveassumed a preponderant weight in the global economic panorama and growing importance in world trade.

InthecaseoftheGroup,thegrowingdiversificationandincreaseofoffer in the different air transport routes, whether in Brazil, Africa or Eastern European destinations, has enabled meeting the increased demand arising from these more dynamic markets. This strategy con-stitutes an important factor in the mitigation of market risks, since these risks could become excessive if the Group's geographical concentration were to be maintained at the same level or increased.


As an example, note should be made of the weight of the inter-nal market in terms of total ticket sales (effective revenue), whichwaslimitedin2010tolessthan30%ofthetotal,andthecombined sales of Europe (including the East and Scandinavia) forthedifferentdestinationsrepresentedapproximately36%.The weight of the Brazilian market in total sales in 2010 was 22%,withAfricarepresentingapproximately7%.Naturally,the size and coverage of the network which is offered enables the creation of synergies and complementari-ties, therefore the offer of routes on the Brazilian market strengthens overall sales in European markets, and the diversityoftheofferinEuropestimulatestrafficacrossthe Atlantic and from Africa, both of which increasingly use Lisbon hub, for example.

Exchange rate risk

In 2010 the American Dollar (USD) appreciated against the Euro once again. After an average appreciationof5%in2009comparedto2008,in2010theUSDappreciatedonceagainby5%on average in comparison to 2009, from 1.39 to 1.32. The Brazilian Real also maintained its trend of appreciation against the Euro and, to a lesser extent, against the USD. Hence, having started at around 3 Reais per Euro in the beginning of 2009, following the post Lehman Brothers wake of turbulence, the Real appreciated to 2.5 at the end of 2009 and reached levels of 2.2 to 2.3 by the end of 2010.

The Group's exposure to the USD resides, fundamentally, in fuel costs, since its market continues to be based in USD. Since fuel consumption represents close to 860 thousand tons, and the average price per ton of Jet fuel (ref-erence CIF NWE) was 725 USD in 2010, exposure to the correspond-ing USD stood at approximately 600 million USD, equivalent to 460 million Euros.

Added to the fuel costs are other portions of the cost structure, albeit of far lesser value, such as navigation and airport taxes, maintenance materials and aircraft operating leas-ing. However, the weight of revenue in the group of countries where the fares and sales are indexed to the USD, such as Brazil, Angola and the USA, rep-resenting, in the case of ticket sales, 30%of the total, merely

corresponds, in this activity segment (excluding Cargo, Mail and Maintenance), approximately USD 650 million, equivalent to EUR 500 million, depending on the exchange rate. It can be con-cluded, therefore, that, except in situations of extreme evolutions of the fuel as occurred in 2008, there is a natural hedge in the most important currency conversion relationship, that of the Euro against the USD.

Fuel price risk

After the oil shock of mid-2008, with Brent at 145 USD/barrel, the retraction in the 2nd half of that year led to minimum prices of 35 USD/barrel by the end of 2008. A year later, the market price stood at almost double this value and remained there, stable, between 70 and 80 USD/barrel, until last Autumn, when the present price hike began. The same effect was experienced in aircraft fuel prices, with significantincreasesattheendof2010.Retrospectively,jetfuelpresented average values per metric ton around 700 USD in 2007, 1000 USD in 2008, 560 USD in 2009 and 720 USD in 2010. By the endof2010,thepriceofjetfuelwascloseto850USDperton.

The concern to guarantee the predictability of the fuel account led tovariousjetfuelhedgingoperations.Partofthehedgingforthefirstsemesterof2010hadbeencarriedoutin2009,andinthebeginning of the 2nd quarter a further series of operations were conducted so as to guarantee a very high hedge ratio over the entireyear,ofaround75%offorecastconsumptionlevels.Asaresultofthemarketfluctuationswhichtookplace,thefinalresultachieved through the hedging operations proved to be slightly negative, in terms of treasury, in spite of the fact that, for example, variouslosseswerecompensatedforovertheyearbymoresignifi-cant gains at the end of the year, for which the hedging level stood atcloseto100%

Interest rate risk

2010 was characterised by an attitude of extreme caution by the monetary authorities in Europe and the United States, so as not to compromise the hesitant recovery of the economies of the developed countries, through the effect of a premature increase in their respective interest rates. In this way, the reference rates weremaintainedat1%intheEurozoneandclosetozerointheUSA. However, both short and long term market rates began on an upward trend, respectively, in the 2nd and 3rd quarters of 2010.The6-monthEuribor,forexample,increasedfrom1%to1.25%andthe5yearrate,whichhadfalleninthe1stsemesterfromcloseto3%downto2%,roseto2.5%duringthesecondhalfof the year. It should be noted in particular that in various emerg-ing markets and some developed economies there were increases inofficialrates,asconcernswithinflationsupersededfearsofeconomic deceleration or stagnation. These concerns related to increasedpricesintensifiedbytheendoftheyearwiththeincreas-ingly sharper growth in the prices of most commodities, especially those of foodstuffs and energy.

The Group's total debt stood at approximately the same level between the end of 2009 and end of 2010, respectively EUR


1,285 million as at 31/12/2009 and EUR 1,270 million as at 31/12/2010. Over the year, and in spite of the growing difficultiesofthenationaleconomyinobtainingfinancing,there was a renewal of the short term operations in force, therefinancingofvariouslongtermleasingoperationswhichhad come to an end, and the contracting of a Schuldschein typefinancingoperationforworkingcapital,at5years. The operations contracted over 2010 were both at variable andfixedrates.Asat31/12/2010,theexposuretothevari-ableraterepresented46%ofthetotal,comparedwith54%tothefixedrate.Theaveragespreadofthetotaldebt,evenafter the deterioration of the funding conditions which took place in 2010, remained at moderate and sustainable levels, which was also the case of the average rate of the group of operationsatfixedratesandtheoverallaverageinterestrate.Regarding the composition by currency of the debt, the com-ponentinEurosrepresentsapproximately97%ofthetotal.The time horizon of the debt remained at adequate levels at theendof2010,withonly5.5%ofthetotalrepresentedbyshort term and automatically renewable loan facilities and, even if the termination of these short term operations were assumed in 2011, the average life of the total debt would stand at approximately 3.5 years, with a staggered but stable amortisationprofileformostofthefundingoverthenext 7 years, and where the remaining values for subsequent years,from2018to2020,islesssignificant.

Liquidity and credit risk

The main factor constraining the funding conditions of companies over the year was the eclosion of the sovereign debtcrisiswhichverysignificantlypenalisedEuropeand,inparticular, the most indebted Member States of the periph-ery of the Euro zone – Greece, Ireland and Portugal –, and which was especially intense regarding private sector access tofunds.Inadditiontothebrutalincrease,from4%to7%,in yields of national public debt at 10 years, over the year, the Credit Default Swaps (CDS) of the Portuguese Republic, which measure the risk of solvency of Portugal, also increased sharplyfromlevelsbelow1%atthebeginningoftheyearto5%bytheendoftheyear.OtherevidentmeasuresofthefinancialstressexperiencedbyPortugalwerethedramaticaggravation of the CDS of the national banking system, the growingdifficultiesofaccesstofundsofthenationalbankingsystem in monetary markets and the need for massive fund-ing from the ECB, as well as the decreases of the ratings of banks, public sector companies and the Portuguese State. All these negative evolutions had extremely strong repercussions on the increases in spreads to the entire private sector, from SMEs to large companies.

In a yearwhen various long term financing operationsmatured, the restrictions in access to loans and their high cost led the Group to dedicate additional efforts to the area of liquidity management and carry out the necessary transac-tionsinthefinancialmarketsinordertomaintainadequateliquiditylevels.Thiseffortwasreflectedinmorecomplexandlengthy negotiations where the costs related to debt were higher for most of the new operations that were contracted,

asaresultoftheextremefinan-cial restriction at a generalised level. However, in the contracts signed it was possible to include balanced clauses with operational mechanisms enabling, namely, early rescission solutions, in an eco-nomically feasible manner, in the eventofasignificantimprovementinthefinancialmarketsinthefuture.

The carrying out of various operations regarding leasing, working capital and credit line renewal did not imply an increase in gross debt, because, on the one hand, they served, essentially, to com-pensate the programmed settlement of long termoperations in theirfinal stageof life, and on the other hand, this did not significantlychangethetimehorizonofthedebt, since most of the operations were for the medium and long term. Ultimately, the current operations, as well as the re-funding effort,resultedinasignificantincreaseinliquid-ity over the year. Therefore, the Group's net debt decreased in 2010 in relation to the previous year, in the order of EUR 100 million.

In the general calculation of the Group's debt, there wasalsoadiversificationoftheinstitutionswithwhich the funding contracts are established, both national and foreign, pursuing a policy of broaden-ing the spectrum of counterpart entities, in order to reduce the risk of the operations and foster opportu-nities of transactions under advantageous conditions. In the area of fund investments, the Group carries out the centralised management of the investment of the funds,under conditionsofmaximumflexibility,withguarantees of early mobilisation without penalties, and always with priority focus on the credit quality of the entity or entities which receive these investments.

Also regarding operations with derivatives, particular atten-tion is given to the quality of the counterparts, while seeking toestablishasufficientlevelofdiversificationsoasachievesatisfactory conditions of competitiveness in the hedging operations. It should be noted that the interest rate and fuel swaps in force over the year were accompanied by ratings as at 31/12/2010, equal to or greater than A- by Standard & Poors.


Changes to the Group’s structure

Asat31December2010,thefollowingsubsidiarieswereincludedinthefinancialstatements:

ρ TAP–Transportes Aéreos Portugueses, SGPS, S.A. ρ Transportes Aéreos Portugueses S.A. (TAP, S.A.) ρ TAPGER–Sociedade de Gestão e Serviços, S.A. and subsidiaries:

ρ CATERINGPOR–Catering de Portugal, S.A. ρ L.F.P.–LojasFrancasdePortugal,S.A. ρ U.C.S.–Cuidados Integrados de Saúde, S.A. ρ MEGASIS–Sociedade de Serviços e Engenharia Informática, S.A.

ρ PORTUGÁLIA–Companhia Portuguesa de Transportes Aéreos, S.A. (PORTUGÁLIA) ρ AERO–LB, Participações, S.A. (AERO-LB) and subsidiary:

ρ TAP–Maintenance and Engineering Brazil, S.A. (ex-VEM)

Subsidiaries are all the entities over which the Group has decision-makingpowerinrelationtofinancialandoperatingpolicies, generally represented by over half of voting rights. The existence and effect of potential voting rights that are cur-rently exercisable or convertible are considered in the evaluation of whether the Group has control over another entity. The equity and net income of these subsidiary companies corresponding to third party shareholdings are presented under the minority interests headings, respectively, in the consolidated balance sheet underaseparateheadingofequityandintheconsolidatedprofitand loss statement.

The purchase method is used to record the acquisition of subsidiary companies. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to theacquisition.Identifiableassetsacquiredandliabilitiesandcontin-gent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, independently of the existence of any non-controlled interests. The excess of the cost of acquisition over thefairvalueoftheGroup'sshareoftheidentifiableassetsandliabili-ties acquired is recorded as Goodwill. Subsidiaries are consolidated by the method of full integration from the date on which control is transferred to the Group. If the acquisition cost is less than the fair value of the net assets of the acquired subsidiary (negative Goodwill), the difference is recognised directlyintheProfitandLossStatementunderOtherOperatingRevenues.Internal transactions, balances, unrealised gains on transactions and divi-dends distributed among Group companies are eliminated. Unrealised losses are also eliminated, unless the transaction reveals evidence of impairment of a transferred asset.

AssociatesaredefinedasallentitiesoverwhichtheGrouphassignificantinflu-encebutnotcontrol,generallywithinvestmentsofbetween20%to50%ofvoting rights.

Economic and Financial Performance of TAP Group

Thefollowingentitywasclassifiedasanassociate:

ρ SPdH–Serviços Portugueses de Handling, S.A. (SPdH)

Investments in associates are accounted for using the equity method. In accord-ance with the equity method, shareholdings are recorded by their acquisition cost,adjustedbythevaluecorrespondingtotheGroup'sshareholdinginthevari-ations of associates' equity (including net income) and dividends received. The differencesbetweentheacquisitioncostandthefairvalueoftheidentifiableassets, liabilities and contingent liabilities of the associate on the acquisition date are recognised, if positive, as Goodwill and maintained under the respec-tive heading. If these differences are negative they are recorded as revenue for the period under the heading Gains and Losses in associated companies. An assessment of the interests in associates is carried out when there are indica-tions that the asset may be impaired, with any impairment losses that also exist also being recorded as a cost, under that heading. When impairment losses recognised in previous years cease to exist, they are reversed with the exception of Goodwill. When the Group’s share of losses in an associ-ate equals or exceeds its investment in these companies, the Group does not recognise further losses, unless it has incurred liabilities or made payments on behalf of the companies. Unrealised gains on transactions with the associates are eliminated to the extent of the Group’s inter-est in the associates. Unrealised losses are also eliminated, unless the transaction reveals evidence of impairment of a transferred asset.

The attached consolidated financial statements of the Group were prepared in conformity with the International Financial Reporting Standards adopted by the European Union (IFRS – for-merly called the International Accounting Standards – IAS) issued by the International Accounting Standards Board (IASB) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or by the former Standing Interpretations Committee (SIC), in force on the date of the said financialstatements.


Economic Situation

Consolidated net income of TAP Group

For the Air Transport Industry, after the largest decrease of demand in the history of commercial aviation in 2009, the year of 2010 was characterised by the return ofairtraffictopreviousprofilesofbehaviour,withthereuptakeofairtravel,aswell as trade relations between the different regions of the world, albeit with significantlydifferentiatedexpression.However,particularnoteshouldbemade of Europe where, in addition to a slow economic recovery, various exter-nalimpactsinterferedwiththenormaldevelopmentoftheflightoperation,constituting factors which negatively affected the performance of commer-cial aviation in the region. It should also be highlighted that, in response to the strong global demand as well as due to the imbalances in supply, relative to certain consumer goods, prices, in particular of oil, increased considerably, to stand at the level of the historic maximums reached dur-ingthefirsthalfof2008.

Regarding the companies of the TAP holding, which follow TAP's strategic guidelines, efforts were made to promote the increased prof-itability of the activities of the respective sphere of intervention, with thisobjectivebeingpursuedintheongoingimprovementofthequal-ity associated to the different aspects of the services provided, in the differentiation of the products offered, in the adoption of best prac-ticesandinthestrengtheningofthesimplificationofprocesses,

as well as in the continuous increase in productivity levels. On the other hand, incisive action has been continued on all costs possible, with the implementation of a suitable cost-cutting pro-grammewhichincludedadiversifiedseriesofmeasures,tobeenforced until 2012, with transversal effects on all the companies of TAP Group.

However, the consolidated performance at the aggregate level of all the Group's companies was negative, with TAP SGPS having ended 2010 with a consolidated net income, with minority interests, for the year of the value of EUR -57.1 million, that is, EUR 53.6 million less than the EUR -3.5 million recorded in 2009.

Contributing to this result was the net income calculated for the com-panies Groundforce, with EUR -43.6 million and Aero LB – the company owning98.64%ofthesharecapitalofTAP–MaintenanceandEngineeringBrazil, with EUR -71.8 million, while the company TAP, S.A. recorded a

positive result of the value of EUR 62.3 million. Pre-tax income came to EUR -44.4 million, representing a variation of EUR -51.7 million compared to the EUR 7.3 million recorded in 2009

Consolidated net income of TAP GroupEUR million 2010 2009

Operating Revenues and Gains 2,351.1 2,198.9

Pre-taxProfit (44.4) 7.3

Net Income of shareholders of the parent company (57.1) (3.5)

Net Income for the year of minority interests 4.2 3.5


EUR 140 million and EUR 150 million, repre-sented in 2010 a value in the order of EUR 522.9 millionforthecompanyTAP,S.A.,45.8%morethan in 2009, with this evolution being equiva-lent to EUR 164.3 million, of which EUR 141.6 million is attributable to the price effect.

Net operating costs and losses, not including depreciation, amortisation and leasing of air-craft stood at EUR 2,212.5 million, EUR 206.7 millionor10.3%morethanin2009.ExcludingFuelcosts,thisvariationstoodat2.6%.

Total operating income and gains reached EUR 2,351.1 million, which compares to the EUR 2,198.9 million of the previous year, cor-respondingtoanincreaseof6.9%.Totalsalesand services rendered increased by EUR 240.5 million,11.6%morethanthevalueachievedlastyear. This result was mainly due to the behaviour of the income generated by Air Transport and by

Net Operating Income

At the operating level (before interest and taxes), the Company recorded EUR -0.4 million, around the break-even point, which reflectsthehighcapacityoftheCompany,inthedevelopmentofitsbusiness,torespondwithadjustedflexibility,intheofferofservices and level of costs, to market alterations and, in this way, enable the absorption of the losses caused by the various exter-nal impacts which occurred.

This result which was EUR 52.6 million less than the EUR 52.2millionrecordedin2009,alsoreflectsthebehav-iour of the price of fuel, once again on an upward trend. It should be noted that Fuel costs, which during the period between 2001 and 2003 varied between

Fuel Costs – TAP, S.A.EUR million 2010 2009 var. (abs.)

Total 522.9 358.6 164.3

Price Effect 141.6Quantity Effect 22.4

Consolidated Net Operating Income of TAP GroupEUR million 2010 2009

Operating Revenues and Gains 2,351.1 2,198.9 Sales and services rendered 2,315.5 2,075.0

Air Transport 1,990.7 1,771.7

Maintenance and Engineering 177.9 167.1

Other sales and services rendered 146.9 136.2

Operating subsidies 4.6 3.6

Gains and losses in associated companies (44.1) (29.6)

Other revenues and gains 75.1 149.9

Operating Costs and losses (2,212.5) (2,005.8)Cost of goods sold and materials consumed (175.8) (180.2)

External supplies and services, except fuel (922.0) (853.4)

Fuel (522.9) (358.6)

Staff costs (559.7) (504.5)

Other 13.0 (73.3)

Other costs and losses (45.0) (35.7)

Depreciation and amortisation costs/reversals (138.6) (141.0)

Impairment of assets subject to depreciation/amortisation(losses/reversals) (0.4) –

Net operating income (earnings before interest and taxes) (0.4) 52.2

Operating Revenues and Gains2010

Others1.3%

Operating subsidies0.2%

Air TransportSales and services rendered 84.7%

Maintenance and Engineering Sales and services rendered7.6%

Other sales and services rendered6.2%

Operating Costs and Losses2010

Cost of goods sold and materials consumed and External supplies and services, except fuel49.6%

Fuel23.6%

Staff costs25.3%

Others1.4%


Maintenance and Engineering, which increased, respectively, by EUR 219.0million (+12.4%)andEUR10.8million(+6.4%),withtheotherservices rendered, arising from activities com-plementary to the Company's core business also having presented a positive performance, with anincreaseofEUR10.8million(+7.9%).

Total gains and losses in associates stood at EUR-44.1million,whichwasmainlyinfluencedby the loss recorded for the year of the com-pany SPdH.

Regarding costs, the heading related to the acquisition of consumed materials and serv-ices, excluding fuel, increased by EUR 64.2 million,6.2%morethanin2009.Totalstaffcosts reached EUR 559.7 million, that is, EUR 55.3 million more than in the previous year, reflectingthevariationswhichoccurredinpost-employmentbenefits, indemnities and staffremunerations.

Financial Results

NetfinancialincomestoodatEUR44.0,reflect-ing an improvement in the order of EUR 0.9 million in relation to the result for 2009. The performanceofthefinancialfunctionwasinflu-enced mainly by the increase of interest received from investments.

EBITDAR

Net working capital to deal with financial and investment costs, measured by EBITDAR (Earnings Before Interest, Taxes, Depreciation andRentderivedfromfleetleasing)reachedEUR 192.4 million, corresponding to EUR 86.2 million less than in 2009.

Financial Situation

The Consolidated Total Assets of TAP, SGPS, S.A. reached EUR 2,086.8 million, while the degree of use of the Assets, expressed through the ratio between the Company's Turnover and Total Assets reached 1.11.

In 2010, for the TAP Group, total Gross Fixed Capital Formation reachedEUR17.2million.Thisvalueessentiallyreflectstheinvest-ments made in the acquisition of spare parts and rotary engines, as well as the acquisition of maintenance equipment, apron and computer equipment, hardware and software. Also important in the value referred to above was the investment relative to the company TAP–Maintenance and Engineering Brazil, regarding alterations to hangars in Porto Alegre and Rio de Janeiro.

Theanalysisoftheeconomicandfinancialindicatorsshowsthe Net Worth of the Company stands at EUR -264.8 million, reflectinganaggravationofEUR60.2millionrelativeto2009.Reference should also be made to the existence of minority interests to the value of EUR 7.4 million, relative to the com-paniesLFP–LojasFrancasdePortugalandCateringpor.TheFinancialAutonomyratioreached-12.7%,representinganaggravation of 2.6 p.p. relative to 2009 and the Solvency ratiowas-11.3%,whichdecreasedby2.1percentagepoints in relation to the previous year.

The share capital of TAP, SGPS, S.A. is composed of 1,500,000 nominative shares, with the value of EUR 10 each, totally held by Parpública–Participações Públicas,SGPS,S.A.,acompany100%ownedbythePortuguese State.

Total Liabilities of TAP, SGPS, S.A. stood at EUR 2,351.6 million, with EUR 1,301.7 million being relative to Non-current Liabilities and EUR 1,049.9 million relative to Current Liabilities, which cur-rentlyrepresents44.6%oftotalLiabilities,2.3percentage points more than in 2009.

Regarding debt structure, bank loans and financialleasing,bytheendof2010thetotalreached EUR 1,277.1 million. Liabilities rela-tive to the current remunerated debt of EUR 249.0million represented 19.5% of thetotal, corresponding to 0.9 p.p. more than in 2009.

2010

0

50

100

150

200

250

300

350

Gross Fixed Capital FormationEUR million

2005 2006 2007 2008 2009 2010

Basic Equip. (Aircraft + Spare Engines + Misc. Machinery and Equipment)63.5%

Buildings and OtherConstructions10.6%

Transport Equipment0.3%

Administrative Equipment6.4%

Others (Other+Intangible Assets+Assets in Progress+Tools and Dies)19.3%

15.5

203.9

300.9

17.232.3

316.3


Aftergrowthof5%,in2010,theforecastsforthe evolution of the economy, at a global level, standataround4.4%,withthisgrowthbeingpropelled by the particularly vigorous perfor-mance of the emerging market and developing economies, the expansion of which is expected toachievevaluesintheorderof6.5%.Particularnote should be made of Sub-Saharan Africa, wheregrowth, forecastat5.5%, isexpectedto exceed other regions, with the exception of Developing Asia, reflecting the sustained strengthening of internal demand in many economies of the region, as well as the effect of increasing global demand, in the context of commodities. In turn, for the group of advanced economies, the forecasts point to growth in the orderof2.5%,anevolutionwhichisstillslow,in view of the intensity of the recession of 2009, andwhichwillalsobeinsufficienttovisiblyinflu-ence the high rates of current unemployment. In this context, following the launch, at the end of 2010, in the United States and Japan, of new fiscalpackageswithaviewtoboosteconomicgrowth, evolutions are expected for these coun-triesof3.0%and1.6%,respectively.

In the Euro zone, although the growth of the peripheral countries is forecast to be low, it is expected that the evolution of the economy, as a whole of the region, should expand in the order of 1.5%, favourably influenced by thestrong internal demand observed in Germany. However, the main risks to be noted include the high level of unemployment and the resurgence of fears in relation to the public debt of the coun-tries of the periphery of the Euro zone, where it is considered likely that the spreads as well as the financingcostsshallremainathighlevels,creat-ingconditionsforare-intensificationoffinancialturbulence.

Regarding Portugal, following the accentuated deceleration observed towards the end of 2010, the forecasts point to a contraction of economic activity,intheorderof1.3%in2011,basedonthe one hand, on an underlying strong retrac-tion of internal demand, conditioned by the budgetary consolidation measures and greater restrictivenessoffinancingconditionsand,onthe other hand, the continued dynamism of exports, albeit lower than that recorded in 2010, accompanying the evolution of the flows ofinternational trade.

Therefore, with the emerging markets, such as theAsianPacific,showingapositioningaimedatthe pursuit of sustained growth, while in Europe, withaweakereconomy,difficultchallengeswillbe faced by the air carriers of the region, the forecasts for the Industry, in this context, are of decreased net income, which is expected to stand at around USD 8.6 billion.

ForTAP,afterayearcharacterisedbysignificantrigour in short term management, the Company proposed,in2011,withthefirstsignsofrecov-ery, to continue with prudent optimism, facing the challenges and not abdicating from a long term vision in the construction of its future. Thus,itsmainobjectivehasbeendefinedastheachievementofprofitability in itsbusinesses,so as to enable, in a sustainable way, the res-torationofitstrajectoryofpositivenetincomeand value creation consolidation. With higher levels of competition requiring flexible and adaptable structures, in a context of growing globalisation, 2011 will be yet another year of demanding challenges, relative to the continu-ation of the structural changes which have been implemented over the last few years. Thus, the Company considers that it is necessary to pur-sue incisive action covering all costs possible, in order to continue the implementation of the cost cuttingandenhancedefficiencyprogramme,inforce until 2012, focused on a Customer-driven approach and on internal organisation based on best practices. Particular attention will also be paid to the growth consolidation strategy which has been undertaken in recent years, continuing the effort to stimulate the load factor, with inten-sifiedcommercialaggressiveness.

Therefore, since the operation of new markets is considered a fundamental tool for the con-solidation of the Company at an international level,itisimportanttomention,asmainobjec-tives for 2011, the creation of new connections and the strengthening of existing connections, in an attitude of exploitation of opportunities. Special note should be made, in this context, of the beginning of the operation for new medium- haul destinations of high potential, diversifying the European network and expanding the visibil-ityofTAP,asacompanyconnectingtheairtrafficbetween Europe, Brazil and Africa. In this way, it is expected that in April operations will begin to Bordeaux and to Dusseldorf and, in June, to Manchester, Vienna, Athens and Dubrovnik. Likewise,inJune,inaneffortfocusedonspecificmarket niches, regular operations will begin to Miami, the second North American destination

Regarding private consumption, it is expected that in 2011 there will be a sharp reduction, in theorderof2.7%,significantlymarkedbythebudgetary consolidation considered, in particu-lar due to the decrease in the nominal salaries of the public sector, as well as the new increase in direct taxation, implying a deterioration in prospects of growth in disposable income, in a context of the maintenance of particularly adverse conditions in the labour market, and especially the strong increase in unemployment. Furthermore, note should be made of the preva-lence of more restrictive conditions of access to credit, as well as the limitations imposed by the conditions of solvency arising from the restric-tions to family budgets. However, this pattern of evolution will contribute to the reduction of external funding needs, measured by the aggre-gate balance of the current and capital account balances, as percentages of GDP, which should stillremainathighlevels,around7%.Inturn,inflationshouldincreasetoapproximately2.7%,comparedto1.4%in2010,largelyinfluencedbythe increased indirect taxation.

Regarding the Air Transport Sector, in spite of the slowdown observed in demand at the end of 2010, by the end of the year there was also astrengtheningofbusinessconfidence,aswellas other drivers of the transport of the business segment, with the prospects for 2011 being con-sistentwithatrendofgrowthof5-6%,forthepassenger and cargo air transport markets.

It should be noted that in the aviation industry, thecyclesofprofitabilitynormallylastbetween7 and 10 years, thus implying some 4 to 5 years until the cycle achieves it maximum. However, it is expected that 2011 will present a slower progression, constrained by the increase in the price of oil as a result of the growing instability in the Arab countries, by the stabilisation of yields and by the trend of recession forecast for some European economies, following their respective public debt crisis.

Outlook for 2011


of the Company, and to Porto Alegre, the tenth pointofTAP inBrazil. In thefirstcase,sinceMiami represents the main focus of distribu-tionofthepassengertrafficbetweenCentralAmerica and the Caribbean and Europe, while in the second situation, Porto Alegre, has the fourth highest GDP of Brazil, this also allows the Company to expand its offer to Buenos Aires and Montevideo, in the context of code-sharing con-nections with partner companies. Likewise, note should be made of the start-up of regular opera-tions to Bamako (Mali), S. Vicente (Cape Verde), and Accra (Ghana) so as to strengthen connec-tions with the African continent.

Moreover, considering that the quality of the service provided to passengers is inseparable from the future of the Company, the TAP main objectivefor2011istocontinueitsimprove-ment supported by technological innovation, promoting,atthesametime,theefficientandeffective use of existing resources. Along the same lines, the Company will remain commit-ted to continuing to pursue efforts to improve its positioning in the areas of punctuality and bag-gage irregularities.

Inthecontextoftheconstitutionofthefleets,following the advent of the adverse economic and social climate, no structural alterations are expected,either regardingtheTAPfleetsorfor those of PGA, for 2011. Over this year, and applying a policy of continuity, initiatives will be developed in relation to the aircraft cabins, aimed at improving the service provided to the Customer. As a result of the signing of the con-tract in 2007, between TAP and Airbus, for the acquisition of the new Airbus A350XWB, the specificationofthesenewlong-haulairplanesis expected to begin in 2011.

Regarding the Maintenance and Engineering business in Portugal, following the implemen-tation of the SMS–Safety Management System, plans have been made for the preparation of the SMD ®–Safety Management Diagnostic study, byaspecialisedcompany.Theobjectiveofthis

study is the assessment of how the Company's culture and its processes might have an impact on or contribute to increasing potential error, reduce the effectiveness of the work and increase risk in the aviation maintenance opera-tions, in addition to permitting a comparison with the best international practices in relation to Aviation Safety and Security. The implemen-tation of the following actions has also been planned: publication of the initial version of the SMS Manual; start-up of the Safety Training and Safety Promotion actions and constitution of the organisational structures supporting this system,namely,theSafetyOffice, Safety Action Group and Safety Review Board. Furthermore, the ERP (Emergency Response Plan) proce-dures will be updated, in coordination with the respective plan of TAP. Regarding the Production areas, the efforts will be directed, in a generalised manner, not only towards increas-ing the in-house production capacity, with the respective productivity gains and cost reduc-tion,butalsotoreceivingthenewA350fleet,in2015. For the Maintenance of Components, the creation of capacities for the maintenance of thenewfleetwillimplythetechnical/economicassessment of the installation of new test equip-ment. In Aircraft Maintenance, various Strategic Projectshavebeenplannedforthethreeyearperiod2011-2013,wherethemainobjectivesare the achievement of cost reductions and in Turn Around Time of the inspections, as well asincreasedproductivity.Currently,aprojectconcerning the restructuring of Operational Maintenance is underway, aimed at increasing thereliabilityoftheTAPfleet,andguarantee-ing the Line Maintenance of the future A350 fleet. Regarding Engine Maintenance, with a view to enabling the growth of the activity relative to Third Party Customers and, follow-ing the market surveys which have been carried out, plans are being made for the introduc-tion of at least two new engine models on the Capacity List of this workshop, for which an assessment is already being carried out on the different options provided by the three main manufacturers, Pratt & Whitney, Rolls Royce and General Electric.

For the Maintenance and Engineering business in Brazil, 2011 should see the beginning of the inversionofthedifficulteconomicsituationofthe company, as the result of the combination of three factors: i) new commercial dynamics based onasignificantrestructuringoftheproductionoperation over the last 2 years; ii) the determi-nation of the management in questioning and

fightingagainstallcostswhicharenotdecisivefor the quality of the production; iii) the begin-ning of the market recovery, following the recovery of the aviation sector in the region. In this context, the company has received the atten-tion of other MRO interested in increasing their capacity in the region, regarding which develop-ments are expected during the year.

For the ground handling company SPdH, 2001 will be structurally determinant. Pursuant to the decision of the Competition Authority, the Grupo TAP should carry out the disposal of the control of the company and, consequently, transfermanagementcontroltothenewmajor-ity shareholder, which results from the sales process. Operationally, in spite of an inevitable transition process, it is expected that there will be a positive impact on the TAP operation, in view of the natural concern of the new operator to con-tinue the effort of continuous improvement to which SPdH has been dedicated over the last 2 years. The launch, by the regulator INAC, of the international public tender for the attribution of new handling licenses in the airports of Portugal, for a new period of 7 years, should be considered as an additional constraint. This will surely be a demanding process, but one for which the com-pany is prepared, and which requires, however, the prior carrying out of the disposal referred to above, in order for the company to be admitted to the tender.

Also within a strategic perspective, the role of TAP, continuously chosen by the Company's Management, is important as a stimulator of national Tourism, acting towards the promotion of the image of Portugal and consequent crea-tion of wealth. It is also important to emphasise that over two thirds of the revenue generated byTAPareobtainedabroad,afactofsignificantimportance, with direct impact on employment creation and development for the country.

Tosummarise,theobjectiveistocontinuethetransformation of TAP into a solid company within the European space, equipped to make the most of all the opportunities presented in the market niche in which it operates, and to dis-tinguishitselfduetoitsoperatingefficiencyandaggregate value of the services provided.


The creation of Transportes Aéreos Portugueses (TAP)

1945, 14th March

Transportes Aéreos Portugueses is created as a section of the Civil Aeronautics Secretariat.

Recruitment of technical staff from the Military and Naval Aeronautical Schools begins, and a group of 11 pilots receives specialised training at BOAC (British Overseas Airways Corporation).

Thefirsttwo21-passengerDC-3Dakotaaircraftare purchased.

In1946,thefirstGeneralPilots’CourseisgiveninPortugaland,on19thSeptember,thefirstcommercial route is launched: Lisbon-Madrid.

On 31st December, the Lisbon-Luanda-Lourenço Marques route is launched, known as the Imperial Air Route. With 12 stopovers and taking 15 days (return), it is the longest route in the world, operated using a DC-3.

1948

TAP becomes a definitive member of IATA. The Paris and Seville routes are launched.

Anew image isadoptedandthefirst ticketofficeisopened.

1950

Maintenance and Engineering begins to provide technical assistance, at the Lisbon and Porto air-ports, to foreign companies without the means to maintain their own aircraft.

The first European company to operate exclusively with jets

1967

ThefirstB727arrivesattheCompany,andthelast Super-Constellation is decommissioned.

TAPthusbecomesthefirstEuropeancompanytooperateexclusivelywithjets.

1968

Maintenance and Engineering infrastructures are expanded, with the opening of the Aircraft Engine Revision and Testing Centre, endowed with the most modern technological equip-ment of the time.

1971

The Company’s services are transferred to new premises at Lisbon airport, and new mainte-nance facilities are opened, including Hangar 6.

1972

ThefirsttwooffourBoeing747-200becomepartoftheCompany’sfleet.

TAPtakesa50%stakeintheAzoreancompanySATA, holding the chairing position at its Board of Directors.

1974

TAP’s network includes over 40 destinations locatedonfourcontinents,operatedbyafleetof 32 technologically-advanced aircraft.

Start-up of the computerised booking, load control and check-in service with the TAPMATIC System.

TAPbecomesthefirstEuropeancompanytocarryoutmajorcompleteoverhaulsoftheB747JT9-D engines.

Transformation into a private company

1953, 1st June

Transportes Aéreos Portugueses achieves the status of a private company (S.A.R.L.) with mixedcapital,majority-ownedbytheState.

1955

The Company’s route network now includes a total of eight destinations and its first four-engine aircraft, a Lockheed L-1049G Super-Constellation enters into service, oper-ating on the Africa route and substantially reducingflighttime.

1960

TheinauguralflightoftheLisbon-Goaroutewhich lasts close to 19 hours is performed and the Friendship Flight is launched between Lisbon and Rio de Janeiro.

1962

InJuly,TAPreceivesthefirstofitsthreeCaravelleVI-Raircraft,bringingitintothejetera.

History of TAP


Nationalisation of TAP

1975, 16th April

TAP becomes a State-owned company through Decree-Law number 205-E/75.

1978

Maintenance and Engineering is distinguished by the international magazine Air Transport World, with the Technical Management Award.

1979

The Company’s modernisation programme is implemented, which also changes the corpo-rate name to TAP–Air Portugal.

The computer cargo booking system (CARGOMATIC) begins operating.

Strengthening of TAP’s fleet

1983

ThefirstBoeingB737-200aircraftarrivesatthe Company for medium-haul routes and the Lockheed L1011-500 Tristar for long-haul.

Maintenance and Engineering is awarded, for the first time, by the Federal Aviation Administration of the USA (FAA), with the Repair Stationcertificate,endowingTAPwiththemostextensive licence to repair aircraft and their components. TAP wins the international tender formajorinspectionsof35B727-100aircraftowned by the Federal Express Corporation (FEC).

1987

Maintenance and Engineering goes ahead with anextensiveprogrammeofstructuralmodifica-tions in Douglas DC-10 aircraft of the FEC, which isthefirsttimethishashappenedanywhereinthe world.

1988

ThefirstA310-300beginsoperating.

1989

TAPisthefirstairlinetoestablishland-airlinksbysatelliteandthefirstpilots’courseentirelyheld in Portugal takes place.

1991, 17th August

TAP becomes a public limited company (TAP S.A.),withcapitalmajority-ownedbytheStatethrough Decree-Law number 312/91.

TAP enters into the Airbus era

1992

ThefirstA320aredelivered,equippedwiththe most advanced technology: fly-by-wire controls.

1994

ThefirsttwoA340-300sbecomepartofthefleet,andtheStrategicPlanforEconomicandFinancial Restructuring (PESEF) is launched.

1996

TAP launches its own website and the decision is takentorenewthemedium-haulfleet.

Airbus distinguishes TAP with the Award for Operational Excellence, for the best operating performanceworldwidefortheA340fleet.

1997

ThefirsttwoA319becomepartoftheTAPfleet,and the cutting edge technology of Electronic Ticketing(ET)isintroducedfordomesticflights.

A strategic alliance agreement is signed with SAirGroup.

1998

TAP becomes a founding-member of the QualiflyerGroup.

1999

Thefirstcooperationagreementisestablishedwith the company Oficinas Gerais de Material Aeronáutica (OGMA).


TAP’s recovery

2000

The QTC–Quick Transfer Centre is created, which is a system for fast links for transit passengers at Lisbon airport.

Airbus distinguished TAP with the Award for Operational Excellence, for the best operating performanceworldwidefortheA319fleet.

The Maintenance and Engineering Quality sys-temisawardeditsfirstcertificationfromAPCERin conformity with NP EN ISO 9002 Standard, as a company for the Maintenance of Aircraft, Engines and Components.

2004

The strategy adopted by TAP is considered as a case-study, in an academic context, by Harvard University.

TAP–Maintenance and Engineering and Federal Express celebrate 20 years of technical cooperation.

2005

The Company’s new corporate image is pre-sented (TAP Portugal).

TAPjoinstheworld’slargestairlinealliance,asacompany-member of the STAR Alliance.

TAP–MaintenanceandEngineering joinstheAirbus MRO Network and wins the tender for the total maintenance of two French Air Force Airbus A340.

Airbus distinguishes TAP with the Award for Operational Excellence, for the best operating performanceworldwidefortheA310fleet.

2001

A hub strategy is adopted, with Lisbon airport as the centre for operations.

Due to internal problems, the SAirGroup is forcedtoabandonitsintentiontoacquirea34%stake in TAP.

Consortium Contract signed for cooperation in the area of extensive maintenance of Airbus air-craft in the A320 family, at OGMA’s facilities in Alverca.

2003, 26th April

The TAP Group is created through the incorpora-tion of a holding company, TAP, SGPS, following a corporate restructuring process, which also involved the creation of the company SPdH–Serviços Portugueses de Handling, S.A., through Decree-Law number 87/2003.

Airbus distinguishes TAP with the Award for Operational Excellence, for best operating per-formanceworldwidefortheA310fleet,whichalso receives the Highest Daily Utilization Award.

APCER and IQNet certify the Maintenance and Engineering Quality System in compliance with ISO 9001:2000 Standard.


2006

Renewalofthelong-haulroutefleet,composedofA310andA340aircraft,withthefirstAirbus330-200 arriving for the operation of the Brazil, USA and Africa routes.

TAP–Maintenance and Engineering and Air France Industries celebrate 10 years of technical cooperation and renew their contract.

The TAP Group and the OMNI Grup sign a con-tract to sell all the shares of White–Airways, S.A..

2007

TAP–Maintenance and Engineering obtains the DOA–Design Organisation Approval certi-ficationfromEASA–EuropeanAviationSafetyAgency following a complex certification process.

After the Competition Authority had issued its decision of non-opposition to the opera-tion, TAP acquired the entire share capital of Portugália–Companhia Portuguesa de Transportes Aéreos, S.A, with Gertiserv–Sociedade de Gestão e Serviços, S.A. having beentheintermediary,andspecificallyincorpo-rated for this purpose.

IATA, International Air Transport Association, announces, in Canada, that Fernando Pinto, CEO of TAP, begins a one year term as Chairman of the Governing Board of the Association, electing the environment and operational safety as priorities.

TAP signs a contract for the acquisition of twelve A350 XWB aircraft with Airbus, in Toulouse, with the option of three additional aircraft, including a letter of intention for a further eight aircraft of the A320 family.

2008

The inaugural flight to BeloHorizonte takesplace, leading to a total of eight destinations between Europe and Brazil.

TAP'sfleetisreinforced,withthenewmedium -haul A319 airplane.

TAPissuetickets100%inelectronicformatandimplementsasignificantchangeinitscommer-cial model, with the launch of the Freedom of Choice Campaign. 1 Flight, 5 Ways to Travel.

TAP inaugurates the new Premium Customer Centre at Lisbon Airport and opens the new lounge.

The 9th A330-220 airplane is included in TAP's fleet,receiveddirectlyfromAirbus.

The operation between Lisbon and Casablanca is inaugurated.

The stake of Globália in SPdH (50.1%) isacquiredbythreefinancialinstitutions,Bancode InvestimentoGlobalBIG (19.94%),BancodeInvestimento,S.A.BANIF(15.1%)andBancoInvest,S.A.(15.1%).

The company GERTISERV, S.A. is extinguished, through its merger with the company Portugália.

2009

ThefirstofsixnewAirbusA320-214airplanesis received.

TAP's Engine Maintenance activity receives the environmental license relative to the Integrated Prevention and Control of Pollution (PCIP Diploma).

TAP is thefirstairlinecompany intheworldto launch the CO2 Emissions Compensation Programme,aprojectinitiatedin2008,inpart-nershipwithIATA,duringthetermofofficeofthe Company's executive chairman, Fernando Pinto.

Expansion of the Network in Europe, with the operations to Moscow, Warsaw, Helsink and Valência.

TAP continues its efforts to sell the stake that itwasforcedtoreacquire,themajorityoftheshare capital of SPdH, with the corresponding shares having been delivered to an independent entity, Europartners, which holds an active role in the realization of AdC decision-making.

AccountingReport

TAP, SGPS, S.A.


114 CONSOLIDATED FINANCIAL POSITION AS AT 31 DECEMBER 2010 AND 2009115 CONSOLIDATED PROFIT AND LOSS STATEMENT 116 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGE IN EQUITY AS AT 31 DECEMBER 2010 AND 2009 117 CONSOLIDATED CASH FLOW STATEMENT

118 NOTES TO THE FINANCIAL STATEMENTS

118 1.Economic activity of TAP Group 119 2. Accounting policies and valuation criteria 2.1. Basis of preparation 2.2. Comparability 2.3. Basis of consolidation 2.3.1. Subsidiaries 120 2.3.2. Associates 2.4. Reporting by segments 121 2.5. Currency conversion 2.5.1. Functional and reporting currency 2.5.2. Balances and transactions expressed in foreign currency 2.5.3. Group companies 2.6. Intangible Assets122 2.7. Goodwill 2.8.Tangiblefixedassets 2.9. Investment properties 2.10. Impairment of non-current assets 123 2.11. Financial investments 2.12.Derivativefinancialinstruments 124 2.13. Income tax 2.14. Inventories 2.15. Current receivables 2.16. Cash and equivalent 2.17. Share capital and own shares 125 2.18. Remunerated liabilities 2.19. Financial costs related to loans 2.20. Provisions 2.21.Post-employmentbenefits 126 2.22. Current payables 2.23. Subsidies 2.24. Leases 2.25. Distribution of dividends 2.26. Revenue and the accrual basis 127 2.27. Contingent assets and liabilities 2.28. Subsequent events 2.29. New standards, amendments and interpretations of existing standards 128 2.30.Re-statementsandreclassifications 129 2.31.Relevantaccountingestimatesandjudgements 3. Financial risk management policies 133 4. Employees134 5.Tangiblefixedassets 135 6. Investment properties 7. Goodwill 136 8. Intangible assets 10. Financial shareholdings – equity method

Consolidated Financial Statements


114 CONSOLIDATED FINANCIAL POSITION AS AT 31 DECEMBER 2010 AND 2009115 CONSOLIDATED PROFIT AND LOSS STATEMENT 116 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGE IN EQUITY AS AT 31 DECEMBER 2010 AND 2009 117 CONSOLIDATED CASH FLOW STATEMENT


118 1.Economic activity of TAP Group 119 2. Accounting policies and valuation criteria 2.1. Basis of preparation 2.2. Comparability 2.3. Basis of consolidation 2.3.1. Subsidiaries 120 2.3.2. Associates 2.4. Reporting by segments 121 2.5. Currency conversion 2.5.1. Functional and reporting currency 2.5.2. Balances and transactions expressed in foreign currency 2.5.3. Group companies 2.6. Intangible Assets122 2.7. Goodwill 2.8.Tangiblefixedassets 2.9. Investment properties 2.10. Impairment of non-current assets 123 2.11. Financial investments 2.12.Derivativefinancialinstruments 124 2.13. Income tax 2.14. Inventories 2.15. Current receivables 2.16. Cash and equivalent 2.17. Share capital and own shares 125 2.18. Remunerated liabilities 2.19. Financial costs related to loans 2.20. Provisions 2.21.Post-employmentbenefits 126 2.22. Current payables 2.23. Subsidies 2.24. Leases 2.25. Distribution of dividends 2.26. Revenue and the accrual basis 127 2.27. Contingent assets and liabilities 2.28. Subsequent events 2.29. New standards, amendments and interpretations of existing standards 128 2.30.Re-statementsandreclassifications 129 2.31.Relevantaccountingestimatesandjudgements 3. Financial risk management policies 133 4. Employees134 5.Tangiblefixedassets 135 6. Investment properties 7. Goodwill 136 8. Intangible assets 10. Financial shareholdings – equity method

137 11. Financial shareholdings – other methods 13.Otherfinancialassets 15. Deferred tax assets and liabilities 139 16. Advances to suppliers 17. State and other public entities 140 18. Other accounts receivable 141 19. Deferrals 142 20. Inventories 21. Customers 143 22. Cash and bank deposits 24. Equity instruments 144 25. Minority interests – Balance Sheet 145 26. Provisions 147 27. Funding received 149 28.Liabilitiesrelatedtopost-employmentbenefits 154 29. Advances from customers 30. Suppliers 155 31. Other accounts payable 156 32. Sales and services rendered 35. Vendas e serviços prestados 36. Operating subsidies 157 37. Gains and losses in associated companies 38. Variation in production 39. Own work capitalised 40. Cost of goods sold and materials consumed158 41. External supplies and services 42. Payroll expenses 159 43.Adjustmentsofinventories(losses/reversals) 44. Impairment of debts receivable (losses/reversals) 45. Provisions (increases/decreases) 46. Impairment of assets160 48. Other revenues and gains 49. Other costs and losses 50. Depreciation and amortisation costs/reversals161 51. Interest and similar revenue received / costs paid 52. Corporate income tax for the year 162 53. Minority interests – net income 55. Reporting by segments 163 56. Related entities 164 57. Contingent assets and liabilities166 58.Breakdownoffinancialassetsandliabilities 167 60. Commitments


Consolidated Financial PositionAS AT 31 DECEMBER 2010 AND 2009VALUES IN THOUSAND EUROS

Note 31-Dec-10 31-Dec-09

ASSETSNON-CURRENT ASSETSTangiblefixedassets 5 1,066,344 1,188,526 Investment properties 6 2,607 1,287 Goodwill 7 211,015 204,432 Other intangible assets 8 1,447 2,115 Otherfinancialassets 13 2,966 3,395 Deferred tax assets 15 24,459 24,221 Other accounts receivable 18 27,231 26,663

1,336,069 1,450,639

CURRENT ASSETSInventories 20 148,590 126,671 Customers 21 223,212 192,590 Advances to suppliers 16 3,465 2,182 State and other public entities 17 15,833 24,814 Other accounts receivable 18 124,669 88,595 Deferrals 19 12,308 7,827 Cash and bank deposits 22 222,677 131,077

750,754 573,756

TOTAL ASSETS 2,086,823 2,024,395

EQUITY AND LIABILITIESEQUITY

Share capital 15,000 15,000 Legal reserves 3,000 3,000 Currency conversion reserves (5,024) (7,423)Fair value reserves (1,006) 4,348 Adjustmentofshareholdings (2,260) (2,260)Retained earnings (224,773) (220,454)

Net income for the year (57,103) (3,542)

TOTAL EQUITY OF THE GROUP 24 (272,166) (211,331)

Minority interests 25 7,355 6,705

TOTAL EQUITY (264,811) (204,626)

NON-CURRENT LIABILITIESProvisions 26 159,575 134,039 Loans received 27 1,028,060 1,037,208 Post-employmentbenefitliabilities 28 88,393 87,784 Deferred tax liabilities 15 24,683 24,064 Other accounts payable 31 1,032 1,275

1,301,743 1,284,370

CURRENT LIABILITIESSuppliers 30 142,619 104,221

Advances from customers 29 3,574 3,661

State and other public entities 17 147,062 112,691

Loans received 27 248,995 265,330

Other accounts payable 31 215,787 197,521

Advances from customers – tickets to be used 32 239,237 206,984

Deferrals 19 52,617 54,243

1,049,891 944,651

TOTAL LIABILITIES 2,351,634 2,229,021

TOTAL EQUITY AND LIABILITIES 2,086,823 2,024,395



Sales and services rendered 35 2,315,52 2,075,010 Operating grants 36 4,565 3,559 Gains and losses in associated companies 37 (44,066) (29,596)Variation in production inventories 38 (838) (14,673)Own work capitalised 39 2,406 1,650 Cost of goods sold and materials consumed 40 (175,829) (180,238)External supplies and services 41 (1,444,939) (1,212,059)Payroll expenses 42 (559,721) (504,450)Inventoryadjustments(losses/reversals) 43 3,966 (8,661)Accountsreceivableadjustments(losses/reversals) 44 4,307 (15,183)Provisions (increases / decreases) 45 3,701 (3,832)Impairmentofassetsnotsubjecttodepreciation/amortisation(losses/reversals) 46 (500) (32,600)Other revenues and gains 48 75,108 149,949 Other costs and losses 49 (45,040) (35,723)

Earnings before interest, taxes, depreciation and amortisation 138,641 193,153

Depreciation and amortisation costs/reversals 50 (138,622) (140,980)Impairmentofassetssubjecttodepreciation/amortisation(losses/reversals) 46 (440) –

Net operating income (earnings before interest and tax) (421) 52,173

Interest and similar revenue 51 6,896 5,702 Interest and similar costs 51 (50,893) (50,587)

Pre-tax profit (44,418) 7,288

Corporate income tax 52 (8,497) (7,287)

Net income for the year (52,915) 1

Net income of shareholders of the parent company (57,103) (3,542)

Net income for the year of minority interests 53 4,188 3,543

Basic and diluted net income per share (euros) (38) (2)

Consolidated Profit and Loss StatementAS AT 31 DECEMBER 2010 AND 2009VALUES IN THOUSAND EUROS


Consolidated Statement of Comprehensive IncomeAS AT 31 DECEMBER 2010 AND 2009VALUES IN THOUSAND EUROS

31-Dec-10 31-Dec-09

Net income (52,915) 1

OTHER FULL INCOME Currency conversion gains and losses 2,400 (17,479)Gainsandlossesincashflowhedginginstruments (5,355) 6,816 Other gains and losses (777) (2,260)

INCOME RECORDED DIRECTLY IN EQUITY (3,732) (12,923)

FULL INCOME (56,647) (12,922)

ATTRIBUTABLE TO: TAP Shareholders (60,835) (16,465)Minority interests 4,188 3,543

TOTAL INCOME AND COSTS RECOGNISED IN THE YEAR (56,647) (12,922)

TOTALShare

capital Legal

reserves

Currency conversion

reserves

Fair value reserves

Adjustment of shareholdings

Retained earnings

Net Income for the Year

Sub-total (before

Minority Interest)

Minority interests

FINANCIAL POSITION AS AT 01-JAN-2009

(188,070) 15,000 3,000 10,056 (2,468) – 67,940 (288,394) (194,866) 6,796

TRANSACTIONS WITH SHAREHOLDERS IN 2009

(3,634) – – – – – (288,394) 288,394 – (3,634)

Application of net income and distributionofprofitandreserves

– – – – – – (288,394) 288,394 – –

Other transactions (3,634) – – – – – – – – (3,634)FULL INCOME IN 2009

(12,922) – – (17,479) 6,816 (2,260) – (3,542) (16,465) 3,543

Net income for the year 1 – – – – – – (3,542) (3,542) 3,543 Other full income (12,923) – – (17,479) 6,816 (2,260) – – (12,923) –

FINANCIAL POSITION AS AT 31-DEC-2009

(204,626) 15,000 3,000 (7,423) 4,348 (2,260) (220,454) (3,542) (211,331) 6,705

TRANSACTIONS WITH SHAREHOLDERS IN 2010

(3,538) – – – – – (3,542) 3,542 – (3,538)

Application of net income and distributionofprofitandreserves

– – – – – – (3,542) 3,542 – –

Other transactions (3,538) – – – – – – – – (3,538)

FULL INCOME IN 2010

(56,647) – – 2,399 (5,354) – (777) (57,103) (60,835) 4,188

Net income for the year (52,915) – – – – – – (57,103) (57,103) 4,188 Other full income (3,732) – – 2,399 (5,354) – (777) – (3,732) –

FINANCIAL POSITION AS AT 31-DEC-2010

(264,811) 15,000 3,000 (5,024) (1,006) (2,260) (224,773) (57,103) (272,166) 7,355

Consolidated Statement of Change in EquityAS AT 31 DECEMBER 2010 AND 2009VALUES IN THOUSAND EUROS



OPERATING ACTIVITIES:Receipts from customers 2,468,901 1,887,848 Payments to suppliers (1,776,895) (1,466,669)Payments to staff (434,626) (386,927)Payment / receipt of corporate income tax (5,350) (3,497)Other receipts / payments relative to operating activity (58,587) 148,132

Cash flows from operating activities 193,443 178,887

INVESTMENT ACTIVITIES:Receipts from: Othertangiblefixedassets 738 4,469 Financial investments 319 – Interest and similar income 5,827 5,550 Loans granted 37,398 – Dividends 30 –

44,312 10,019 Payments relative to:Othertangiblefixedassets (9,957) (31,979)Loans granted (73,000) (35,000)

(82,957) (66,979)

Cash flows from investment activities (38,645) (56,960)

FINANCING ACTIVITIES:Receipts from:

Loans received 179,697 10,000 179,697 10,000

Payments relative to: Loans received (82,209) (65,931)Financial leasing contracts (124,900) (90,338)Interest and similar costs (44,885) (49,751)Dividends (3,464) (3,989)Otherfinancingoperations – –

(255,458) (210,009)

Cash flows from financing activities (75,761) (200,009)

Variations in cash and cash equivalents 79,037 (78,081)Effect of exchange rate differences 12,580 11,920 Cash and cash equivalents at the beginning of the period 116,137 182,298

Cash and cash equivalents at the end of the period 22 207,754 116,137

Consolidated Cash Flow StatementAS AT 31 DECEMBER 2010 AND 2009VALUES IN THOUSAND EUROS


1. Economic activity of TAP Group

TAP Group is formed by TAP – Transportes Aéreos Portugueses, SGPS, S.A. (TAP SGPS) and its subsidiaries (TAP Group or the Group) and has its head officeatLisbonAirport.TAPSGPSoperatesinthepassengers,cargoandmail transport industry, as well as carries out maintenance and engineer-ing works, handling in the airports, management of commercial areas in airports (duty free) and catering for aviation

A TAP – Transportes Aéreos Portugueses, SGPS, S.A. was incorporated on 25 June 2003 under Decree-Law No. 87/2003, of 26 April, and its share capital was fully subscribed and paid up in kind by Parpública – Participações Públicas, SGPS, S.A. (“Parpública”), through the deliv-ery of the shares representing the total share capital of the company Transportes Aéreos Portugueses, S.A. (TAP S.A).

Head Office Aeroporto de Lisboa, Edifício 25 Share Capital Euros 15,000,000Taxpayer Number 506 623 602

Theconsolidatedfinancialstatementsreportedhereinwereapproved in a meeting of the Board of Directors on 30 March 2011.

The members of the Board of Directors that have signed this report declare that, to the best of their knowledge, the infor-mation provided herein was drafted in conformity with the applicable Accounting Standards, presenting a true and adequateviewoftheassetsandliabilities,thefinancialsituation and the results of the companies included in the Group's consolidation perimeter.

Notes to the Financial Statements


2. Accounting policies and valuation criteria

Themainaccountingpoliciesappliedinthepreparationoftheseconsolidatedfinancialstatementsaredescribedbelow.

2.1. Basis of preparation

ThepresentconsolidatedfinancialstatementsoftheGroupwerepreparedinconformitywiththeInternationalFinancialReportingStandardsadopted by the European Union (IFRS – previously called International Accounting Standards – IAS) issued by the International Accounting Standards Board (IASB) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or by the former Standing InterpretationsCommittee(SIC),inforceatthedateofpreparationofthesaidfinancialstatements.

Theattachedconsolidatedfinancialstatementswerepreparedassumingthecontinuityofoperations,usingtheaccountingledgersandrecordsofthecompaniesincludedintheconsolidation(Note2.3.1),andbasedonhistoricalcost,withtheexceptionofderivativefinancialinstruments,assetsavailable for sale and customer loyalty programmes which are recorded at fair value.

ThepreparationofthefinancialstatementsrequirestheuseofrelevantestimatesandjudgementsintheapplicationoftheGroup'saccountingpoli-cies.Themainstatementsthatinvolveamoresignificantlevelofjudgementorcomplexity,ormoresignificantassumptionsandestimatesforthepreparationofthesaidfinancialstatements,aredisclosedinNote2.31.

2.2. Comparability

Thevaluespresentedintheconsolidatedfinancialstatementsfortheperiodendedon31December2009arecomparableinallsignificantaspectswith the values for 2010.

2.3. Basis of consolidation

2.3.1. Subsidiaries

SubsidiariesarealltheentitiesoverwhichtheGrouphaspowertodecideonfinancialandoperatingpolicies,normallyrepresentedbymorethanhalf of voting rights. The existence and the effect of potential voting rights that are currently able to be exercised or converted are considered in the evaluation of whether the Group has control over another entity.

The equity and net income of these subsidiary companies related to third party shareholdings are presented under the minority interests items respec-tively,intheconsolidatedbalancesheetunderaseparateitemofequityandintheconsolidatedprofitandlossstatement.Thecompaniesincludedintheconsolidatedfinancialstatementsaredetailedbelow.

Corporate NameHead Office

Main Activity Shareholders% share capital held

31-Dec-10% share capital held

31-Dec-09

TAP–Transportes Aéreos Portugueses, SGPS, S.A.

LisbonManagement and administration of shareholdings

PARPÚBLICA, SGPS, S.A.

100.00% 100.00%

Reaching Force, SGPS, S.A. (“Reaching Force”)

LisbonManagement and administration of shareholdings

TAP, SGPS, S.A. n/a 100.00%

SEAP–Serviços, Administração e Participações Lda. (“SEAP”)

MacauManagement and administration of shareholdings

TAP, SGPS, S.A. n/a 75.00%

Transportes Aéreos Portugueses, S.A. Lisbon Aeronautical activities TAP, SGPS, S.A. 100.00% 100.00%

TAPGER–Sociedade de Gestão e Serviços, S.A.

LisbonManagement of complementary activities

TAP, SGPS, S.A. 100.00% 100.00%

PORTUGÁLIA–Companhia Portuguesa de Transportes Aéreos, S.A. (“Portugália”)

Lisbon Aeronautical activities TAP, SGPS, S.A. 100.00% 100.00%

AIR PORTUGAL TOURS–Programações Turísticas, S.A.

Lisbon Tour operator TAP S.A. n/a 100.00%

CATERINGPOR–Catering de Portugal, S.A. Lisbon Catering TAPGER, S.A. 51.00% 51.00%

L.F.P.–LojasFrancasdePortugal,S.A. Lisbon Duty free shop operation TAPGER, S.A. 51.00% 51.00%

MEGASIS–Soc. de Serviços e Engenharia Informática, S.A.

LisbonEngineering and provision of IT services

TAPGER, S.A. 100.00% 100.00%

U.C.S.–Cuidados Integrados de Saúde, S.A. Lisbon Healthcare services TAPGER, S.A. 100.00% 100.00%

AERO-LB, Participações, S.A. (“Aero-LB”)Brazil

Management and administration of shareholdings

TAP, SGPS, S.A. 99.00% 99.00%

PORTUGÁLIA 1.00% 1.00%

TAP–Manutenção e Engenharia Brasil, S.A. (ex-VEM)

Brazil Maintenance and aeronautical engineering Aero-LB 98.64% 98.64%

In 2010 the Group decided to dispose of its stake in Air Macau Cª Lda., and so the subsidiary SEAP was extinguished. Moreover, Reaching Force and AIR PORTUGAL TOURS–Programações Turísticas, S.A. were incorporated by merger into TAP, SGPS, S.A. and TAP S.A., respectively.


The purchase method is used to record the acquisition of subsidiary companies. The cost of an acquisition is measured at the fair value of the assets delivered, equity instruments issued and liabilities incurred or assumed at the acquisition date, plus any costs directly assigned to the acquisition.

Identifiableassetsacquiredandliabilitiesandcontingentliabilitiesassumedinabusinesscombinationaremeasuredinitiallyattheirfairvalueattheacquisition date, independently of the existence of any non-controlled interests. Any excess of the acquisition cost over the fair value of the Group's shareoftheidentifiablenetassetsacquiredisrecordedasgoodwill,whichispresentedindetailinNote7.

Subsidiaries are consolidated by the method of full integration from the date on which control is transferred to the Group.

If the acquisition cost is less than the fair value of the net assets of the subsidiary acquired (negative goodwill), the difference is recognised directly in theprofitandlossstatementas"Otherincomeandgains".

Internal transactions, balances, unrealised gains on transactions and dividends distributed among Group companies are eliminated. Unrealised losses are also eliminated, unless the transaction shows an impairment of a transferred asset.

The accounting policies of subsidiaries were changed whenever necessary, to guarantee consistency with the policies adopted by the Group.

2.3.2. Associates

AssociatesareallentitiesoverwhichtheGrouphassignificantinfluencebutnotcontrol,usuallyaccompanyingashareholdingof20%to50%ofvoting rights. Investments in associates are recorded using the equity method.

Inaccordancewiththeequitymethod,shareholdingsarerecordedattheiracquisitioncost,adjustedbythevaluecorrespondingtotheGroup'sstakein the variations of associates’ equity (including net income) and dividends received.

The differences between the acquisition cost and the fair value of the assets, liabilities and contingent liabilities of the associate at the acquisition date are recognised as goodwill when positive and maintained in the respective item. If those differences are negative they are recorded as revenue of the period as "Gains and losses in associated companies".

An assessment of the interest in associates is carried out when there are indications that the asset might be impaired, with any existing impairment loss being recorded as a cost in that item. When impairment losses recognised in previous years cease to exist, they are reversed with the exception of goodwill.

When the Group’s share of losses in an associate equals or exceeds its investment in these companies, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of those companies. Unrealized gains on transactions with the associates are elimi-nated to the extent of the Group’s stake in the associates. Unrealised losses are also eliminated, unless the transaction reveals evidence of impairment of a transferred asset.

The accounting policies of associates are changed whenever necessary, to guarantee consistency with the policies adopted by the Group.

The following entities qualify as associates:

Corporate Name Head Office Main Activity Shareholders% share capital held

31-Dec-10% share capital held

31-Dec-09

SPdH–Serviços Portugueses de Handling, S.A. (“SPdH”) Lisboa

Handling TAP SGPS 43.90% 43.90%

PORTUGÁLIA 6.00% 6.00%

TAP S.A. 50.10% –

AIR MACAU, Cª Lda. Macau Aeronautical activities SEAP n/a 20.00%

SPdHisclassifiedasanassociatesincetheCompetitionAuthorityimposedthat,untilitssale,themanagementoftheCompanyshouldbedonebyanagent manager acting on behalf of the Competition Authority, and managing SPdH independently from TAP Group.

In 2010 the Group decided to dispose of its stake in Air Macau Cª Lda., and so the Company no longer belongs to TAP Group as at 31 December 2010.

The investments in associates are detailed in Note 10.

2.4. Reporting by segments

The Group presents its operating segments based on the internal Management information.

BusinesssegmentisasetofGroupassetsandoperationsthataresubjecttodifferentrisksandreturnsfromotherbusinesssegments.

Fivebusinesssegmentswereidentified:AirTransport,MaintenanceandEngineering,DutyFreeShop,CateringandOthers.

Geographicsegmentisanindividualareacommittedtoofferproductsorservicesinaspecificeconomicenvironmentthatissubjecttodifferentrisksandbenefitsfromothersegmentsoperatinginothereconomicenvironments.ThegeographicsegmentisdefinedbasedonthedestinationcountryofthegoodsandservicessoldbytheGroup,whichinthecaseofairtransportandthedutyfreeshopisconsideredastheflightdestinationcountry.

The accounting policies of the reporting by segments are those ones used consistently in the Group. All inter-segment income is stated at market pricesandiseliminatedintheconsolidation.TheinformationrelativetotheidentifiedsegmentsisdetailedinNote55.


2.5. Currency conversion

2.5.1. Functional and reporting currency

The items included in the Financial Statements of each Group entity are measured using the currency of the economic environment in which the entity operates (functional currency). The Consolidated Financial Statements are presented in thousands of euros, which is the Group's functional and reporting currency.

2.5.2. Balances and transactions expressed in foreign currency

All Group assets and liabilities expressed in foreign currency were converted into euros using the exchange rates in force at the end of the reporting period.

Foreign exchange rate differences, favourable or unfavourable, arising from differences between the exchange rates in force on the date of the trans-actionsandthoseapplicableonthedateofthecollections,paymentsorbalancesheet,wererecordedasincomeandcostsintheconsolidatedprofitand loss statement for the year.

2.5.3. Group companies

TheresultsandfinancialpositionofallGroupentitiesthatuseafunctionalcurrencydifferentfromitsreportingcurrencyareconvertedintothereporting currency as follows:

ρ (i) The assets and liabilities of each Balance Sheet are converted at the exchange rate in force on the date of the Consolidated Financial Statements; The resulting exchange rate differences are recognised as a separate item in Equity – "Currency conversion reserves".

ρ (ii) The income and costs of each Profit and Loss Statement are converted at the average exchange rate of the reporting period, unless the average rate is not a reasonable approximation of the cumulative effect of the rates in force on the dates of the transactions, in which case the income and costs are converted at the exchange rates in force on the dates of the transactions.

The resulting exchange rate differences of a monetary item that is part of the net investment in a foreign operating unit are recognised in a separate component of equity and recognised in results when the net investment is sold or the amounts are settled.

The exchange rates used in the conversion of balances expressed in a currency other than the euro or to update balances expressed in a foreign cur-rency were as follows:

Currency 31-Dec-10 31-Dec-09

BRL 2.2177 2.5113

MOP 10.6972 11.5060

Currency Average exchange rate 2010 Average exchange rate 2009

BRL a) a)

MOP 10.8697 11.1291

a) For the Brazilian subsidiary, the monthly balances were converted at the rate of the last day of each month, as follows:

Month 2010 2009

January 2.6006 2.9640

February 2.4719 3.0093

March 2.4043 3.0767

April 2.2959 2.8850

May 2.2343 2.8320

June 2.2082 2.7469

July 2.2924 2.6482

August 2.2347 2.7089

September 2.3201 2.6050

October 2.3638 2.5574

November 2.2373 2.6251

December 2.2177 2.5113

2.6. Intangible Assets

Intangible assets are recorded at acquisition cost minus depreciation and impairment losses, using the straight line method over a period ranging between 5 and 10 years.


2.7. Goodwill

Goodwillrepresentstheexcessofacquisitioncostoverthefairvalueoftheassets,liabilitiesandidentifiablecontingentliabilitiesofthesubsidiarieson the acquisition date.

Goodwillisnotamortisedandissubjecttoimpairmenttests,atleastonceayear.Impairmentlossesrelativetogoodwillcannotbereversed.Gainsorlosses arising from the sale of the control of an entity include the value of the corresponding goodwill.

2.8. Tangible fixed assets

Tangiblefixedassetsacquireduntil1January2004(IFRStransitiondate)arerecordedatacquisitioncost,oracquisitioncostrevaluatedinaccordancewith the accounting principles usually accepted in Portugal until that date, minus depreciation and accumulated impairment losses.

Furthermore, on the transition date the subsidiary Transportes Aéreos Portugueses, S.A. applied the exception foreseen in IFRS 1 – First-time Application of International Financial Reporting Standards, which allows the fair value of some categories of assets, reported at the transition date (1 January 2004), to be considered at deemed cost.

Thus, effective as of 1 January 2004, the buildings of the abovementioned subsidiary were revalued to the corresponding fair value on that date. The fairvalueofthesetangiblefixedassetitemswasstatedbyanassetsevaluationstudyconductedbyanindependentspecialisedentity(ColliersP&I),which also stated the remaining useful life of these assets, on the transition date.

Tangiblefixedassetsacquiredafterthetransitiondatearepresentedatacquisitioncostminusdepreciationandimpairmentlosses.Theacquisitioncost includes all expenditure directly associated with the acquisition of the assets.

Subsequent costs are included in the acquisition cost of the asset or recognised as separate assets, only when it is probable that future economic benefitswillflowtothecompanyandtherespectivecostcanbemeasuredreliably.Anyotherexpenditurerelatedtorepairsandmaintenanceisrec-ognised as a cost for the period in which they were incurred.

Depreciationiscalculatedbasedonacquisitioncost,usingthestraightlinemethodbytwelfthsandtheratesthatbestreflecttheasset'sestimateduseful life, as follows:

Theresidualvaluesoftheassetsandrespectiveusefullivesarereviewedandadjusted,ifnecessary,attheendofthereportingperiod.Ifthebookvalueishigherthantherecoverablevalueoftheasset,itisadjustedtoitsestimatedrecoverablevaluewithanimpairmentlossbeingrecorded(Note2.10).

Gains or losses arising from a write-off or disposal are calculated by the difference between the disposals receipts minus transaction costs and the bookvalueoftheassets,andarerecognisedintheprofitandlossstatement,asoperatingincomeorlosses.

2.9. Investment properties

Investment properties are valued at acquisition cost minus depreciation and impairment losses. For those acquired prior to 1 January 2004 (date of transition to IFRS), the acquisition cost corresponds to the historical acquisition cost or revalued acquisition cost in accordance with the accounting policies usually accepted in Portugal until that date.

2.10. Impairment of non-current assets

Non-currentassetsthathaveanindefiniteusefullifearenotsubjecttoamortisation,butaresubjecttoannualimpairmenttests.Assetssubjecttoamor-tisation/depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the book value may not be recoverable.

An impairment loss is recognised as the amount by which the asset's book value exceeds its recoverable value. The recoverable amount is the highest between an asset's fair value minus its selling costs, and its use value.

Tocarryoutimpairmenttests,assetsaregroupedatthelowestlevelforwhichitispossibletoseparatelyidentifycashflows(cashgeneratingunitswhich the asset belongs to), when it is not possible to do so on an individual basis for each asset.

Years of useful life Final salvage valueBuildings and other constructions 50 –

Machinery and equipment

Flight equipment

Aircraft 16 10%

Aircraftunderfinancialleasing 16 10%

Spare engines and other spares 16 10%

Spareenginesunderfinancialleasing 16 10%

Other machinery and equipment 7 – 16 0–10%

Transport equipment 4 – 10 –

Tools and dies 8 – 16 0–10%

Admnistrative equipment 5 – 16 –

Othertangiblefixedassets 10 –


Impairment losses recognised in previous periods are reversed when it is concluded that recognised impairment losses no longer exist or have dimin-ished (with the exception of goodwill impairment losses – see Note 2.7).

Thereversalofimpairmentlossesisrecognisedintheprofitandlossstatementas“Impairmentofassets”subjecttodepreciationandnotsubjecttodepreciation, unless the asset has been revalued, in which case the reversal will correspond to a revaluation increase. However, an impairment loss is reversed only up to the limit of the amount that would be recognised (net of amortisation or depreciation) if the impairment loss had not been recorded in previous periods.

2.11. Financial investments

TheGroupclassifiesitsinvestmentsintothefollowingcategories:financialassetsatfairvaluethroughprofitandloss,loansgrantedandaccountsreceivable,held-to-maturityinvestmentsandfinancialassetsavailableforsale.Theclassificationdependsonthepurposeforwhichtheinvestmentwasacquired.Theclassificationoftheinvestmentsisdeterminedattheinitialrecognition,beingrevaluatedattheendofthereportingperiod.

All acquisitions and disposals of these investments are recognised on the date of the signing of the respective purchase and sale contracts, regardless ofthefinancialsettlementdate.

Investments are initially recorded at their acquisition value, with the fair value being equivalent to the price paid, including transaction costs. Thereafter,measurementdependsonthecategoryintowhichtheinvestmentisclassified,asfollows:

Loans granted and accounts receivableLoansgrantedandaccountsreceivablearenon-derivativefinancialassetswithfixedordeterminablepaymentsandarenotquotedonanactivemar-ket. They arise when the Group provides money, goods or services directly to a debtor with no intention of negotiating the debt.

Theyareincludedincurrentassets,exceptformaturitiesabove12monthsaftertheendofthereportingperiod,inwhichcasetheyareclassifiedasnon-current assets.

Loans granted and accounts receivable are measured initially at fair value and subsequently at amortised cost.

Loans granted and accounts receivable are included in the balance sheet as Current receivables.

Financial assets at fair value through profit and lossAfinancialassetisclassifiedinthiscategoryifacquiredprincipallyforthepurposeofitssaleintheshorttermorifclassifiedassuchbythemanage-ment.Assetsinthiscategoryareclassifiedascurrentiftheyareeitherheldfortradingorareexpectedtobesoldwithin12monthsoftheendofthereportingperiod.Theseinvestmentsaremeasuredatfairvaluethroughtheprofitandlossstatement.

Held-to-maturity investmentsHeld-to-maturityinvestmentsarenon-derivativefinancialassets,withfixedordeterminablepaymentsandfixedmaturitiesthattheGroupintendsand is able to hold to maturity. Investments in this category are recorded at amortised cost using the effective interest rate method.

Available for sale financial assetsAvailableforsalefinancialassetsarenon-derivativefinancialassetsthatareeitherclassifiedintothiscategoryorarenotclassifiedintoanyothercat-egory. They are included in non-current assets, unless the management intends to dispose of the investment within 12 months after the end of the reporting period. These investments are recorded at fair value in Equity.

Ifthereisnoactivefinancialmarket,theGroupestablishestheasset'sfairvaluethroughvaluationtechniques,whichincludetheuseofrecentcom-mercialtransactions,referencetootherinstrumentswithsimilarcharacteristics,discountedcash-flowsanalysisandoptionpricingmodelsmodifiedtoreflecttheissuer’sspecificcircumstances.

Potentialgainsandlossesarisinginthiswayarerecordeddirectlyinthefairvaluereserve,unlessthereisimpairments,untilthefinancialinvestmentis sold, received, or disposed of in any way, at which time the accumulated gain or loss, formerly recognised in the fair value reserve, is included in net income for the period.

If there is no market value or if it is not possible to determine one, the said investments are maintained at acquisition cost. Impairment losses are rec-ognisedforaprolongedorsignificantreductionofvalue.

AttheendofthereportingperiodtheGroupassesseswhetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsareimpaired.Iftherehasbeenacontinueddecreaseinthefairvalueofthefinancialassetsavailableforsale,thenthecumulativeloss–measuredasthedifferencebetweenacquisitioncostandcurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognisedthroughprofitorloss–isreversedfromequityandrecognisedthroughtheprofitorlossfortheperiod.

Arecognisedimpairmentlossonfinancialassetsavailableforsaleisreversedifthelosshasbeencausedbyspecificexternaleventsofanexceptionalnature that are not expected to recur but which subsequent external events have reversed. Under these circumstances, the reversal does not affect the profitandlossstatement,andthesubsequentpositivefluctuationoftheassetisrecordedunderthefairvaluereserve.

2.12. Derivative financial instruments

TheGroupusesderivativesinordertomanagethefinancialandoperatingriskstowhichitisexposed.Wheneverexpectationsofchangesininterestratesorjetfuelpricesjustifythis,theGroup,throughderivativeinstruments,signcontractssuchasinterestrateswaps(IRS),swapsandoptionstobeprotected against adverse movements.


Intheselectionofthederivativefinancialinstruments,itistheireconomicaspectsthatarethemainfocusofassessment.Derivativefinancialinstru-ments are recorded in the balance sheet at fair value.

As they are considered effective hedges, changes in fair value are initially recorded in equity and subsequently recorded in the net operating income forjetfuelinstrumentsandnetfinancialresultsforinterestrateinstruments,ontheirsettlementdate.

Accordingly,innetterms,thecostsassociatedtohedgedfinancingareaccruedattheinherenthedgingtransactionratecontracted.Gainsorlossesarisingfromtheearlyrescissionofthistypeofinstrumentarerecordedintheprofitandlossstatementwhentheyarise.

Whenever possible, the fair value of derivatives is estimated based on quoted instruments. In the absence of market prices, the fair value of derivatives isestimatedthroughthediscountedcash-flowmethodandoptionvaluationmodels,inaccordancewithprevailingmarketassumptions.Thefairvalueofderivativefinancialinstrumentsisincluded,essentially,asCurrentreceivablesandCurrentpayables.

2.13. Income tax

Incometaxincludescurrentanddeferredtaxes.Currentincometaxiscalculatedonnetincome,adjustedinaccordancewithtaxlawprevailingonthe reporting date.

Deferred tax is calculated based on the balance sheet liabilities, on temporary differences between the book value of assets and liabilities and the respective tax base. To calculate the deferred tax, the tax rate used is the one expected to apply when the temporary differences will be reversed.

Deferred tax assets are recognised as assets whenever there is a reasonable assurance that earnings will be generated in the future, against which they can be used. Deferred tax assets are reviewed periodically and revised downwards whenever it no longer appears probable that they can be used.

Deferred taxes are recorded as cost or income for the period, except if they arise from amounts recorded directly in equity, in which case the deferred tax is also recorded under the same item.

2.14. Inventories

Inventories are valued according to the following criteria:

i) Goods and raw materialsGoods and raw materials, supplies and consumables are valued at the lower of acquisition cost and net realisable value. Acquisition cost includes expenses incurred in bringing the inventories to the warehouse, using the weighted average cost for the measurement of inventories.

Materialrecoveredinternallyismeasuredatcost.InthecurrentfinancialyearthesubsidiaryTAPManutençãoeEngenhariaBrasil,S.A.alsoadoptedthiscriterion.Itwasnotpossibletocarryouttherespectivequantificationforthepreviousfinancialyear.

ii) Products and work in progressProducts and work in progress are measured at the lower of production cost (which includes the cost of raw materials, labour and general manufac-turing costs, based on the normal production level) and the net realisable value.

Thenetrealisablevaluecorrespondstotheestimatedsellingpriceminustheestimatedfinishingandmarketingcosts.Differencesbetweencostandnetrealisablevalue,ifthelatterislower,arerecordedinAdjustmentsofinventories.

2.15. Current receivables

The balances of customers and other current receivables are recorded initially at fair value and recognised subsequently at amortised cost, minus any impairment losses required to place them at their expected net realisable value (Note 18).

ImpairmentlossesarerecordedwhenthereisobjectiveevidencethattheGroupwillnotreceiveallamountsowedinaccordancewiththeoriginalconditions of the receivables.

2.16. Cash and cash equivalents

The cash and cash equivalents item includes cash, bank deposits and other short-term investments with original maturities up to 3 months, which canbereadilyconvertibletoaknownamountofcashwithoutanysignificantriskoffluctuationsinvalue.Onthecashflowstatement,thisitemalsoincludes bank overdrafts, which are presented in the Balance Sheet, in current liabilities, as "Remunerated liabilities".

2.17. Share capital and own shares

Ordinarysharesareclassifiedasequity(Note24).

Costs directly attributed to the new shares issuance or other equity instruments are presented as a deduction, net of tax, from the value received as a result of the issuance.


Costs directly imputable to the issuance of new shares or options, for the acquisition of a business are included in the acquisition cost, as part of the purchase value.

Own shares are recorded at their acquisition value, as a reduction in equity, as "Own shares". Any gains or losses resulting from their sale are recorded as "Other reserves". In accordance with applicable commercial legislation, while the own shares are held by the company, a reserve for an amount equal to their acquisition cost is made unavailable.

2.18. Remunerated liabilities

Remunerated liabilities are recognised initially at fair value, net of transaction costs incurred, and are subsequently stated at amortised cost. Any dif-ferencebetweenthereceipts(netoftransactioncosts)andtherepaymentvalueisrecognisedintheprofitandlossstatementovertheperiodofthedebt, using the effective interest rate method.

Remuneratedliabilitiesareclassifiedascurrentliabilities,unlesstheGrouphasanunconditionalrighttodefersettlementoftheliabilityforatleast12months after the end of the reporting period (Note 27).

2.19. Financial costs related to loans

Financialcostsassociatedtoloansareusuallyrecognisedasfinancialcostsinaccordancewiththeaccrualprinciple.

Financial costs on loans directly associated to the acquisition, construction (if the period of construction or development exceeds one year) or produc-tionoffixedassetsareincludedintheasset'scost.

Capitalisation of these charges begins once preparations for the construction or development of the asset are started and is suspended after its utilisa-tionbeginsorwhentherespectiveprojectissuspendedorsubstantiallyconcluded.

Anyrevenuedirectlyassociatedtoaspecificinvestmentissubtractedfromthecostoftheasset.

2.20. Provisions

Provisions are recognised whenever the Group has a present legal or constructive obligation, as a result of past events, the settlement is expected to resultinanoutflowofresources(payment)andtheamounthasbeenestimatedreliably.

Provisionsforfutureoperatinglossesarenotrecognised.Provisionsarereviewedattheendofthereportingperiodandareadjustedtoreflectthebest estimate on that date (Note 26).

The Group incurs expenditure and assumes liabilities of an environmental nature. Accordingly, expenditures on equipment and operating techniques that ensure compliance with applicable legislation and regulations (as well as the reduction of environmental impacts to levels that do not exceed those representing a viable application of the best available technologies, which permit minimising energy consumption, atmospheric emissions, the produc-tion of waste and noise) are capitalised when they are intended to serve the Group’s business in a durable way, as well as those associated with future economicbenefitsandwhichservetoprolonglifeexpectancy,increasecapacityorimprovethesafetyorefficiencyofotherassetsownedbytheGroup.

2.21. Post-employment benefits

Some Group subsidiaries have undertaken to make payments to their employees for retirement pension supplements, healthcare and seniority bonuses.

AsmentionedinNote28,TheGrouphassetupautonomousPensionFundsastofinancepartofitsliabilitieswiththosepayments.InaccordancewithIAS19,companieswhichattributepost-employmentbenefitsrecognisetheircostsasandwhentheservicesareprovidedbytheemployedben-eficiaries.Inthisway,thetotalliabilityoftheGroupisestimatedseparatelyforeachplanonanannualbasis,byaspecialisedandindependententityin accordance with the forecast unit credit method.

Costsrelatedtopastliabilitiesresultingfromtheimplementationofanewplan,orincreasesinthebenefitsattributedarerecognisedimmediatelyintheGroup'sprofitorloss.

Liabilities calculated in this way are presented in the balance sheet item non-current liabilities, minus the market value of the funds set up, under "Liabilitiesassociatedtopost-employmentbenefits".

Actuarial variances arising from the differences between the assumptions used to calculate liabilities and those which effectively occurred (as well as of changes made to same and the difference between the expected return on the assets of the funds and their actual yield) are recognised directly on theprofitandlossstatementfortheperiod.

Gainsandlossesgeneratedonacurtailmentorsettlementofadefinedbenefitpensionplanarerecognisedthroughtheprofitorlossfortheyearwhen the curtailment or settlement occurs. A curtailment occurs when there is a material reduction in the number of employees or when the plan is modifiedandconsequentlythebenefitsaremateriallyreduced.


2.22. Current payables

The balances of suppliers and current payables are stated initially at fair value and subsequently measured at amortised cost (Note 30 and 31).

2.23. Grants

Government grants are recognised only after it becomes certain that the Group will comply with the respective conditions and that the grant will be received.

Operatinggrants,receivedtocompensatetheGroupforcostsincurred,arerecordedsystematicallyintheprofitandlossstatementduringtheperi-ods in which the costs that those grants are intended to cover are recognised.

InvestmentgrantsreceivedbytheGrouptocompensatefixedassetinvestmentsarepresentedas"Currentpayables"andrecognisedthroughprofitor loss during the estimated useful life of the respective granted asset, through deduction of the depreciation.

2.24. Leases

Fixedassetsacquiredunderfinancialleasingcontractsaswellastherespectiveliabilitiesarerecordedthroughthefinancialmethod.

Inaccordancewiththismethod,theassetcostisrecordedintangiblefixedassets,therespectiveliabilityisrecordedinliabilitiesundertheloansitem,theinterestcomponentofleasepaymentsanddepreciationoftheasset,calculatedasdescribedinNote2.8,arerecognisedascostsintheprofitandloss statement of the respective period.

Leasesinwhichasignificantportionoftherisksandrewardsofownershipareretainedbythelessor,withtheGroupbeingthelessee,areclassifiedasoperatingleases.Paymentsmadeunderoperatingleases,netofanyincentivesreceivedfromthelessor,arerecordedintheprofitandlossstate-ment over the period of the lease.

2.25. Distribution of dividends

ThedistributionofdividendstoCompanyshareholdersisrecognisedasaliabilityintheGroup’sfinancialstatementsintheperiodinwhichthedivi-dends are approved by the Company shareholders, up to the date of their payment.

2.26. Revenue and the accrual basis

Incomefromsalesisrecognisedintheconsolidatedprofitandlossstatementwhentherisksandbenefitsassociatedtotheownershipoftherespec-tive assets are transferred to the purchaser and the income can be measured with reliability.

Revenues arising from the sale of passenger and cargo transport are recorded as a liability when the sale is made, as “Advances from customers – tick-ets to be used”. When the ticket is used or cancelled, its value is transferred to income for the year or to an account payable, depending on whether thetransporthasbeen:i)carriedoutbytheGrouporthetickethasbeencancelledandisnotsubjecttoreimbursementii)madebyanotherairlineorthetickethasbeencancelledbutissubjecttoreimbursement,respectively,byavaluewhichisusuallydifferentfromthatrecordedattimeofitssale.Fromtimetotime,thebalanceofthe"Advancesfromcustomers–ticketstobeused"itemisanalysedtoadjustthebalanceofticketssoldtocheckthosethathavealreadybeenusedorthatarenolongervalidandsonotsuitableforflightorreimbursement.

Commissions attributed by the Group on ticket sales are deferred and recorded as costs for the year, according to the distribution through the periods of the respective transport revenues.

Forthe"TAPVictoria"frequentflyerprogramme,theGroup,incertaindefinedsituationsandbasedontheflightscarriedout,grantsfreeairmilestocustomerswhojointhesaidloyaltyscheme,whichmaysubsequentlybeusedinflightswithfavourableconditions,suchasreducedfares.Basedonthe number of miles attributed and not used or expired at the end of each year and on the unit valuation attributed, the Group defers the revenue corresponding to the estimate of the value perceived by the customer in the attribution of points and miles.

For the recognition of the revenue from maintenance contracts, the work completion method was adopted. According to this method, the revenue directly associated with the work in progress is recognised in the income statement up to the point at which it is probable that the incurred contract costs will be recoverable.

Contract costs are recognised as a cost for the period in which they are incurred. When it is probable that total contract costs exceed the total revenue of the contract, the expected loss is recognised as a cost.

The provisional invoicing of maintenance work for third parties that was still underway as at 31 December 2010 is recorded as deferrals.

Sales are recognised net of taxes, discounts and other costs inherent to their completion, at the fair value of the sum received or receivable.

Interest receivable is recognised according to the accrual principle, in accordance with the amount owed and the effective interest rate during the period to maturity.


Group companies record their costs and income in accordance with the accrual principle. Costs and income are recognised as they are generated, regardless of when they are paid or received.

The differences between amounts received and paid and the respective income and cost are stated as deferrals, current receivables and current paya-bles (Notes 18, 19 and 31, respectively).

2.27. Contingent assets and liabilities

Contingentliabilitiesarenotrecognisedintheconsolidatedfinancialstatementsifitisimprobablethatanoutflowoffundswillaffectfutureeco-nomicbenefits;theyaredisclosedinthenotes,unlessthepossibilityofanactualoutflowoffundsaffectingfutureeconomicbenefitsisaremoteone,in which case they are not disclosed.

Provisions for liabilities that meet the conditions established in Note 2.20 are recognised.

Contingentassetsarenotrecognisedintheconsolidatedfinancialstatements,butaredisclosedinthenoteswhenafutureeconomicbenefitisprobable.

2.28. Subsequent events

Events subsequent to the end of reporting period that provide additional information of conditions existing at the end of reporting period are reflectedintheconsolidatedfinancialstatements.

Events subsequent to the end of reporting period that provide information on conditions that arose after the end of reporting period are disclosed in thenotestotheconsolidatedfinancialstatement,ifmaterial.

2.29. New standards, amendments and interpretations of existing standards

a) New standards and interpretations that are mandatory as at 31 December 2010:TheinterpretationsandamendmentsofexistingstandardsoftheIASBidentifiedbelowaremandatoryforfinancialyearsstartingon1January2010:

New standards in force Date of application *

IFRS 3 (review) – Business combinations 1-Jan-10

IAS27(review)–Consolidatedandseparatefinancialstatements 1-Jan-10

IFRS 5 (Improved 2008) – Non-current assets held for sale and discontinued operations 1-Jan-10

IFRS 1 (amendment) – First-time adoption of IFRS 1-Jan-10

IFRS2(amendment)–Share-basedpayments–transactionspaidfinanciallybytheGroup 1-Jan-10

IAS 39 (amendement) – Financial instruments – Items eligible for coverage 1-Jan-10

IFRIC 12 – Service concession arrangements 1-Jan-10

IFRIC 15 – Agreements for construction of real estate 1-Jan-10

IFRIC 16 – Hedges of a net investment in a foreign operation 1-Jan-10

IFRIC 17 – Distributions of non-cash assets to owners 1-Jan-10

IFRIC 18 – Transfer of assets from customers 1-Jan-10

* Financial years commencing on or after the indicated date.

Annual improvement of standards in 2009 (applicable for years commencing on or after 01 January 2010) Date of application *

IAS 17 – Leasing 1-Jan-10

IAS 36 – Impairment of Assets 1-Jan-10

IAS 38 – Intangible Assets 1-Jan-10


Furthermore, as part of the process to review the consistency of the practical application of the IAS/IFRS, the IASB decided to improve the standards toclarifysomeofidentifiedinconsistencies.ThemostsignificantimprovementsrefertotheamendmentsmadetoIAS17,IAS36andIAS38.

The introduction of these interpretations and amendments of the standards referred to above did not have any relevant impact on the Group's statements.


b) New standards and interpretations that are not mandatory as at 31 December 2010:There are new standards, amendments and interpretations of existing standards, which in spite of having been published, are only mandatory for the periods starting after 1 January 2010, for which the Group decided against their early adoption:

New standards approved by the European Commission Date of application *IAS32(amendment)–Financialinstruments:Presentation–classificationofissuedrights 1-Feb-10

IFRS 1 (amendment) – First-time adoption of IFRS 1-Jul-10

IAS 24 (amendment) – Related Parties Disclosures 1-Jan-11

IFRIC 19 (amendment) – Extinguished Financial Liabilities with Equity Instruments 1-Jul-11

IFRIC14(amendment)–TheLimitonaDefinedBenefitAsset,MinimumFundingRequirementsandtheirinteraction 1-Jan-11

* Financial years commencing on or after the indicated date

New standards not approved by the European Commission Date of application *

IFRS9(new)–Financialinstruments–classificationandmeasurement 1-Jan-13


Project of annual improvement of standards in 2010 Date of application *IFRS 1 – First-time adoption of IFRS 1-Jan-11

IFRS 3 – Business combinations 1-Jan-11

IFRS 7 – Financial instruments – Disclosures 1-Jan-11

IAS 1 – Presentation of the Financial Statements 1-Jan-11

IAS27–Consolidatedandseparatefinancialstatements 1-Jan-11

IAS34–Interimfinancialreporting 1-Jan-11

IFRIC 13 – Customer loyalty programmes 1-Jan-11


The Group has not yet concluded the calculation of all the impacts resulting from the application of the abovementioned standards, and therefore choseagainsttheirearlyadoption.However,theGroupdoesnotexpecttheywillhaveamateriallyrelevantimpactonitsfinancialsituationandresults.

2.30. Re-statements and reclassifications

Comparativevalueswerereclassifiedtoensuretheeasierinterpretationofthesaidconsolidatedfinancialstatements.Themainchangesareasfollows:

Headings Reclassified accounts Reclassification Published accounts

BALANCE SHEET

Assets 2,024,395 – 2,024,395

Current assets 573,756 – 573,756

Customers 192,590 192,590 –

Advances to suppliers 2,182 2,182 –

Other accounts receivable 88,595 (202,599) 291,194

Deferrals 7,827 7,827 –

Equity (204,626) – (204,626)

Liabilities 2,229,021 – 2,229,021

Current liabilities 944,651 – 944,651

Suppliers 104,221 104,221 –

Advances from customers 3,661 3,661 –

Other accounts payable 197,521 (162,125) 359,646

Deferrals 54,243 54,243 –

PROFIT AND LOSS STATEMENT

Operating grants 3,559 3,559 –

Own work capitalised 1,650 1,650 –

Payroll expenses (504,450) (1,843) (502,607)

Post-employmentbenefitcosts – 1,843 (1,843)

Inventoryadjustments(losses/reversals) (8,661) (8,661) –

Accountsreceivableadjustments(losses/reversals) (15,183) (15,183) –

Inventoryandaccountsreceivableadjustments(losses/reversals) – 26,105 (26,105)

Assetsnotsubjecttodepreciation/amortisationimpairement(losses/reversals) (32,600) (32,600) –

Other revenues and gains 149,949 15,757 134,192

Other costs and losses (35,723) (18,738) (16,985)

Depreciation and amortisation costs/reversals (140,980) 32,600 (173,580)

Net operating income 52,173 4,489 47,684

Interest and similar revenue 5,702 (42,139) 47,841

Interest and similar costs (50,587) 37,650 (88,237)

Netfinancialresults – 40,396 (40,396)

Net income of shareholders of the parent company (3,542) – (3,542)


Theamountof202,599thousandEurosofthe“Otheraccountsreceivable”wasreclassifiedtocustomers,advancestosuppliersanddeferrals. Theamountof162,125thousandEurosof“Otheraccountspayable”wasreclassifiedtosuppliers,advancesfromcustomersanddeferrals.

IntheProfitandlossstatementthechangesinforeignexchangerateswerereclassifiedfromfinancialresultstooperatingresultswhentheirnatureis operational.

2.31. Relevant accounting estimates and judgements

ThepreparationoftheconsolidatedfinancialstatementsrequiresthattheGroup'smanagementcarryoutjudgementsandestimateswhichaffectthe amounts of the income, costs, assets, liabilities and disclosures on the end of reporting period.

TheseestimatesaredeterminedbythejudgementsoftheGroup'smanagement,based:(i)onthebestinformationandknowledgeofpresentevents,and in some cases, reports prepared by independent experts, and (ii) on the actions the Group considers it may develop in the future. However, on the execution date of the operations, their results may be different from these estimates.

Theestimatesandassumptionsthatpresentasignificantriskofleadingtoamaterialadjustmentinthebookvalueoftheassetsandliabilitiesinthefollowing year are presented below:

Goodwill impairmentEvery year, the Group conducts a goodwill impairment test, which is recorded in its balance sheet, in accordance with the accounting policy indicated in Note 2.10. The recoverable values of the cash generating units are determined based on the calculation of the use values. This calculation requires the use of estimates.

Income taxTheGrouprecognisesliabilitiesforadditionaltaxpaymentthatmayresultfromreviewscarriedoutbytaxauthorities.Whenthefinalresultofthesesituations is different from the values initially recorded, the differences will have an impact on income tax and provisions for taxes, in the period in which such differences are recognised.

Actuarial assumptionsTheliabilitiesrelatedtobenefitplansattributedtoemployeeswithdefinedbenefitsarecalculatedbasedonspecificactuarialassumptions.Changesin these assumptions can have a relevant impact on those liabilities.

Recognition of provisions and adjustmentsTheGroupisinvolvedinseveralcurrentlegalactionsforwhich,basedontheopinionofitslawyers,itcarriesoutajudgementtodeterminewhethera provision for these contingencies should be recorded.

Theadjustmentsforaccountsreceivablearecalculatedessentiallybasedonaccountsreceivablebyage,theriskprofileofcustomersandtheirfinancialsituation.

Inventoryadjustmentsarecalculatedbasedoncriteriapertainingtothenature,purposeofuse,ageandturnoverofmaterials.

3. Financial risk management policies

ThemanagementfinancialriskcontinuestobeconductedandsupervisedbytheGroup,coveringitsmultipleandcomplexaspects,andissubjecttoongoing coordination between the Management and the Financial Department. The assessment of the acceptable levels of risk in the different areas and alternative forms of their protection is a key decision-making area which has strong potential impact on the Group's results and stability, whereby it is a permanent and very demanding challenge to ensure that the Group is safeguarded against the diversity and dimension of the economic shocks caused by market behaviour. In particular, 2010 witnessed historically unique behaviour in the public debt markets, with extremely strong impacts on the availability of funding to enterprises in Portugal and Europe in general, as well as growing instability in the commodities markets, especially in theoilmarkets,wherepricesincreasedgraduallyovertheyearandsignificantlyduringthefinalphaseof2010.

Price risk

Overrecentyearstherehasbeenasharptransformationinthe"physionomy"oftheglobaleconomy,withsignificantalterationsinthedynamicsandrelative economic weight among developed countries and emerging economies, with the last ones recently having shown higher average growth and astrongerlevelofresistancetotheeconomiccrisesthantheeconomiesofEurope,USAandJapan.Growthof10%inChina(9%in2009)and7.5%inIndiaandBrazilin2010(5%and0%in2009),contrastyetagainwiththeratesof2.8%intheUSA(-2.6%in2009)and1.8%fortheEuropeanUnionasawhole(-4.2%in2009).Ingeneralterms,theeconomiesofthe"formerThirdWorld",inAsia,LatinAmericaandAfrica,manyofwhichareimportantproducersofcommoditiesandwithsignificantdemographicgrowthrates,averyyoungpopulationwithincreasingqualificationlevels,have assumed a preponderant weight in the global economic panorama and growing importance in world trade.

IntheGroup’scasethegrowingdiversificationandincreaseofofferinthedifferentairtransportroutes,inBrazil,AfricaorEasternEuropeandestinations,has enabled meeting the increased demand arising from the most dynamic markets. This strategy constitutes an important factor in the mitigation of market risks, since these risks could become excessive if the Group's geographical concentration were to be maintained at the same level or increased.

As an example, note should be made of the weight of the internal market in terms of total ticket sales (effective revenue), which was limited in 2010tolessthan30%,andthecombinedsalesofEurope(includingtheEastandScandinavia)forthedifferentdestinationsrepresentedapproxi-mately36%.TheweightoftheBrazilianmarketintotalticketsalesin2010was22%,withAfricarepresentingapproximately7%.Indeedtheextentand coverage of the network offered, enables synergies and complementarities, with the offer of routes on the Brazilian market contributing to


strengthenoverallsalesinEuropeanmarkets,aswellasthediversityoftheofferinEuropestimulatestrafficacrosstheAtlanticandfromAfrica,both of which increasingly use Lisbon hub.

The price policy, and its impact on revenues, is naturally conditioned at the costs level by the behaviour of fuel, for which the mechanism of surcharges is activated in case of sharply rising prices, which took place in 2010 due to the increase in the price of fuel.

Manyotherfactorshaveanimpactonrouterevenueandprofitability,suchastheconnectionsoffered,theintegrationofthenetwork,thequalityofthein-flightservice,thenumberofflightfrequencies,thebrandimage,thegreaterorlesserdemandfortheavailabledestinations,thedevelopmentof tourist, ethnic and business demand, and the opening up of new destinations.

Exchange rate risk

The exchange rate exposure of the group is the result, at the revenue level, of the geographic distribution of the sales (of air tickets and cargo, as well as of maintenance services), namely in European markets outside the Euro zone and markets outside Europe such as Brazil, with sales outside of the nationalmarketrepresentingasignificantproportionoftotalticketsales.Atthecostslevel,varioussourcescontributetowardssignificantexposureto the dollar, either directly through Operations, as is the case of fuel, or indirectly through investments such as the acquisition of aircraft, with con-tractual prices denominated in USD.

In2010theUSDappreciatedagainsttheEuroonceagain.Afteranaverageappreciationof5%in2009comparedto2008,in2010theUSDappre-ciatedonceagainby5%onaverageincomparisonto2009,from1.39to1.32.TheBrazilianRealmaintaineditstrendofappreciationagainsttheEuro and, to a lesser extent, against the USD. Hence, having started at around 3 Reais per Euro in the beginning of 2009, following the post Lehman Brothers wake of turbulence, the Real appreciated to 2.5 at the end of 2009 and reached levels of 2.2 to 2.3 by the end of 2010.

The Group's exposure to the USD is centred, mainly in fuel costs, since its market continues to be based in USD. Since fuel consumption represents closeto860thousandtons,andtheaveragepricepertonofjetfuel(referenceCIFNWE)was725USDin2010,exposuretotheUSDstoodatapproxi-mately 624 million USD, equivalent to 472 million Euros.

Added to the fuel costs are other cost structure items, albeit of far lesser value, such as navigation and airport taxes, maintenance materials and aircraft operating leasing. However, the weight of revenue in the group of countries where the fares and sales are indexed to the USD, such as Brazil, Angola and theUSA,representing,inthecaseofticketsales,30%ofthetotal,merelycorresponds,inthisactivitysegment(excludingCargo,MailandMaintenance),approximately 650 million USD, equivalent to 500 million Euros. It can be concluded, therefore, that, except in situations of extreme evolutions of the fuel price as occurred in 2008, there is a natural hedge in the most important currency conversion relationship, that of the Euro against the USD.

It should also be noted that, in 2010, no foreign exchange hedging operations were carried out relative to the exchange rate exposure of the debt, whichcontinuedtobealmosttotallydenominatedinEuros(approximately97%ofthetotalattheclosingofthefinancialyear)

TheexposureoftheGrouptoexchangerateriskasat31December2010,basedonthebalancesheetvaluesoftheGroup'sfinancialassetsandliabili-ties converted into Euros at the exchange rates in force at the end of the reporting period is detailed below:

Assets and liabilities in foreign currency31-Dec-10

USD BRL OTHER TOTAL

ASSETS

Cash and cash equivalents 18,449 12,610 20,973 52,032

Accounts receivable – customers 29,912 97,523 24,969 152,404

Accounts receivable – other 22,042 17,892 4,135 44,069

70,403 128,025 50,077 248,505

LIABILITIES

Remunerated liabilities 38,792 – – 38,792

Accounts payable – suppliers 15,865 13,967 3,994 33,826

Accounts payable – other 159 4,697 268 5,124

54,816 18,664 4,262 77,742

Assets and liabilities in foreign currency31-Dec-09

USD BRL OTHER TOTAL

ASSETS

Cash and cash equivalents 18,899 6,064 33,556 58,519

Accounts receivable – customers 39,052 76,114 15,479 130,645

Accounts receivable – other 26,160 19,076 2,890 48,126

84,111 101,254 51,925 237,290

LIABILITIES

Remunerated liabilities 41,688 – – 41,688

Accounts payable – suppliers 19,740 12,527 3,489 35,756

Accounts payable – other 349 5,442 376 6,167

61,777 17,969 3,865 83,611


Interest rate risk

2010 was characterised by an attitude of extreme caution by the monetary authorities in Europe and the United States, so as not to compromise the hesitant recovery of the economies of the developed countries, through the effect of a premature increase in their respective interest rates. In this way, thereferenceratesweremaintainedat1%intheEurozoneandclosetozerointheUSA.However,bothshortandlongtermmarketratesbeganonanupwardtrend,respectively,inthe2ndand3rdquartersof2010.The6-monthEuribor,forexample,increasedfrom1%to1.25%andthe5yearrate,whichhadfalleninthe1stsemesterfromcloseto3%downto2%,roseto2.5%duringthesecondhalfoftheyear.Itshouldbenotedinparticu-larthatinvariousemergingmarketsandsomedevelopedeconomiestherewereincreasesinofficialrates,asconcernswithinflationsupersededfearsofeconomicdecelerationorstagnation.Theseconcernsrelatedtoincreasedpricesintensifiedbytheendoftheyearwiththeincreasinglysharperincreases in the prices of most commodities, especially those of foodstuffs and energy.

The Group's remunerated debt decreased by approximately 26 million Euros, between 31 December 2009 and 31 December 2010. Over the year, and inspiteofthegrowingdifficultiesofthenationaleconomyinobtainingfinancing,therewasarenewaloftheshorttermoperationsinforce,therefi-nancingofvariouslongtermleasingoperationsandthecontractingofafinancingoperationforworkingcapitaloftheSchuldschein type, for 5 years. Theoperationscontractedover2010werebothatvariableandfixedrates.Asat31December2010,theexposuretothevariableraterepresented46%ofthetotal,comparedwith54%tothefixedrate.Itshouldbenotedthat,atthevariablerate,themostsignificantpartofthecomponentswereindexedtothe3-monthEuribor(40%)whilethe1and6-monthratesmerelyrepresented3%each.Theaveragespreadofthetotaldebt,evenafterthe deterioration of the funding conditions which took place in 2010, remained at moderate and sustainable levels, which was also the case of the averagerateofthegroupofoperationsatfixedrates.Thedebtmaturityremainedatadequatelevelsattheendof2010,withonly5.5%ofthetotalrepresented by short term and automatically renewable loan facilities and, even if the termination of these short term operations were assumed in 2011,theaveragelifeofthetotaldebtwouldstandatapproximately3.5years,withastaggeredbutstableamortisationprofileformostofthefund-ingoverthenext7years,andwheretheremainingvaluesforsubsequentyears,from2018to2020,islesssignificant.

The table of Remunerated Liabilities presented below, which includes principal and interest, is based on the following assumptions relative to mar-ketinterestratesandtheEuro/USDexchangerate:3%fortheEuribor,1.75%fortheDollarLibor,and1.3362fortheEuroDollar.Theliabilityvaluesexpressthevaluespayablewithintherespectiveperiodsoflifeincludingtheestimateofallcontractedcashflowswithamortisationandinterest,notdiscounted, until the maturity of the loans. A simplifying assumption of a linear intra-annual amortisation rate to calculate future interest rates was considered:

31-Dec-10 < 1 year 1 - 2 years 3 - 5 years 6 - 10 years > 10 years TOTAL

Loans 160,565 85,607 310,878 135,671 – 692,721

Financial leasing 131,747 119,340 321,236 190,979 – 763,302

TOTAL 292,312 204,947 632,114 326,650 – 1,456,023

Loans–fixedrate 51,747 51,748 205,703 98,134 407,332

Financialleasing–fixedrate 72,906 49,609 158,039 106,791 387,345

TOTAL FIXED RATE 124,653 101,357 363,742 204,925 – 794,677

31-Dec-09 < 1 year 1 - 2 years 3 - 5 years 6 - 10 years > 10 years TOTAL

Loans 156,509 84,609 250,879 220,505 – 712,502

Financial leasing 143,418 112,310 274,676 245,097 6,399 781,900

TOTAL 299,927 196,919 525,555 465,602 6,399 1,494,402

Loans–fixedrate 59,472 49,243 147,551 147,262 – 403,528

Financialleasing–fixedrate 93,785 78,471 167,173 162,372 6,399 508,200

TOTAL FIXED RATE 153,257 127,714 314,724 309,634 6,399 911,728

Note27detailsthebreakdownoftheremuneratedbankdebt,indicatingthefinancingentityandrespectivereferencerate.

Fuel price risk

After the oil shock of mid-2008, with Brent at 145 USD/barrel, the retraction in the 2nd half of that year led to minimum prices of 35 USD/barrel by the end of 2008. A year later, the market price stood at almost double this value and remained there, stable, between 70 and 80 USD/barrel until last autumn,whenthepresentpricehikebegan.Thesameeffectwasexperiencedinaircraftfuelprices,withsignificantincreasedattheendof2010.Retrospectively,jetfuelpresentedaveragevaluespermetrictonaround700USDin2007,1,000USDin2008,560USDin2009and725USDin2010.Bytheendof2010,thepriceofjetfuelwascloseto850USDperton.

Theconcerntoguaranteethepredictabilityoffuelcostsledtovariousjetfuelhedgingoperations.Partofthehedgingforthefirstsemesterof2010had been carried out in 2009, and in the beginning of the 2nd quarter a further series of operations were conducted so as to guarantee a very high hedgeratioovertheentireyear,ofaround75%offorecastconsumptionlevels.Asaresultofthemarketfluctuationswhichtookplace,thefinalresultachieved through the hedging operations proved to be slightly negative, in terms of treasury, in spite of the fact that, for example, various losses were compensatedforovertheyearbymoresignificantgainsattheendoftheyear,forwhichthehedginglevelstoodatcloseto100%.


The exposure to fuel prices is one of the most important factors of the Group's net exchange rate exposure (especially when fuel prices are high) becausethejetfuelmarketisdenominatedindollarsandfuelisthemainvariablecostitem.AconsiderablefallinfuelpricessignificantlyreducestheGroup's net exposure to the USD.

The sensitivity analysis related to the cost of fuel for the company was based on the assumptions below:

Standard consumption: 860 thousand tonsVariation: 100 USD/tonEUR/USD exchange rate: 1.30Annual impact on Operations: 86 million USD, approximately 66 million Euros

Credit and liquidity risk

The cash balance is a critical and determinant variable of the Group's stability. This variable requires special attention due to the susceptibility of liquid-itytothegeneraleconomicfluctuationsandtotheoscillationsinprioritymarketssuchastheoilmarket.

The main factor constraining the funding conditions of companies over the year was the emergence of the sovereign debt crisis which very sig-nificantlypenalisedEuropeand,inparticular,themostindebtedMemberStatesoftheperipheryoftheEurozone–Greece,IrelandandPortugal–,whichwascommunicatedintensivelytotheprivatesector’saccesstofunds.Inadditiontotheenormousincrease,from4%to7%,inyieldsofnational public debt at 10 years, over the year, the Credit Default Swaps (CDS) of the Portuguese Republic, which measure the risk of solvency of Portugal,alsoincreasedsharplyfromlevelsbelow1%atthebeginningoftheyearto5%bytheendoftheyear.Otherevidentmeasuresofthefinan-cialstressexperiencedbyPortugalwerethedramaticincreasingoftheCDSofthenationalbankingsystem,thegrowingdifficultiesofaccesstofundsof the national banking system in monetary markets and the massive funding from the European Central Bank, as well as the decreases of the ratings of banks, public sector companies and the Portuguese State. All these negative evolutions had extremely strong repercussions on the increases in spreads to the entire private sector, from SMEs to large companies.

In a year when various long term operations matured, the restrictions in access to loans and their high cost led the Group to dedicate additional effortstotheliquiditymanagementareaandcarryoutthenecessarytransactionsinthefinancialmarketsinordertomaintainadequateliquiditylevels.Thiseffortwasreflectedinmorecomplexandlengthynegotiationswherethecostsrelatedtodebtwerehigherformostofthenewcontractedoperations,asaresultofthecontextofextremefinancialrestrictionatageneralisedlevel.However,inthecontractssigneditwaspossibletoincludebalanced clauses and with operational mechanisms enabling, namely, early rescission solutions, in an economically feasible manner, in the event of asignificantimprovementinthefinancialmarketsinthefuture.

The carrying out of various leasing operations, working capital and credit line renewal did not result in an increase in gross debt, because, on the one hand,theywereusednamelytocompensatetheprogrammedsettlementoflongtermoperationsintheirfinalstageoflife,andontheotherhand,thisdidnotsignificantlychangethedebtmaturity,sincemostofthemweremediumandlongtermoperations.Ultimately,thecurrentoperationsandre-fundingeffortresultedinasignificantliquidityincreaseovertheyear.Therefore,theGroup'snetdebtdecreasedby117millionEurosin2010compared to the previous year.

At the end of 2010, and after the changes in debt which took place over the year, the short term components of the Remunerated Liabilities reached the amounts presented in the table below:

1st Semester 2nd Semester

AMORTISATION

Loans 33,834 103,461

Leasings 61,997 45,027

TOTAL 95,831 148,488

INTEREST

Loans 11,958 11,312

Leasings 13,068 11,655

TOTAL 25,026 22,967

Overall,intheGroup'sdebttherewasalsoadiversificationoftheinstitutionswithwhichthefundingcontractsareestablished,bothnationalandforeign, pursuing a policy of broadening the spectrum of counterpart entities, in order to reduce the risk of the operations and foster opportunities of transactions under advantageous conditions. In the area of fund investments, the Group carries out centralised investment management, under conditionsofmaximumflexibility,withguaranteesofearlymobilisationwithoutpenalties,andalwayswithpriorityfocusonthecreditqualityoftheentity or entities which receive these investments and their safety.


Concerningoperationswithderivatives,particularattentionisgiventothequalityofthecounterparts,alwaysseekingtoestablishasufficientlevelofdiversificationtoachievesatisfactoryconditionsofcompetitivenessinthehedgingoperations.Itshouldbenotedthattheinterestrateandfuelswapsin force over the year were accompanied by ratings as at 31 December 2010, equal to or greater than A- by Standard & Poors.

The Group's credit risk also lies in the possibility of failure to meet the contractual obligations by certain customers, related for example to main-tenance and engineering services. However, credit risk safeguard and protection mechanisms are consistently implemented (for example, bank guarantees)allowingtherisksinquestiontobeminimised.Standardairtransportactivityleadstosignificantlymitigatedriskincorporatedinthevaluestobereceivedfromcustomers.Infact,thereisarecurrentlyhighbalanceofcustomeradvances,amountspaidbeforetheflighttakesplace.Itisimportanttonotethattheticketssoldthroughtravelagentsarepaidtothecompanythroughanindustry-specificclearingsystem,coordinatedby IATA (International Air Transport Association), which safeguards against the credit risk of airline companies through the continuous evaluation of thefinancialpositionofagentsandthroughtherequest,wheneverjustified,ofriskprotectioninstruments,suchasbankorshareholderguarantees.

The following table presents information relative to the Group's liquidity position as at 31 December 2010 and 2009, as well as balances of accounts receivable,whichreflectthecreditriskonthosesamedates:

31-Dec-10 31-Dec-09

NON-CURRENT ASSETS

Judicial deposits – Brazil 16,283 14,749

Associates and other non-current assets 13,914 15,309

CURRENT ASSETS

Cash and cash equivalents 222,677 131,077

Accounts receivable – customers 223,212 192,590

Associates and other current assets 128,134 90,777

604,220 444,502

EXPOSURE TO OFF-BALANCE SHEET CREDIT RISK

Guarantees provided (Note 60) 40,853 37,666

Other commitments (Note 60) 241,871 259,777

282,724 297,443

Itisnoteworthythatover50%ofthetotalof"Accountsreceivable–customers"correspondedin2010tocreditwhichwasnotyetoverdue.Concerning overdue credit, the portion which is less than 12 months overdue represented one third of total in 2010. The credit which is more than 1 year overdue refers essentially to receivables from several public entities and to values owed by customers to TAP Manutenção e Engenharia Brasil as at 31 December 2010.

4. Employees

During 2010 and 2009, the average number of employees working for the company and all its subsidiaries was 10,886 and 11,020, respectively.

2010 Air Transport Maintenance Duty Free shop Catering Other TOTAL

Portugal 4,513 1,942 366 499 830 8,150

Brazil 119 2,187 – – – 2,306

Other 420 10 – – – 430

5,052 4,139 366 499 830 10,886

2009 Air Transport Maintenance Free Shop Catering Other TOTAL

Portugal 4,506 1,938 329 478 843 8,094

Brazil 112 2,393 – – – 2,505

Other 411 10 – – – 421

5,029 4,341 329 478 843 11,020


5. Tangible fixed assets

Duringtheyearendedon31December2010,thechangesintangiblefixedassetsamountsandtheirrespectiveaccumulateddepreciationwereas follows:

Tangible fixed assets2010

Land and natural

resourcesBuildings Basic

equipmentTransport

equipmentTools and

utensilsAdministrative

equipmentOther tangible

assets

Fixed assets under

construction

Down-payments on fixed

tangible assetsTOTAL

GROSS ASSETS

Opening balance 46,699 348,782 2,163,017 5,282 20,345 69,529 11,774 2,122 6,321 2,673,871

Additions – 1,827 11,294 45 2,125 1,095 1,181 4,332 – 21,899

Recognised impairment losses (500) (440) – – – – – – – (940)

Disposals (28) (489) (933) (43) – (54) (10) – – (1,557)

Other transfers / reductions (288) (1,336) (29,954) (64) 8,452 (1,275) 7,147 (2,440) 481 (19,277)

Currency conversion differences 159 255 2,727 12 1,147 2,193 – 238 – 6,731

CLOSING BALANCE 46,042 348,599 2,146,151 5,232 32,069 71,488 20,092 4,252 6,802 2,680,727

ACCUMULATED DEPRECIATION

Re-expressed opening balance – 219,348 1,173,627 4,615 13,700 63,582 10,473 – – 1,485,345

Additions – 5,947 127,780 332 984 2,250 661 – – 137,954

Disposals – (80) (873) (43) – (49) (9) – – (1,054)

Other transfers / reductions – (315) (19,660) (40) 2,892 (1,131) 6,167 – – (12,087)

Currency conversion differences – 71 2,034 10 274 1,836 – – – 4,225

CLOSING BALANCE – 224,971 1,282,908 4,874 17,850 66,488 17,292 – – 1,614,383

NET VALUE 46,042 123,628 863,243 358 14,219 5,000 2,800 4,252 6,802 1,066,344

Tangible fixed assets2009

Land and natural

resourcesBuildings Basic

equipmentTransport

equipmentTools and

utensilsEquipamento

AdministrativoOther tangible

assets

Fixed assets under

construction

Down-payments on fixed

tangible assetsTOTAL

GROSS ASSETS

Opening balance 47,430 349,946 2,134,395 6,097 22,650 83,127 11,698 8,106 9,387 2,672,836

Additions – – 25,949 72 969 1,223 242 3,312 – 31,767

Recognised impairment losses (1,000) – – – – – – – – (1,000)

Disposals (2) (40) (18,308) (168) (6) (497) (15) – – (19,036)

Other transfers / reductions – (1,471) 1,370 (734) (4,242) (20,198) (151) (10,626) (3,066) (39,118)

Currency conversion differences 271 347 19,611 15 974 5,874 – 1,330 – 28,422

CLOSING BALANCE 46,699 348,782 2,163,017 5,282 20,345 69,529 11,774 2,122 6,321 2,673,871

ACCUMULATED DEPRECIATION

Re-expressed opening balance – 215,502 1,050,151 7,877 14,387 70,673 10,653 – – 1,369,243

Additions – 5,866 125,948 361 1,059 5,534 232 – – 139,000

Disposals – (12) (16,492) (156) (3) (472) (15) – – (17,150)

Other transfers / reductions – (2,112) 8,382 (3,479) (2,110) (17,902) (397) – – (17,618)

Currency conversion differences – 104 5,638 12 367 5,749 – – – 11,870

CLOSING BALANCE – 219,348 1,173,627 4,615 13,700 63,582 10,473 – – 1,485,345

NET VALUE 46,699 129,434 989,390 667 6,645 5,947 1,301 2,122 6,321 1,188,526

The increase of 11,294 thousand Euros recorded under "Basic equipment" refers to the acquisition of three used B737/300 engines of 3,558 thousand Euros, spare parts of approximately 3,215 thousand Euros and miscellaneous equipment of approximately 4,521 thousand Euros.

The disposal of basic equipment refers essentially to the sale of spare parts of 933 thousand Euros.

The transfers of basic equipment refer to assets transferred to inventories, since they are available for sale immediately.

As at 31 December 2010, the "Basic equipment" is detailed as follows:

2010 2009

Gross

value

Accumulated

depreciation

Net

value

Gross

value

Accumulated

depreciation

Net

value

BASIC EQUIPMENTFlight equipment

Aircraft 601,433 (436,373) 165,060 607,859 (381,943) 225,916

Spare engines 49,425 (23,927) 25,498 46,026 (21,127) 24,899

Spare parts 148,137 (110,835) 37,302 147,803 (108,809) 38,994

798,995 (571,135) 227,860 801,688 (511,879) 289,809

Flightequipmentunderfinancialleasing

Aircraft 1,209,524 (609,030) 600,494 1,202,316 (550,422) 651,894

Spare engines 6,867 (1,738) 5,129 6,867 (1,352) 5,515

1,216,391 (610,768) 605,623 1,209,183 (551,774) 657,409

Machines and misc. equipment 130,765 (101,005) 29,760 152,146 (109,974) 42,172

2,146,151 (1,282,908) 863,243 2,163,017 (1,173,627) 989,390


Asat31December2010and2007,theGroup'saircraftfleetisdetailedasfollows:

2010 2009

Owned byTAP Group

FinancialLeasing

OperatingLeasing

TOTAL Owned byTAP Group

FinancialLeasing

OperatingLeasing

TOTAL

Airbus A340 4 – – 4 4 – – 4

Airbus A310 – – 1 1 – – 1 1

Airbus A330 3 8 1 12 3 8 1 12

Airbus A319 3 12 4 19 4 11 4 19

Airbus A320 – 5 12 17 – 5 13 18

Airbus A321 – 2 1 3 – 2 1 3

Fokker 100 – 6 – 6 – 6 – 6

Embraer 145 – 8 – 8 – 8 – 8

10 41 19 70 11 40 20 71

It should be noted that at as at 31 December 2010 the Airbus A310 aircraft was not in operation.

The"Down-paymentsontangiblefixedassets"refernamelytodown-paymentsforthefutureacquisitionofaircraft.

6. Investment properties

As at 31 December 2010, "Investment properties" refers to the value assigned to two buildings in Maputo (Mozambique), one of which is leased to third parties, and two apartments in Sacavém.

31-Dez-10 31-Dez-09OPENING BALANCE 1,287 1,287

Other variations 1,320 –

CLOSING BALANCE 2,607 1,287

According to the evaluations obtained, the fair value of the abovementioned assets exceeds their book value by 195 thousand Euros.

7. Goodwill

During 2010 and 2009, the changes in Goodwill were as follows:

31-Dec-10Opening balance

Increases Impairment losses

for the yearExchange rate

variationClosing balance

Air Transport 63,099 – – – 63,099

Maintenance and Engineering Brazil 141,333 – – 6,583 147,916

204,432 – – 6,583 211,015


Increases Impairment losses

for the yearExchange rate

variationClosing balance

Air Transport 63,099 – – – 63,099

Maintenance and Engineering Brazil 130,106 – – 11,227 141,333

193,205 – – 11,227 204,432

The 6,583 thousand Euros refers to the goodwill foreign exchange rate variation of the Aero-LB which is denominated in Reais (124,880,960 BRL).

PursuanttoIAS36,goodwillissubjecttoimpairmenttestsonanannualbasisinaccordancewiththeaccountingpolicydescribedinNote2.10.

GoodwillisattributedtotheGroup'scashgeneratingunits(CGUs),identifiedaccordingtothebusinesssegmentandcountryofoperation,asfollows:

31-Dec-10 31-Dec-09

Air Transport Maintenance Total Air Transport Maintenance Total

Portugal 63,099 – 63,099 63,099 – 63,099

Brazil – 147,916 147,916 – 141,333 141,333

63,099 147,916 211,015 63,099 141,333 204,432

Forthepurposeofimpairmenttests,therecoverablevalueoftheCGUsiscalculatedbasedonthevalueinuse,followingthediscountedcashflowmethod. The calculations are based on historical performance and expectations of business development with the current productive structure, using thebudgetforthefollowingyearandestimatedcashflowsforthenext4years.

For the business unit of TAP Manutenção e Engenharia Brasil, S.A. a budget for the following year was used in addition to an estimate for the subse-quentperiodof9yearswhichincluded,namely,therecoveryoftheexistingtaxlossesinthecashflowestimate.


AsaresultoftheimpairmenttestscarriedoutfordifferentCGUs,noimpairmentlossesingoodwillwereidentified.

The main assumptions used for impairment tests were the following:

31-Dec-10 Portugal Brazil

Discount rate* 8.90% 14.50%

CAGR of the revenue** 0.00% 13.20%

Perpetuity Growth 0.00% 4.00%

Tax Rate 26.50% 34.00%

31-Dec-09 Portugal Brazil

Discount rate* 8.08% 12.00%

Perpetuity Growth 0.00% 4.00%

Tax Rate 26.50% 34.00%

* Discount rate net of taxes** Compound Annual Growth Rate of the revenue: year-on-year growth rate of an investment during a given period of time

The impairment tests carried out in 2010 sustain the recoverability of the book value of the abovementioned cash generating units. As at 31 December 2010, the book value of the air transport unit reaches 110,257 thousand Euros, and the book value of the business unit Manutenção do Brasil is negative by 118,707 thousand Euros.

8. Intangible assets

During 2010 and 2009, the changes in the "Other intangible assets" were as follows:

Research and development costs

Industrial property and other rights

TOTAL

ACQUISITION COST

Balance as at 01 January 2009 20,053 11,952 32,005

Acquisitions – – –

Disposals – – –

Regularisations, transfers and reductions – – –

Balance as at 31 December 2009 20,053 11,952 32,005

Acquisitions – – –


Regularisations, transfers and reductions – – –

Balance as at 31 December 2010 20,053 11,952 32,005

ACCUMULATE DEPRECIATION AND IMPAIRMENT LOSSES

Balance as at 01 January 2009 (20,053) (7,857) (27,910)

Depreciation and impairment losses – (1,980) (1,980)


Balance as at 31 December 2009 20,053 (9,837) (29,890)

Depreciation and impairment losses – (668) (668)


Balance as at 31 December 2010 (20,053) (10,505) (30,558)

Net value as at 01 January 2009 – 4,095 4,095

Net value as at 31 December 2009 – 2,115 2,115

Net value as at 31 December 2010 – 1,447 1,447

The 1,447 thousand Euros refers to the maintenance license, of the amount of 5,000 thousand USD, valid for 10 years and granted by CFM International, S.A. (CFMI), which allows the Group to provide, to third parties, information and technical support related to engines that TAP S.A. does not currently operate. This license is amortised by the straight line method over that period, and its net value reaches 1,447 thousand Euros.

10. Financial shareholdings – equity method

Asat31December2010and2009,TAPGroupdidnothaveanyassetsunderthecategoryoffinancialshareholdingsrecordedthroughtheequitymethod(see"Provisionsforfinancialinvestments"inNote26).


11. Financial shareholdings – other methods

Asat31December2010and2009,TAPGroupdidnothaveanyassetsunderthecategoryoffinancialshareholdingsrecordedthroughothermethods.

13. Other financial assets

Asat31December2010and2009,theotherfinancialassetsweredetailedasfollows:

31-Dec-10 31-Dec-09

Current Non-current Current Non-current

Financialinvestmentsatfairvaluethroughprofitorloss

Other – – – –

Available for sale

Other – – – –

Loans granted and accounts receivable – 2,966 – 3,395

2,966 3,395

Asat31December2010and2009,theotherfinancialassetsweredetailedasfollows:

31-Dec-10 31-Dec-09

SITA Group Foundation 474 474

Bank deposits in Mozambique 524 443

Loan – Salvor Hotéis Moçambique 1,578 2,261

Other 390 217

2,966 3,395

TheSITAGroupFoundationamountrefersto437,070certificates(non-listedsecurities)ofthiscompany,whichwasfoundedbySociétéInternationalde Télécommunications Aéronautiques.

The loan to SALVORHOTÉIS Moçambique came out from funds owned by TAP S.A in 1997 which could be used only for investment in Mozambique. Asat31December2008,thesaidamountsweretotallyadjustedduetotherestrictionsregardingthetransferoffundsabroad.Inthebeginningof2010,thecompanyreceived3,250thousandUSD,representing2,261thousandEuros,withtheadjustmentofthesameamounthavingbeenreversedin2009.In2010anagreementwassignedfortherepaymentoftheremainingbalance,hencetheremainingadjustmentof1,788thousandEuros was reversed (see Note 44).

The changes in this item in 2010 and 2009 were as follows:

31-Dec-10 31-Dec-09

Fair value at the beginning of the year 3,395 1,134

Acquisitions – –

Reductions (2,298) –

Exchange rate variation 81 –

Other movements (Note 44) 1,788 2,261

Fair value at the end of the year 2,966 3,395

The decrease in 2010 refers essentially to the repayment of 2,261 thousand Euros of the loan granted to SALVORHOTÉIS Moçambique.

15. Deferred tax assets and liabilities

TAPGrouprecordedinitsfinancialstatementsthetaxeffectofthetemporarydifferencesbetweenassetsandliabilitiesforaccountingandtaxpur-poses,whichwascalculatedbasedonthefollowingaggregatetaxrates:25%fordeferredtaxassetsrelatedtoreportabletaxlosses,and29%(26.5%in 2009) for other deferred tax assets and liabilities.

However,inTAPS.A.,althoughthetemporaryassetdifferencesaresignificantlyhigherthanthoseforliabilities,TAPS.A.recognisesonlythetempo-raryassetdifferencesuptotheconcurrenceofthetemporaryliabilitydifferences,sincethereisnorealexpectationofsufficientfuturetaxprofitstouse them beyond those amounts. Thus, at the end of each reporting period a re-appreciation of temporary differences related to deferred tax assets ismade,inordertoidentifydeferredtaxassetsthatwerenotpreviouslyrecordedbecausetheydidnotfulfiltheconditionstoberegisteredand/ortoreduce the amount of deferred tax assets recorded based on the current expectation of their recovery in the future.


The main temporary differences between accounting and taxable amounts as at 31 December 2010 and 2009, the corresponding deferred tax assets and liabilities and the respective effect on net income for 2010 and 2009 are as follows:

31-Dec-10 Opening balance Variations with effects

on Net IncomeVariations with effect

on EquityClosing balance

Deferred Tax Assets

Reportable tax losses 3,499 (709) – 2,790

Retirementbenefitliabilities 12,474 3,854 716 17,044

Inventory impairment losses 8,248 (3,623) – 4,625

24,221 (478) 716 24,459

Deferred Tax Liabilitie

Revaluations carried out 24,064 (874) 1,493 24,683

24,064 (874) 1,493 24,683

396 (777)

31-Dez-09 Opening balance Variations with effects

on Net IncomeVariations with effect

on EquityClosing balance

Deferred Tax Assets

Reportable tax losses 1,062 2,437 – 3,499

Retirementbenefitliabilities 15,651 (3,177) – 12,474

Inventory impairment losses 8,176 72 – 8,248

24,889 (668) – 24,221

Deferred Tax Liabilitie

Revaluations carried out 24,712 (648) – 24,064

24,712 (648) – 24,064

(20) –

Reportable tax losses without deferred tax assets

TheTaxlosseswhichtheGroupconsiders,asat31December2010,thatitisnotpossibletodeductfromfuturetaxableprofits,andthereforewithoutdeferred tax assets, are broken down as follows:

01 January 2010 2004 2005 2006 2007 2008 2009 2010 TOTAL

TAP–Transportes Aéreos Portugueses, SGPS, S.A. 1,853 1,040 4,085 2,331 1,765 1,526 n/a 12,600

Transportes Aéreos Portugueses, S.A. – – – – 197,294 – n/a 197,294

Portugália – Companhia Portuguesa Transportes Aéreos, S.A. 14,400 34,070 39,340 27,979 156 – n/a 115,945

TAP Manutenção e Engenharia Brasil, S.A. 4,839 22,111 47,041 59,371 31,105 119,684 n/a 284,151

21,092 57,221 90,466 89,681 230,320 121,210 n/a 609,990

Use of Reportable Tax Losses in 2010 2004 2005 2006 2007 2008 2009 2010 TOTAL

TAP – Transportes Aéreos Portugueses, SGPS, S.A. – – – – – – n/a –

Transportes Aéreos Portugueses, S.A. – – – – (44,682) – n/a (44,682)

Portugália – Companhia Portuguesa Transportes Aéreos, S.A. – – – – – – n/a –

TAP Manutenção e Engenharia Brasil, S.A. – – – – – – n/a –

– – – – (44,682) – n/a (44,682)

31 December 2010 2004 2005 2006 2007 2008 2009

2010(Provisional) TOTAL

TAP – Transportes Aéreos Portugueses, SGPS, S.A. n/a 1,040 4,085 2,331 1,765 1,526 2,925 13,672

Transportes Aéreos Portugueses, S.A. n/a – – – 152,612 – – 152,612

Portugália – Companhia Portuguesa Transportes Aéreos, S.A. n/a 34,070 39,340 27,979 156 – 3,102 104,647

TAP Manutenção e Engenharia Brasil, S.A. n/a 22,111 47,041 59,371 31,105 119,684 54,261 333,573

n/a 57,221 90,466 89,681 185,638 121,210 60,288 604,504

DEDUCTION DEADLINE YEAR n/a 2011 2012 2013 2014 2015 2016

In 2006, the subsidiary Transportes Aéreos Portugueses, S.A. carried out, under Decree-Law No. 453/99, of 5 November, a securitisation opera-tion of future loans, in which Deutsche Bank acted as the lead manager and where the future receivables were acquired by Tagus – Sociedade de Titularização de Créditos, S.A.

As a result of this operation, and pursuant to number 1 of article 2 of Decree-Law No. 219/2001, of 4 August, the amount of 230,000,000 Euros was addedforthedeterminationofthetaxableprofitfortheyear2006.Itshouldbenotedthatthetaxlossesreportedfor2000and2001weredeductedfrom the calculated taxable income.


The liabilities recorded by TAP S.A., corresponding to the amount received from the sale of the future receivables, of 230,000,000 Euros, net of the operation expenses of 779 thousand Euros, will be repaid between March 2009 and December 2016, as the receivables are handed over to the credit securitisationcompany.Thefinancialcostassociatedtotheliabilitygeneratedbythesaleofthesereceivablesisinlinewithmarketrates.

The report prepared by the Tax Authorities in 2008, presents a divergent understanding to the one issued by the Group, based essentially on the non-applicabilityofDecree-LawNo.219/2001,of4August.TheTaxAuthoritiesconsiderthatthesaidoperationconstitutesafinancialliability,andthus does not result, on its own, in a calculation of any corporate taxable income (IRC), concluding that a correction to the taxable income of 2006, of 230,000,000 Euros is required.

The Board of Directors, supported in its decision by its lawyers and tax consultants, is of the opinion that the procedure adopted was correct and as such will exercise its legitimate right to contest.

Itshouldbenotedinparticularthatthesaidcorrectionhasbeenadjustedinthereportabletaxlossespresentedabove.

16. Advances to suppliers

Current 31-Dec-10 31-Dec-09

ADVANCES TO SUPPLIERS:

Current account 3,465 2,182

3,465 2,182

The amount recorded as at 31 December 2010 and 2009 refers to the following entities:

31-Dec-10 31-Dec-09

Império Bonança – Comp, Seguros 737 –

SITA 501 471

SPdH 434 –

Chapman Freedom Airchatering 252 136

Boeing Commercial Airplane Comp, 226 200

Airbus 138 –

Unibanco, S,A, – 316

FRB Serviços de Alimentação Ltda 75 250

Other 1,102 809

3,465 2,182

17. State and other public entities

The balances with the State and other public entities are detailed as follows:

Current 31-Dec-10 31-Dec-09

ASSETS

State and other public entities

Income tax payable 601 504

Other 15,232 24,310

15,833 24,814

LIABILITIES

State and other public entities

Income tax payable 6,713 2,745

Other 140,349 109,946

147,062 112,691

The amounts relative to 2010 and 2009 can be detailed as follows:

31-Dec-10 31-Dec-09

Debtor Creditor Debtor Creditor

STATE – GRANTS RECEIVABLE

Compensatory indemnities 6,318 – 14,566 –

STATE AND OTHER PUBLIC ENTITIES:

IRC (corporate income tax) 601 4,556 504 2,745

IRS – 10,980 – 7,843

VAT (value added tax) 3,917 902 4,043 203

Social Security – 13,627 – 12,788

State – Brazil 4,519 116,837 5,352 88,602

Other 478 160 349 510

15,833 147,062 24,814 112,691


As at 31 December 2010, the amount recorded as "Compensation" includes the portion of the fare granted by the Government for the routes of the Autonomous Region of Azores of part of the year of 2009 and the full year of 2010, of 4,189 thousand Euros. These amounts correspond to tickets soldbyTAPS.A.whichmaybeusedonTAPS.A.orotherairlineflights.

ThisitemalsoincludestheamountreceivablefromtheGovernmentof2,129thousandEurosrelativetoflightsbetweentheislandsoftheAutonomous Region of Azores.

Thefiguresfor2009and2010havenotyetbeencalculatedandauditedbytheTaxAuthoritiesorapprovedbytheGovernment;however,nosignifi-cant corrections to the amounts recorded by TAP S.A. are expected.

The decrease in this item compared with the previous year is mainly due to the fact that the credit relative to Government compensation on the Madeira route have been claimed from the Government directly by residents and/or students since the second quarter of 2008.

The VAT debtor balance refers to the reimbursement request made in October, November and December 2010, to be received in 2011.

As at 31 December 2010 and 2009 the "State – Brazil" was detailed as follows:

31-Dec-10 31-Dec-09

Debtor Creditor Debtor Creditor

REFIS – 103,684 – 52,279

Other 4,519 13,153 5,352 36,323

4,519 116,837 5,352 88,602

In2009thesubsidiaryTAPManutençãoeEngenhariaBrasil,S.A.joinedthetaxrefinancingprogramme,calledREFIS,inthiswayhavingcompen-satedpartoftheinterestandcontingencyfinesrelatedtorenttaxanddeferredsocialsecuritycontributions,ofthetotaltaxlossesandnegativesocialsecurity contribution base, therefore having reduced its debt by 49,448 thousand Euros.

Theadherencetotheabovetaxrefinancingprogrammehadafavourableimpactof55,734thousandEurosonnetincomefor2009,whichisrecorded as "Other income and gains" (Note 48).

In2010theliabilityassumedbythesubsidiarywasreclassifiedfrom"Provisions"to"Stateandotherpublicentities",whichjustifiestheincreasedcredi-tor balance associated to REFIS.

In 2010, as a result of the application of temporary measures derived from the Growth and Stability Plan (PEC) instituted by Law 12-A/2010, the Groupbegantoreflectitsestimatefortaxbasedontherateof29%insteadof26.5%whichhadbeenapplicableuptothisdate.

Decree-LawNo.258/98of17AugustrepealedthetaxexemptionswhichTAPS.A.hadbenefitedfromuntilthenandhadbeenestablishedinbaseXII attached to Decree-Law No. 39.188 of 25 April 1953 and in Decree-Laws No. 39.673, of 22 May 1954, No. 41.000 of 12 February 1957 and No. 44.373 of 29 May 1962, which implied that TAP S.A. is no longer exempt from payments of tax and other contributions to the State.

Inaccordancewithcurrentlegislation,thetaxreturnsofcompaniesincludedintheconsolidationaresubjecttoreviewandcorrectionbytheTaxAuthoritiesoveraperiodoffouryears(fiveyearsforSocialSecurity),exceptwhentherehavebeentaxlosses,whentaxbenefitshavebeengrantedorwhen inspections, claims or appeals are taking place, in which cases, depending on the circumstances, these periods may be extended or suspended. The Group’s Board of Directors considers that any corrections resulting from reviews/inspections by the tax authorities to these tax returns will not haveasignificantimpactonthefinancialstatementsasat31December2010.

Underthetermsofarticle88oftheCorporateIncomeTaxCode,thecompaniesoftheGrouparesubjecttoautonomoustaxationonseveralexpenses,at the tax rates listed therein.

18. Other accounts receivable

As at 31 December 2010 and 2009, the "Other accounts receivable" are detailed as follows:

31-Dec-10 31-Dec-09


Participated entities 73,862 3,700 35,155 3,700

Staff 9,248 – 9,608 –

Accrued gains 8,480 – 11,324 –

Other 37,707 25,452 37,924 24,884

Adjustmentsduetoimpairmentofotherdebtors (4,628) (1,921) (5,416) (1,921)

124,669 27,231 88,595 26,663

"Participated entities – non-current" of 3,700 thousand Euros, refers to the additional paid-in capital granted to SPdH.

As at 31 December 2010, the amount of the "Participated entities – current" refers essentially to a loan contract concluded with SPdH, of 73,000 thou-sand Euros (2009: 35,000 thousand Euros), with a repayment period of less than 1 year and remunerated at normal market rates.


As at 31 December 2010 and 2009, the amount recorded as "Other – non-current" corresponds essentially to:

31-Dec-10 31-Dec-09

Bonds and Guarantees (Note 27) 3,250 3,805

Retained deposits 3,307 3,533

Judicial deposits – Brazil (Note 26) 16,283 14,749

SITA – Société Internatio Telecommunications Aeronautiques

361 434

Other non-current 2,251 2,363

25,452 24,884

The security deposits are constituted by TAP S.A. as established in the operating leasing contracts for aircraft and engines which will be returned, without interest, when the airplanes are handed back to their lessors.

These retained deposits refer to the guarantee for the future maintenance services for the French Air Force aircraft.

As at 31 December 2010 and 2009, the amount recorded as "Other – non-current" corresponds essentially to:

31-Dec-10 31-Dec-09

Interline and other invoicing 8,400 7,524

Airbus 7,269 6,529

Debtors – Brazil 3,356 2,171

Other receivables from suppliers 2,296 5,972

VAT – Representations 1,411 1,346

SPdH 1,209 1,134

White loans to Abreu and other 907 907

Bonds and Guarantees 655 636

Other 12,204 11,705

37,707 37,924

As at 31 December 2010 and 2009, the amount recorded as "Accrued gains" is detailed as follows:

31-Dec-10 31-Dec-09

Fuel hedging 2,997 8,927

Sale of miles to partners 1,521 748

Interest receivable 1,066 75

Other 2,896 1,574

8,480 11,324

The amount of 2,997 thousand Euros (2009: 8,927 thousand Euros), recorded as fuel hedging is detailed as follows:

31-Dec-10 31-Dec-09

Fairvalueofjetfuelswaps(Note24) – 6,285

Accrual-based accounting 2,997 2,642

2,997 8,927

19. Deferrals

As at 31 December 2010 and 2009, the "Deferrals" is detailed as follows:

31-Dec-10 31-Dec-09

Asset deferrals 12,308 7,827

12,308 7,827

Liability deferrals 52,617 54,243

52,617 54,243

The amount recorded as "Deferred assets", as at 31 December 2010 and 2009, corresponds mainly to:

31-Dec-10 31-Dec-09

Commissions 5,323 3,523

Insurance 1,983 132

Leasing of aircraft 1,948 1,816

Rents and leases 1,428 333

Other deferred costs 1,626 2,023

12,308 7,827


The commissions refer to the amounts paid to agents for tickets sold but which have not yet been used or expired by 31 December 2010 and 2009.

The amounts recorded as "Deferred liabilities", as at 31 December 2010 and 2009, refer essentially to:

31-Dec-10 31-Dec-09

Customer loyalty programmes 29,976 28,863

Work for aviation companies 18,989 20,928

Fuel supplies 1,750 2,625

Overhaul reserves 123 267

Other 1,779 1,560

52,617 54,243

The amount of 18,989 thousand Euros (2009: 20,928 thousand Euros), recorded as "Maintenance work for airline companies", refers to provisional invoicing of maintenance work for third parties that was still underway as at 31 December 2010.

"Fuel supplies" totalising 1,750 thousand Euros (2009: 2,625 thousand Euros) refer to the deferral of discounts received in 2008 relative to the pur-chase of fuel for the period 2010 to 2012.

20. Inventories

The breakdown of the inventories as at 31 December 2010 and 2009 is as follows:

31-Dec-10 31-Dec-09

Goods 11,455 10,851

Products and work in progress 15,219 8,131

Raw materials, subsidiary materials and consumables 121,916 107,689

148,590 126,671

"Products and work in progress" correspond to the amount of materials and hours spent on aircraft maintenance works for third parties which are in progress.

Raw materials, subsidiary materials and consumables refer to technical material used in the repair of own aircraft and in work carried out to other airline companies.

The year-on-year increase in the inventories is essentially due to the fact that the subsidiary TAP Manutenção e Engenharia Brasil, S.A. used part of its available labour in the recovery of spare parts that may be used in services rendered or sold during its operating activity. In 2010 this recovery had an impact of 16,630 thousand Euros (2009: 19,061 thousand Euros) which had been recorded as "Other income and gains – recovered warehouse material" (Note 48).

The amounts presented are net of impairment losses totalising 59,176 thousand Euros (2009: 59,889 thousand Euros).

The changes which occurred in the inventory impairments item in 2009 and 2010 were as follows:

Opening balance as at 01 January 2009 48,708

Reinforcement (Note 43) 9,618

Reversals (Note 43) (957)

Utilisations (61)

Currencyconversionadjustment 2,581

Closing balance as at 31 December 2009 59,889


Reversals (Note 43) (15,024)

Utilisations (52)



21. Customers

As at 31 December 2010 and 2009, the "Customers" is broken down as follows:

31-Dec-10 31-Dec-09

Customers – current accounts receivable 259,036 225,762

Customers – doubtful debts 35,069 38,033

Accumulated impairment losses (70,893) (71,205)

223,212 192,590


The breakdown of this item by type of customer is as follows:

31-Dec-10 31-Dec-09

Travel agencies 77.962 75.938

Private entities 68.432 56.007

Airline companies 24.353 35.526

SPdH 6.977 7.042

Grupo ANA – Aeroportos de Portugal 3 5.958

Other 45.485 12.119

223.212 192.590

The balances receivable from travel agencies and airline companies are settled, essentially, through the IATA Clearing House system, as described in Note 3.

The changes which occurred in the customer impairments item in 2009 and 2010 were as follows:

Balance as at 01 January 2009 52,907


Reversals (Note 44) (376)

Utilisations (499)




Reversals (Note 44) (9,441)

Utilisations (26)



22. Cash and cash equivalents

As at 31 December 2010 and 2009, the breakdown of cash and cash equivalents present the following amounts:

31-Dec-10 31-Dec-09

Term deposits 162,982 74,383

Overnight bank cash deposits 59,517 56,494

Cash 178 200

222,677 131,077

BANK OVERDRAFTS (Note 27) 14,923 14,940

CASH AND CASH EQUIVALENTS 207,754 116,137

The amount of cash on hand presented by TAP Group results, essentially, from the cash on hand of TAP S.A. of 205,671 thousand Euros.

Thissurplusliquidityisnormallyinvestedinshorttermfinancialinvestments,earninginterestatthenormalmarketrates.

24. Equity instruments

ThenominalsharecapitalofTAPGroup,of15,000thousandEurosisrepresentedby1,500,000nominalsharesof10Euroseach,100%ownedbyParpública – Participações Públicas, SGPS, S.A..

"Non-distributable reserves" includes essentially the legal reserve constituted in accordance with article 295 of the Commercial Companies Code, whichestablishesthataminimumof5%ofthenetincomeoftheyearmustbeallocatedtothisreserveuntiltheamountofthereservecorrespond-entstoafifthofthesharecapital.Thisreservecannotbedistributed,exceptincaseofthecompany'sliquidation,butcanbeusedtoabsorblossesafter other the reserves have been exhausted, or incorporated into the share capital.

Thisitemalsoincludestheadjustmentstothefairvalueofthefinancialinstrumentsusedtohedgeagainstcashflows,aswellasforeignexchangerate differences arising from the conversion of operating units in foreign currency (Other reserves).

The"Retainedearnings"includesthenetincomefrompreviousyears,asdeliberatedattheGeneralMeetings.Anyalterationsarisingfromthefirst-time application of the International Financial Reporting Standards are also recorded under this item.


Fair value of financial instruments

Theamountof1,006thousandEurospresentedin"Fairvalueoffinancialinstruments"correspondstothefairvalueoffinancialinstrumentsclassifiedas hedging instruments of the subsidiary TAP, S.A. recorded in accordance with the policy described in Note 2.12.

Asat31December2010and2009,thefairvalueoftheDerivativefinancialinstrumentsisbrokendownasfollows:

Beginning Maturity2010

Net2009

Net

COVERAGE

Interest rate swaps

TTG 16-11-1999 05-11-2010 – (194)

TTH 16-11-1999 26-11-2010 – (214)

TTI 18-06-1999 22-12-2010 – (254)

TTK 15-06-2000 15-06-2011 (108) (431)

TNG 18-06-1999 17-02-2011 (35) (183)

TNI 22-05-2000 22-05-2011 (116) (558)

TOL 26-11-2009 26-11-2019 (747) (103)

Jet fuel Swaps – 6,285

(1,006) 4,348

Currency conversion reserve

Entity Opening balance Increases Reductions Closing balance

SEAP:

Financial statements conversion (2,385) 2,385 – –

TAP ME Brasil and Aero-LB:

Financial statements conversion (12,536) – (18,437) (30,973)

Extension of the net investment in Aero-LB 7,498 18,451 – 25,949

(7,423 ) 20,836 (18,437) (5,024)

Theincreaseof20,836thousandEurosrefersessentiallytothefavourableexchangeratedifferencesfromthemediumandlongtermfinancinggranted to Aero-LB Participações, S.A., whose repayment is unlikely to occur in the predictable future, and so, in substance, an extension of the Group's net investment in this foreign entity.

During2010,theGroupdisposedofAirMacauandconsequentlyextinguishedSEAP;consequentlythecurrencyconversionreserveinthefinancialstatementsofthesubsidiarywasderecognisedthroughprofitorloss,leadingtoacapitallossof829thousandEuros(Note37).

The decrease of 18,437 thousand Euros refers to the appropriation by the Group of the exchange rate differences resulting from the foreign exchange ofthefinancialstatementsofcompaniesthatoperateoutsideoftheEurozone,essentiallyinBrazil.

Net income per share

TherearenoconvertiblefinancialinstrumentsrelativetothesharesofTAP,SGPS,S.A.;therefore,thereisnodilutednetincomepershare.

2010 2009

Net income attributable to TAP Shareholders (57,103) (3,542)

Weighted average number of shares 1,500,000 1,500,000

Basic net income per share (38) (2)

Diluted net income per share (38) (2)

25. Minority interests – Balance Sheet

The minority interests stated in the Balance Sheet are broken down as follows:

31-Dec-10 31-Dec-09

MINORITY INTERESTS OF EQUITY

TAP Group

SEAP – 20

Cateringpor 2,614 2,551

LFP 4,741 4,134

7,355 6,705


26. Provisions

During 2010 and 2009, the changes in provisions are as follows:


IncreasesReductions due to use

Reversed unused

amounts

Exchange rate

variation

Other movements

Closing balance

PROVISIONS

Provision for current lawsuits 36,358 12,839 (206) (16,055) 3,301 2,378 38,615

Guaranties to associated companies 387 – – (387) – – –

Provisionsforfinancialinvestments(Note37) 72,105 43,556 – – – – 115,661

Other provisions 25,189 61 (661) (159) 3,170 (22,301) 5,299

134,039 56,456 (867) (16,601) 6,471 (19,923) 159,575


IncreasesReductions due to use

Reversed unused

amounts

Exchange rate

variation

Other movements

Closing balance

PROVISÕES

Provision for current lawsuits 24,228 9,080 (234) (4,020) 4,853 2,451 36,358

Securities to associated companies 482 – – (95) – – 387

Provisionsforfinancialinvestments(Note37) 20,084 29,596 – – – 22,425 72,105

Other provisions 49,186 918 (1,423) (2,051) 8,054 (29,495) 25,189

93,980 39,594 (1,657) (6,166) 12,907 (4,619) 134,039

The net result from these changes in provisions was recorded as “Provisions”, with the exception of the provision for negative equity which is recordedas"Gainsandlossesinassociatedcompanies",totalisingareversalof3,701thousandEurosandanadjustmentof3,832thousandEuros,respectively (Note 45).

Current legal actions

Provisions for current legal actions are calculated according the risk assessments carried out by the Group and its legal advisors, based on historical success rates by type of legal action and the probability of unfavourable outcomes for the Group. As at 31 December 2010 the amount of 38,615 thousand Euros recorded as “Provisions for current legal actions” was destined to face the cost of various court cases against the Group, in Portugal and abroad.

The breakdown of the provision for current lawsuits is as follows:

31-Dec-10 31-Dec-09

TAP Group (without the subsidiary TAP ME Brasil) 13,246 10,237

Subsidiary TAP ME Brasil 25,369 26,121

38,615 36,358

As at 31 December 2010, the subsidiary TAP Manutenção e Engenharia Brasil, S.A. had close to 2,062 labour claims against it (1,842 claims as at 31December2009).ThesubsidiaryisajointdebtorofthelabourliabilitiesrelatedtothemigrationofemployeesfromVARIGtoTAPManutençãoeEngenharia Brasil in 2001 and 2002. There are labour claims from former employees of VARIG against the subsidiary and against TAP S.A. due to the dismissalofVARIGemployeesfollowingthejudicialauctionofthesaleoftheproductionunitofVARIGwhichtookplaceinJuly2006.

Provisions for financial investments

"Provisionsforfinancialinvestments"of115,661thousandEurosreferstotheappropriationofthetotalnegativeequityofSPdH(seeNote2.3.2– Associates), plus 3,700 thousand Euros relative to additional paid-in capital granted to SPdH, which is recorded as "Other accounts receivable – non-current" (Note 18).

The increase of 43,556 thousand Euros in this item refers to the appropriation of the full loss of this associate (Note 2.3.2) and is recorded as "Gains and losses in associates" (Note 37).

InMarch2009,aconsortiumofthreebanks(BIG,BanifandBancoInvest)transferredthestakeinSPDH(50.1%)toTAPS.A.for31.6millionEuros.Onthe same date and during the period in which the concentration process at the Competition Authority was pending, TAP S.A. transferred the exercise ofitsvotingandsupervisionrights,asmajorityshareholderofSPdH,toanindependententityofTAPGroup.

On 19 November 2009, following an in-depth investigation, the Competition Authority decided to adopt a prohibition decision relative to the con-centrationoperationwhichconsistedoftheacquisition,byTAPS.A.,ofexclusivecontrolofSPdH,viatheacquisitionofa50.1%stakeofthesharecapital of SPdH.


TheCompetitionAuthoritythusimposedtheobligationofseparationofSPdHviathesale,byTAPGroup,ofthesharesrelativetoatleast50.1%oftheshare capital of SPdH. Until the sale, the regulator imposed that SPdH be administered by a manager, acting on behalf of the Competition Authority and managing SPdH independently from TAP Group.

Thus,thepresentfinancialstatementsincludeprovisionstocovertheappropriationofthetotallossesandnetworthofSPdH.

Asat31December2010and2009,thefinancialinformationrelatedtotheassociateSPdH–ServiçosPortuguesesdeHandling,S.A.isasfollows:

31-Dec-10 Total assets EquityNet income for the year

Total income

SPdH–Serviços Portugueses de Handling, S.A. 37,169 (111,961) (43,556) 135,429

31-Dec-09 Total assets EquityNet income for the year

Total income

SPdH–Serviços Portugueses de Handling, S.A. 27,371 (68,405) (28,223) 117,614

Other provisions

This item is broken down as follows:

31-Dec-10 31-Dec-09

Subsidiary TAP ME Brasil

Provision for tax contingencies 3,823 23,398

Remaining subsidiaries

Other provisions 1,476 1,791

5,299 25,189

Provision for tax contingenciesThesubsidiaryTAPManutençãoeEngenhariaBrasil,S.A.iscurrentlyinvolvedintaxactions,bothintheadministrativeandjudicialareasandwhich,whenapplicable,areguaranteedbyjudicialdepositsand/orthepledgeofassets.

In2009,thesubsidiaryTAPManutençãoeEngenhariaBrasil,S.A.joinedtheREFIStaxrefinancingprogramme,dividingupthetotalfederalcontin-gencies,forwhichtheprobabilityofsuccesswasclassifiedasremote.

The breakdown of the provision for lawsuit contingencies is as follows:

31-Dec-10 31-Dec-09

REFIS Tax contingencies (Note 17) – 21,523

Subsidiary TAP ME Brasil 3,823 1,875

3,823 23,398

The changes which have occurred in this provision were as follows:

Balance as at 01 January 2009 26,202

Reinforcement of provisions 780

Reduction for payments made (174)

Reversal due to estimate review (2,035)

Exchange rate variation 7,955

Other movements (9,330)

Balance as at 31 December 2009 23,398

Reinforcement of provisions –

Reduction for payments made (444)

Reversal due to estimate review –

Exchange rate variation 3,170

Other movements 2,071

Transfer to the State – accounts payable (Note 17) (24,372)

Balance as at 31 December 2010 3,823


27. Funding received

The loans refer, essentially, to funding received from national and foreign credit institutions.

31-Dec-10 31-Dec-09

Current Liabilities Non-current Liabilities Current Liabilities Non-current Liabilities

Bank loans 125,705 470,294 120,708 485,974

Financial leasing liabilities 108,367 557,766 129,682 551,234

Bank overdrafts 14,923 – 14,940 –

248,995 1,028,060 265,330 1,037,208

As at 31 December 2010 and 2009, the remunerated net debt is broken down as follows:

31-Dec-10 31-Dec-09

REMUNERATED THIRD PARTY DEBT

Non-current 1,028,060 1,037,208

Current 248,995 265,330

1,277,055 1,302,538

CASH AND CASH EQUIVALENTS

Cash 178 200

Overnight bank cash deposits 59,517 56,494

Other cash investments 162,982 74,383

222,677 131,077

REMUNERATED NET DEBT 1,054,378 1,171,461

Remunerated bank debt

As at 31 December 2010 and 2009, the current and non-current remunerated bank debt are broken down as follows:

31-Dec-10 31-Dec-09 Reference Rate

NON-CURRENT

TAP SGPS

BCP bank loan 4,318 4,867 Euribor 3m

Deutsche Bank bank loan 50,142 – Fixed rate

TAP S.A.

Tagus – Sociedade de Titularização de Créditos, S.A. 155,676 181,646 Euribor 3m

Deutsche Bank bank loan 260,158 297,453 Fixed rate

Misc.–Aircraftfinancing – 2,008 Various

470,294 485,974

CURRENT

TAP SGPS

BCP bank loan 560 142 Euribor 3m

Deutsche Bank bank loan 1,433 – Fixed rate

TAP S.A.

Bank overdraft 14,923 14,940 Various

Tagus – Sociedade de Titularização de Créditos, S.A. 26,069 24,592 Euribor 3m

BCP credit line 40,192 40,161 Euribor 30 d

Banco Popular credit line 16,146 – Euribor 3m

Deutsche Bank bank loan 39,290 37,966 Fixed rate

Banco Popular commercial paper – 10,000 Fixed rate

Misc.–Aircraftfinancing 2,015 7,847 Various

140,628 135,648

REMUNERATED BANK DEBT AT THE END OF THE YEAR 610,922 621,622


The debt analysis by maturity and by type of interest rate, as at 31 December 2010 and 2009, is broken down as follows:

31-Dec-10 31-Dec-09

BY MATURITY

Up to 1 year 140,628 135,648

From 1 to 2 years 66,468 65,822

From 2 to 3 years 69,842 67,058

From 3 to 4 years 73,445 70,423

From 4 to 5 years 129,684 74,016

Over 5 years 130,855 208,655

610,922 621,622

BY TYPE OF INTEREST RATE

Variable Rate

Expires in 1 year 99,904 87,682

Expires in 1 to 2 years 28,116 28,527


Over 3 years 102,021 131,878

259,898 276,202

Fixed Rate

Expires in 1 year 40,724 47,966



Over 3 years 231,963 221,216

351,024 345,420

610,922 621,622

The loans received by functional currency are broken down as follows:

31-Dec-10 31-Dec-09

Values in foreign currency

Values in EurosValues in

foreign currencyValues in Euros

Euros (EUR) – 610,922 – 617,804

US Dollars (USD) – – 5,491 3,818

– 610,922 5,491 621,622

"Funding received – non-current" includes, as at 31 December 2010, 155,676 thousand Euros corresponding to a liability generated as part of a securitisation operation of future loans, carried out by TAP S.A. in December 2006, under the terms of Decree-Law No. 453/99, of 5 November, in which Deutsche bank acted as the lead manager and the future receivables were acquired by Tagus – Sociedade de Titularização de Créditos, S.A..

Financial Leasing

TheGrouprecordstheassetsacquiredunderfinancialleasinginitstangiblefixedassets.Asat31December2010,TAPS.A.hadongoingfinancialleasing liabilities as described in Note 5, for which the corresponding principal is included in the balance sheet as "Funding received", as follows:

31-Dec-10 31-Dec-09

DEBTS RELATIVE TO FINANCIAL LEASING

Basic equipment 666,133 678,299

Other tangible assets – 2,617

666,133 680,916

FUTURE PAYMENTS OF PRINCIPAL

Up to 1 year 108,367 129,682

From 1 to 5 years 378,752 316,612

Over 5 years 179,014 234,622

666,133 680,916

Thefinancialleasing,byfunctionalcurrency,isbrokendownasfollows:

31-Dec-10 31-Dec-09

Financial leasing in EUR 627,341 643,046

Financial leasing in USD 38,792 37,870

666,133 680,916

The total amount of liabilities plus future interest is presented in the Interest rate risk section (Note 3).

As at 31 December 2010 and 2009, bank loans granted and not drawn totalise 750 thousand Euros.


Operating Leasing

As referred to in Note 2.24, these liabilities are not recorded in the Balance Sheet of the Group. These contracts have different periods of duration which may reach up to 10 years, and may be extended through the explicit consent of the contracting parties.

As at 31 December 2010, 19 airplanes were under operating leasing contracts, as presented in detail in Note 5. It should be noted that the Airbus A310 aircraft was not in operation at that time.

Asat31December2010and2009,thefinancialcommitmentsassumedbyTAPGrouprelatedtooperatingleasingcontractsforaircrafttotalise241,871 thousand Euros (314,432 thousand USD) and 259,777 thousand Euros (383,171 thousand USD), respectively.

The lease rent plans are broken down as follows:

31-Dec-10 31-Dec-09

Up to 1 year 50,209 50,826

From 1 to 2 years 43,213 44,007

From 2 to 3 years 30,591 34,462

From 3 to 4 years 22,811 25,550

Over 4 years 95,047 104,932

241,871 259,777

There were security deposits associated to these contracts totalising 3,250 thousand Euros as at 31 December 2010 (Note 18) and 3,805 thousand Euros as at 31 December 2009, which will be returned to the Group when each aircraft is handed back to its lessor.

Financial Covenants

TheFinancialCovenantsenclosedintheleasingandfinancingcontractsaretheusualonesinthiskindofoperation,includingcompulsoryprovisionssuchasmaintainingtheairlineoperatoractivity,periodicallyprovidingtheavailablefinancialinformationand,inthespecificcaseoffinancialleasing,obligationsofanoperatingcharacterrelativetoregistrationsatofficialentities,informationrelativetotheleasedaircraft,strictcompliancewithalltheregulationsandproceduresdefinedbytheauthorities,amongstothers.

28. Liabilities related to post-employment benefits

31-Dec-10 31-Dec-09

LIABILITIES FOR PAST SERVICES AT THE BEGINNING OF THE PERIOD 87,784 97,168

Cost of interest 11,677 11,217

Cost of current service 3,281 3,173

Pensions Fund contributions (15,931) (11,022)

Actuarial gains and losses 3,291 (14,551)

Exchange rate changes in the plans measured in a different currency 3,586 6,007

Fund asset income (5,295) (4,208)

Benefitspaid – –

LIABILITIES FOR PAST SERVICES AT THE END OF THE PERIOD 88,393 87,784

The main assumptions used in the preparation of the studies are as follows:

Portugal

2010

Brazil

2010

Portugal

2009

Brazil

2009

Mortality table TV 88/90 AT 83 TV 88/90 AT 83

Incapacity table EVK 1980 IAPB – 57 EVK 1980 IAPB – 57

Discount rate 4.75% 10.35% 5.50% 11.18%

Fund yield rate 4.75% 10.90% 5.50% 10.19%

Growth rate

Salaries 1.50% 6.49% 2.50% 6.28%

Pensions 1.00% 4.40% 1.50% 4.20%

Trend of healthcarel costs 1.50% – 2.50% –


The liabilities of the different companies of TAP Group were calculated by actuarial studies reported as at 31 December 2010 and 2009, prepared by independententities,individuallyforeachcompany,usingtheProjectedUnitCreditmethod.Theliabilitiesforthefinancialyearsof2005to2010are broken down as follows:

31-Dec-10Viva

PensionsBefore

1997Active Healthcare

Seniority Bonus

England representation

Brazil Total

Liabilities from past services

Active 4,854 – – – 37,398 8,956 – 51,208

Pre-retirement – – 820 197 – – 83,569 84,586

Retired 6,562 45,000 – 2,942 – 3,424 – 57,928

Market value of the funds (15,467) – – – (25,543) (10,370) (53,949) (105,329)

DEFICIT / (SURPLUS) (4,051) 45,000 820 3,139 11,855 2,010 29,620 88,393

31-Dec-09Viva

PensionsBefore


Seniority Bonus


Brazil Total


Active 3,389 – – – 37,214 14,418 – 55,021

Pre-retirement – – 1,247 115 – – 60,419 61,781

Retired 6,723 44,606 – 3,356 – 1,220 – 55,905


DEFICIT / (SURPLUS) (5,037) 44,606 1,247 3,471 14,226 2,508 26,763 87,784

31-Dec-08Viva

PensionsBefore


Seniority Bonus


Brazil Total


Active 7,219 – 2,843 – 32,641 15,638 – 58,341

Pre-retirement – – 1,064 136 – – 40,436 41,636

Retired 10,568 44,139 – 3,362 – – – 58,069


DEFICIT / (SURPLUS) 8,968 44,139 3,907 3,498 14,487 2,508 19,661 97,168

31-Dec-07Viva

PensionsBefore


Seniority Bonus


Brazil Total


Active 3,737 – 6,968 – 18,682 15,638 – 45,025

Pre-retirement – – 2,170 218 – – – 2,388

Retired 10,512 44,457 – 4,663 – – – 59,632

Market value of the funds (9,900) – – – (13,631) (13,130) – (36,661)

DEFICIT / (SURPLUS) 4,349 44,457 9,138 4,881 5,051 2,508 – 70,384

31-Dec-06Viva

PensionsBefore


Seniority Bonus


Brazil Total


Active 9,644 – – – 20,888 14,729 – 45,261

Pre-retirement – – 1,827 242 – – – 2,069

Retired 10,538 45,563 – 5,097 – – – 61,198


DEFICIT / (SURPLUS) 13,738 45,563 1,827 5,339 8,869 3,991 – 79,327

31-Dec-05Viva

PensionsBefore


Seniority Bonus


Brazil Total


Active 8,967 – – – 20,040 14,729 – 43,736

Pre-retirement – – 241 130 – – – 371

Retired 10,622 48,304 – 4,427 – – – 63,353


DEFICIT / (SURPLUS) 17,616 48,304 241 4,557 9,859 3,991 – 84,568

Thesurplusfinancingrecordedasat31December2010,of4,051thousandEuros,arisingexclusivelyfromthecorrectionofthevolumeofthetotalstaff covered by the pensions plan, is reimbursable under the terms of the law and/or allows for exemption from future contributions.


Evolution of the liabilities related to pensions and other post-employment benefits stated in the balance sheet

Theevolutionoftheassumedliabilities,reflectedintheconsolidatedbalancesheetasat31December2010and2009,isasfollows:

31-Dec-10 Values reflected in the Balance Sheet

Viva Pensions

Before 1997

Active HealthcareSeniority

Bonus England

representationBrazil TOTAL

Liabilities at the beginning of the year 10,112 44,606 1,247 3,471 37,215 15,638 60,418 172,707

Exchange rate variation – – – – – (2,342) 8,690 6,348

Values recorded in net income for the year:

Current services 193 – – – 2,870 – 218 3,281

Cost of interest 592 2,119 59 165 1,655 – 7,087 11,677

Actuarial deviations 519 (1,725) (486) (497) (1,766) (916) 11,393 6,522

Benefitspaid – – – – (2,576) – (4,237) (6,813)

LIABILITIES AT THE END OF THE YEAR 11,416 45,000 820 3,139 37,398 12,380 83,569 193,722

31-Dec-09 Values reflected in the Balance Sheet

Viva Pensions

Before 1997


Bonus England


Liabilities at the beginning of the year 17,787 44,139 3,907 3,498 32,642 15,638 40,436 158,047

Exchange rate variation – – – – – – 12,541 12,541

Values recorded in net income for the year:


Cost of interest 774 2,428 215 192 1,921 – 5,687 11,217

Actuarial deviations (8,840) (1,961) (2,875) (219) 81 – 4,687 (9,136)

Benefitspaid – – – – – – (3,135) (3,135)

LIABILITIES AT THE END OF THE YEAR 10,112 44,606 1,247 3,471 37,215 15,638 60,418 172,707

If the rate of the trend of medical costs increase or decrease by one percentage point, the respective impact on the Group's liabilities as at 31 December 2010 and 2009 is as follows:

Rate 31-Dec-10

Annual growth rate of heathcare costs 1.50% 3,139

Increaseof1%inthegrowthrateofhealthcarecost 2.50% 3,405

Decreaseof1%inthegrowthrateofhealthcarecost 0.50% 2,905

Rate 31-Dec-09

Annual growth rate of heathcare costs 2.50% 3,471

Increaseof1%inthegrowthrateofhealthcarecost 3.50% 3,796

Decreaseof1%inthegrowthrateofhealthcarecost 1.50% 3,187

Expenses related to pensions and other post-employment benefits

Theexpensesrelatedtopensionsandotherpost-employmentbenefitsarebrokendownasfollows:

31-Dec-10

Values reflected in the Profit and Loss Statement

Viva Pensions

Before 1997


Bonus England



Cost of interest 592 2,119 59 165 1,655 – 7,087 11,677

Reversal of plan assets (318) – – – (704) (633) (3,640) (5,295)

Actuarial losses/(gains) 6,766 (1,725) (486) (497) (1,766) 135 5,099 7,526

7,233 394 (427) (332) 2,055 (498) 8,764 17,189

31-Dec-09

Values reflected in the Profit and Loss Statement

Viva Pensions

Before 1997


Bonus England



Cost of interest 774 2,428 215 192 1,921 – 5,687 11,217

Reversal of plan assets (1,150) – – – (620) – (2,438) (4,208)

Actuarial losses/(gains) (2,628) (1,961) (2,875) (219) 81 – (737) (8,339)

(2,613) 467 (2,660) (27) 3,953 – 2,723 1,843

Thecostsrelatedtopensionsandotherpost-employmentbenefitsarerecordedas"Payrollexpenses"(Note42).


Evolution of funds allocated to benefit schemes with pensions

During 2010 and 2009, the evolution of the fund's assets was as follows:

31-Dec-10

Evolution of the fund's net worthViva

PensionsSeniority

Bonus England


Opening balance 15,149 22,988 13,130 33,656 84,923

Exchange rate variation – – (1,967) 4,727 2,760

Allocation made in the year – 4,425 1,637 9,869 15,931

Income from the funds in the year 318 704 633 3,640 5,295

Actuarial deviations – – (3,063) 6,294 3,231

Benefitspaid – (2,574) – (4,237) (6,811)

CLOSING BALANCE 15,467 25,543 10,370 53,949 105,329

31-Dec-09

Evolution of the fund's net worthViva

PensionsSeniority

Bonus England


Opening balance 8,819 18,154 13,130 20,775 60,878

Exchange rate variation – – – 6,534 6,534

Allocation made in the year 5,180 4,214 – 1,628 11,022

Income from the funds in the year 1,150 620 – 2,438 4,208

Actuarial deviations – – – 5,415 5,415

Benefitspaid – – – (3,134) (3,134)

CLOSING BALANCE 15,149 22,988 13,130 33,656 84,923

The breakdown of the funds and respective category of the amounts included in the fair value of the assets, as at 31 December 2010 and 2009, are as follows:

31-Dec-10 Fair Value

Level Viva

PensionsSeniority

Bonus England


Shares 1 3,940 823 6,568 7,267 18,598

Derivative products 2 18 – – – 18

Bonds 1 3,469 22,644 2,815 45,306 74,234

Public Debt 1 5,811 – – – 5,811

Real Estate 1 1,001 109 – 1,360 2,470

Liquidity 1 1,220 1,590 – 16 2,826

Other investments – short term 1 8 377 987 – 1,372

15,467 25,543 10,370 53,949 105,329

31-Dec-09Fair Value

LevelViva

PensionsSeniority

Bonus England


Shares 1 2,758 381 8,316 5,048 16,504

Derivative products 2 (57) – – – (57)

Bonds 1 3,662 20,626 3,564 28,271 56,123

Public Debt 1 6,480 – – – 6,480

Real Estate 1 1,136 194 – 337 1,666

Liquidity 1 1,162 1,400 – – 2,562

Other investments – short term 1 8 387 1,250 – 1,645

15,149 22,988 13,130 33,656 84,923

Pensions – Transportes Aéreos Portugueses, S.A.

InaccordancewiththerulesatTAPS.A.,employeeswhojoinedthecompanybefore31May1993areentitledtoreceivethedifferencebetweenthe state retirement pension paid by the Social Security System, due to the age limit or incapacity for work, and a minimum amount, guaranteed by TAPS.A..Thisamountcorrespondstoafixedpercentageofthepensionablesalaryatthedateofretirement,multipliedbyeachyearofserviceatthecompany, up to a maximum of 20 years, as follows:

ρ Flight Deck Crew (pilots and flight technicians) 3.2% peryearofservice ρ Ground staff and cabin crew 4% peryearofservice

Furthermore,TAPS.A.hasundertakentopaypre-retirementpensionsrangingfrom75%to100%ofthesalaryitsemployeeswouldreceiveiftheywere still in active service.


In October 2008, the agreement between the company and the Civil Aviation Pilots’ Union (SPAC) was changed, with the main alterations being as follows:

ρ (i)Pilotsrecruitedbefore31May2007:thepensionplanincludesthesenioritybonusguaranteedbytheState(of15%or10%,accordingtothestartingdateofthecontributorycareer)andthepossibilityofanadditionalbonus(upto25%or30%)asanoptionforthebeneficiaryatthedateofretirement(thisadditionalbonusofupto25%ispaidbyTAPS.A.);

ρ (ii) Pilotsrecruitedafter1June2007:thepensionplanconsistsofadefinedcontributionscheme,of7.5%ofthebaseremuneration(14timesayear),ofwhich80%ispaidbyTAPS.A..

TAPS.A.hasrecordedallitsliabilitiesrelatedtopastservicesforthepaymentofpensionsupplementsandpre-retirementbenefitsrelativetothedefinedbenefitscheme.

Thequantificationoftheliabilitiesconsideredthatunderthetermsofthecollectiveregulationsestablishingtheabovementionedpensionplan,thetotal pension guaranteed by TAP S.A., that is, the social security pension and pension supplement will never exceed the base monthly remuneration, net of personal income tax (IRS) and social security payments during employment. This premise is not applicable, since it is not established in the col-lectiveregulationsrelativetoflightdeckcrew,forwhomthislimitdoesnotapplyandthepensionablesalaryismadeupofthebasesalaryestablishedinthepayscale,plusmonthlyearningsinthefinancialyearandannuities.

Pensions – TAP Manutenção e Engenharia Brasil, S.A.

Benefit Scheme II – VEM (Defined benefits component)Thesubsidiarysponsorsapensionplanforitsemployees,managedbyInstitutoAERUSdeSeguridadeSocialandcalledtheBenefitSchemeII–VEM.Althoughthisisa"definedcontribution"benefitscheme,italsooffersinvalidityanddeathbenefitsundertheconceptof"definedbenefits",inaddi-tiontoguaranteeingspecialbenefitstoagroupofemployeesfromVARIGwhowereintegratedinthestaffofthesubsidiarywhentheoperationsofthis company were demerged.

From 1 January 2002 onwards, the subsidiary became one of the sponsors of Instituto AERUS de Seguridade Social (AERUS), through means of the complementarypensionscheme(definedcontribution),calledBenefitSchemeII–VEM.

In2008thesubsidiaryrequestedthetransferofthemanagerofthebenefitsfundofitsemployeesfromtheentityAERUS.Thisprocesswasrefusedby the holding company of the AERUS fund, which claimed that TAP Manutenção & Engenharia Brasil, S.A. had debts that were not recognised inthetransferofliabilitiesrelatedtopost-employmentbenefits,sinceitwasco-responsibleforthepensionfunddeficitsofothersponsors.TAPManutenção e Engenharia Brasil, S.A. is contesting the legal validity of the abovementioned debt and the Board of Directors, supported by prelimi-nary opinions of its lawyers and external consultants, believes that the debt is not its responsibility, the reason why it did not create a provision to deal with the respective process.

Therefore,onlythepreviouslymentioneddefinedbenefitcomponentisrecordedas"Pensionsandotherpost-employmentbenefits".

Seniority bonus – PNT – Transportes Aéreos Portugueses, S.A.

Under the Company Agreement signed between TAP S.A. and the Civil Aviation Pilots’ Union (SPAC), TAP S.A. undertakes to pay, in addition to a pension scheme, a one-off retirement bonus to every pilot on the day of their entitlement to a full retirement pension, which is funded by the capital accumulated in a collective insurance policy set up by TAP S.A. on behalf of the pilots. The main conditions of the collective retirement policy con-tractedwiththeinsurancecompany,describingthisRetirementBenefitSchemeforPilotsareasfollows:

ρ (i) Admission conditions: Pilots who are still in active service; ρ (ii) Normal retirement age: 60 years; ρ (iii) Guarantees: Each participant is entitled at normal retirement age to an amount 16 times the last earned gross monthly salary.

TheBenefitSchemeisfundedthroughaninsurancepolicythatisbackedbycontributions(premiums)paidbyTAPS.A.andbyincomeobtainedfrominvestments made by the insurance company in an independent fund that supports this kind of insurance.

In October 2008, the agreement between the company and SPAC was changed, whereby the main alterations were:

ρ Pilots recruited before 31 May 2007: The one-off retirement bonus is maintained, but it shall be paid only if the retirement date coincides with the pensionable age at which full pension entitlement is attributed, with the possibility of increasing the capital for every additional year of service after the full pension age has been reached;

ρ Pilots recruited after 1 June 2007: there is no entitlement to a one-off retirement bonus.


Healthcare – Transportes Aéreos Portugueses, S.A.

TAP S.A. ensures that both pre-retired and early-retired employees, below the age of 65, are provided with a healthcare plan providing access to medicalcareatreducedprices.Moreover,TAPS.A.providesitsretiredstaffwithaccesstoUCSmedicalservices,asafreelygrantedbenefit,forwhichthey pay a portion of the cost of each service with the remainder being subsidised by TAP S.A..

TAP S.A. considers that although it provides its former, pre-retired, early-retired and retired staff with access to the healthcare services of UCS (a companyofTAPGroup),thisisnotaliabilitybutafreelygrantedbenefitatanygiventime,therefore,thecompanyassumesnoaccountingliabilityregarding the provision of healthcare services to current employees after they cease working for the company. This means that at this date the exist-ing provision covers the total liabilities related to medical treatment for pre-retired, early retired and retired staff, with this total liability having been calculated based on an actuarial evaluation carried out by and independent entity.

29. Advances from customers

As at 31 December 2010 and 2009, the balance of "Advances from customers" was broken down as follows:

31-Dec-10 31-Dec-09

SPdH 2,667 3,005

Ministère de la Defense 465 203

Other 442 453

3,574 3,661

30. Suppliers

As at 31 December 2010 and 2009, the balance of "Suppliers" was broken down as follows:

31-Dec-10 31-Dec-09

Suppliers – current account 115,849 96,018

Suppliers – invoices pending 26,770 8,203

142,619 104,221

As at 31 December 2010 and 2009, the balance of "Suppliers current account" was broken down as follows:

31-Dec-10 31-Dec-09

SpdH 12,985 2,968

ME Brasil suppliers 5,738 7,674

Petrogal 10,013 7,522

Grupo ANA 7,652 7,534

Petrobras Distribuidora 6,268 2,200

Amadeus It Group, SA 4,115 1,306

BP Lubs–Cmp.Lub e Combust, S.A. 1,648 1,121

Gestmin Power – Unipessoal, Lda 1,457 1,497

REPSOL Portuguesa, S.A. 1,298 771

NAV – Emp. Pub. Nav. Aérea Portugal 1,290 1,292

Siemens e Iberlim ACE 1,173 1,107

INAC – Inst. Nac. Aviação Civil 1,150 1,095

Sonangol 1,114 502

ASECNA – Ag. Sec. Navigat. Ari 919 2,645

Companhia de Seguros Fidelidade – Mundial, S.A. 966 1,552

Asa – Emp. Nac. Aerop. Seg. Aérea EP 632 1,240

Shell Brasil, Ltda 697 1,095

Other 56,734 52,897

115,849 96,018


31. Other accounts payable

As at 31 December 2010 and 2009, the "Other accounts payable" is broken down as follows:

31-Dec-10 31-Dec-09


Suppliersoffixedassets 2,930 – 6,745 –

Participating entities 299 – 299 –

Staff 4,481 – 3,673 –

Unions 301 – 335 –

Consultants and advisers – – 13 –

Accrued costs 141,922 – 138,820

Other 65,854 1,032 47,636 1,275

215,787 1,032 197,521 1,275

Other – current

As at 31 December 2010 and 2009, the "Other – current" was broken down as follows:

31-Dec-10 31-Dec-09

Fees and taxes 41,119 29,751

Work Accident indemnities 1,463 1,253

Customer balances payable 1,104 3,661

Interest rate swaps 259 662

Other 21,909 12,309

65,854 47,636

Accrued costs

As at 31 December 2010 and 2009, the "Accrued costs" was broken down as follows:

31-Dec-10 31-Dec-09

Remuneration 62,463 62,997

Maintenance reserves 11,894 5,750

Special sales charges 10,718 10,051

Remuneration – air crew 10,162 10,311

Commissions payable to non-resident entities 7,238 5,030

Specialised work 6,218 710

Handling by third parties 4,261 2,927

Fuel 4,191 3,410

Conservation and repair of materials 2,294 2,370

Passenger boarding taxes 1,377 669

Landing charges 1,225 1,210

Social security: other entities – Brazil 1,159 –

Commissions 292 2,166

Booking fees 287 2,154

Navigation taxes 447 10,430

Insurance payable 360 2,290

Other 17,336 16,345

141,922 138,820


32. Advances from customers – tickets to be used

As at 31 December 2010 and 2009, the Group’s liabilities related to unused issued tickets recorded as "Advances from customers – tickets to be used" was as follows:

31-Dec-10 31-Dec-09

Passengers 238,298 206,560

Cargo 939 424

239,237 206,984

During2010and2009,basedonthepartialandperiodicanalysesmadeofthisitem(seeNote2.26),adjustmentswererecordedontherevenuesfrompassengerandcargotransportof59,345thousandEurosand59,310thousandEuros,respectively,correspondingtoapproximately3%offlownrevenues,whichwererecognisedas"Salesandservicesrendered".

35. Sales and services rendered

As at 31 December 2010 and 2009, the Sales and services rendered were detailed as follows:

31-Dec-10 31-Dec-09

SALES AND SERVICES RENDERED

Sales

Internal Market

Air Transport and Maintenance 2,445 958

Catering 5,383 4,405

Duty Free Shops 16,180 14,827

Healthcare – 56

Foreign Market

Air Transport and Maintenance 2,918 6,738

Duty Free Shops 117,876 104,330

144,802 131,314

Services Rendered

Internal Market

Air Transport and Maintenance 217,154 171,052

Catering 1,348 1,345

Healthcare – 3,737

Travel Agencies – 2,942

Information Technologies 5,862 4,064

Foreign Market

Air Transport and Maintenance 1,946,079 1,760,114

Travel Agencies – 176

Information Technologies 276 266

2,170,719 1,943,696

2,315,521 2,075,010

36. Operating grants As at 31 December 2010 and 2009, the Operating grants were detailed as follows:

31-Dec-10 31-Dec-09

Other revenues and gains 4,565 3,559 4,565 3,559

TheGrouprecognises,onanannualbasis,thegrantsreceivablefromtheGovernmentrelatedtoitscontributiontotheretailpriceoffaresonflightscoming from or going to the archipelago of the Azores, provided that the passengers meet the applicable legal conditions. The value recognised for eachyearcorrespondstotheGroup'sestimateofthevaluereceivablefortheticketsusedintheactualyearbypassengerscoveredbythisbenefitscheme.


37. Gains and losses in associated companies

As at 31 December 2010 and 2009, the Gains and losses imputed to associated companies were broken down as follows:

31-Dec-10 31-Dec-09

GAINS

A.A.E. – Academia Aeronáutica de Évora, S.A. 319 –

319 –

LOSSES

SEAP 829 –

SPdH–Serviços Portugueses de Handling, S.A. 43,556 29,596

44,385 29,596

44,066 29,596

The amounts recorded under this item, as at 31 December 2010, correspond essentially to the loss for the year of SPdH, as described in Note 2.3.2 and Note 26, arising from the application of the equity method.

Furthermore, in 2010 the Group disposed of its stake in Academia Aeronáutica de Évora, S.A., which generated a capital gain of 319 thousand Euros.

Also in 2010, following the disposal of the Group's stake in Air Macau, SEAP was extinguished, generating a capital loss of 829 thousand Euros.

38. Variation in production

The variation in production in 2010 and 2009 was as follows:

31-Dec-10 31-Dec-09

Opening Inventories (8,131) (22,824)

Regularisation of Inventories (7,926) 20

Closing Inventories 15,219 8,131

CHANGE IN PRODUCTION (838) (14,673)

39. Own work capitalised

Own work capitalised, in 2010 and 2009, refers to staff costs and others included in inventory acquisition/production costs and other tangible assets.

31-Dec-10 31-Dec-09

CURRENT ASSETS

Inventories 2,406 1,650

Other non-current assets – –

2,406 1,650

40. Cost of goods sold and materials consumed

The cost of goods sold and materials consumed in 2010 and 2009 was as follows:

31-Dec-10 31-Dec-09

GoodsRaw materials, subsidiary

materials and consumablesGoods

Raw materials, subsidiary materials and consumables

Opening Inventories 11,152 167,199 21,914 101,873

Purchases 77,851 118,531 70,031 162,956

Regularisation of Inventories 8,633 (15,049) (3,714) 5,529

Closing Inventories (11,833) (180,655) (11,152) (167,199)

INVENTORIES CONSUMED AND SOLD 85,803 90,026 77,079 103,159

175,829 180,238


41. External supplies and services

External supplies and services are broken down as follows:

31-Dec-10 31-Dec-09

Fuel 522,933 358,641

Handling services 149,526 146,254

Navigation charges 132,644 124,180

Specialised work 82,007 61,413

Commissions 64,333 50,249

Operating leasing of aircraft (Note 27) 56,298 46,620

Conservationandrepairofflightequipment 54,677 71,566

Rents and leases 54,243 43,145

Landing charges 51,383 49,560

Onboard expenses 41,929 35,511

Special sales charges – air transport 36,705 30,705

Conservation and repair of other assets 30,204 25,098

Sub-contracts 11,620 12,625

Insurance 8,163 4,111

Fees 2,854 3,299

Other 145,420 149,082

TOTAL 1,444,939 1,212,059

The increase in costs related to External supplies and services is mainly due to the increase in operations compared with the previous year plus the increaseintheaveragepriceofjetfuel(seeNote3).

42. Payroll expenses

Payroll expenses are broken down as follows:

31-Dec-10 31-Dec-09

Staff Remuneration 406,701 379,867

Social Charges 82,973 78,377

Other staff costs 52,858 44,363

Expensesrelatedtopost-employmentbenefits(Note28) 17,189 1,843

559,721 504,450

The following remunerations were paid to the members of the corporate bodies of TAP Group during 2010:

Board of Directors: 3,598 thousand EurosGeneral Meeting: 4 thousand EurosAudit Board / Statutory Auditor: 82 thousand Euros

Other staff costs

Other staff costs are broken down as follows:

31-Dec-10 31-Dec-09

Social Action Costs 12,657 14,723

Insurance 11,564 10,505

Indemnities 12,849 2,962

Meals allowance 4,900 7,043

Work accident insurance 3,464 3,798

Other staff costs 7,424 5,332

52,858 44,363


43. Adjustments of inventories (losses/reversals)

As at 31 December 2010 and 2008, this item is broken down as follows:

31-Dec-10 31-Dec-09

Inventory lossesReversal of inventory

adjustmentsInventory losses

Reversal of inventory adjustments

Raw materials, subsidiary materials and consumables 11,058 (15,024) 9,618 (957) 11,058 (15,024) 9,618 (957)

(3,966) 8,661

Inventories (Note 20) are recorded net of the gains and losses for the year.

44. Impairment of debts receivable (losses/reversals)

As at 31 December 2010 and 2009, this item is broken down as follows:

31-Dec-10 31-Dec-09

Adjustments of accounts receivable

Reversal of adjustments of accounts receivable

Adjustments of accounts receivable

Reversal of adjustments of accounts receivable

Customers 6,922 (9,441) 17,820 (376)

Other Financial Assets – (1,788) – (2,261)

6,922 (11,229) 17,820 (2,637)

(4,307) 15,183

The amounts recorded as “customers” (Note 21) are recorded net of the gains and losses for the year.

45. Provisions (increases/decreases)

The breakdown of the amount recorded as provisions, net of allocations and reversals, for the years ended on 31 December 2010 and 2009, is as follows:

31-Dec-10 31-Dec-09

Provision for current lawsuits (3,216) 5,060

Guaranties to associated companies (387) (95)

Other provisions (98) (1,133)

(3,701) 3,832

46. Impairment of assets

Theimpairmentofassetswhichare,andthosewhicharenot,subjecttodepreciationwererecordedin2010and2009asfollows:

31-Dec-10 31-Dec-09

FIXED ASSETS SUBJECT TO DEPRECIATION

Buildings and other constructions 440 –

440 –

FIXED ASSETS NOT SUBJECT TO DEPRECIATION

Land and natural resources 500 1,000

Otherfinancialassets – 31,600

500 32,600

940 32,600


48. Other revenues and gains

As at 31 December 2010 and 2009, other revenues and gains are broken down as follows:

31-Dec-10 31-Dec-09

Supplementary revenues 57,518 69,092

REFIS (Note 17) – 55,734

Favourable operating exchange rate differences 10,294 18,434

Gainsinfixedassets 2,547 4,949

Gains in inventories 2,279 414

Otherfinancialrevenuesandgains 1,106 –

Prompt payment discounts obtained 223 497

Other revenues and gains 1,141 829

75,108 149,949

As at 31 December 2010 and 2009, "Supplementary income" is broken down as follows:

31-Dec-10 31-Dec-09

Recovered warehouse material 19,592 30,912

TAP Miles sales 12,185 17,275

Rents and sub-leases 2,334 3,857

Advertising 3,671 3,800

Rental of aircraft 2,392 2,402

Other 17,344 10,846

57,518 69,092

The year-on-year variation in "Recovered warehouse material" is essentially due to the fact that the subsidiary TAP Manutenção e Engenharia Brasil, S.A. according to its available capacity used part of its available labour in the recovery of spare parts that may be used in services rendered or sold during its operating activity (Note 20).

49. Other costs and losses

As at 31 December 2010 and 2009, the other costs and losses are broken down as follows:

31-Dec-10 31-Dec-09

Othercostsandlossesoffinancialservices 15,031 17,088

Inventory losses 9,821 5,919

Taxes 7,937 5,059

Fines and penalties 4,207 947

Lossesinfixedassets 1,732 4,033

Other 6,312 2,677

45,040 35,723

50. Depreciation and amortisation costs/reversals

The balance of this item is broken down as follows:

31-Dec-10 31-Dec-09

TANGIBLE FIXED ASSETS

Buildings and other constructions 5,947 5,866

Basic equipment 127,780 125,948

Transport equipment 332 361

Tools and utensils 984 1,059

Administrative equipment 2,250 5,534

Other tangible assets 661 232

137,954 139,000

OTHER INTANGIBLE ASSETS

Other intangible assets 668 1,980 668 1,980

138,622 140,980


51. Interest and similar revenue received / costs paid

As at 31 December 2010 and 2009, the interest incurred and received were broken down as follows:

31-Dec-10 31-Dec-09

REVENUES AND GAINS

Interest received from investments 6,896 4,091

Favourable exchange rate differences – 1,611

6,896 5,702

COSTS AND LOSSES

Interest paid on loans 44,977 46,558

Unfavourable exchange rate differences 3,159 –

Otherfinancialcostsandlosses 2,757 4,029

50,893 50,587

Asat31December2010and2009,theitemrelatedtointerestpaidincludes,basically,financinginterestof44,977thousandEurosand46,558thousand Euros, respectively.

52. Corporate income tax for the year

ThecompaniesoftheGrouparesubjecttoCorporateIncomeTax(IRC)basedontheirindividualnetincome,atthenormalrateof25%.InadditiontoIRC,thetaxablenetincomeofthesecompaniesisalsosubjecttoamunicipaltax(Derrama),resultinginanaggregateincometaxofapproximately29%in2010(26.5%in2009).

Underthetermsofarticle88oftheCorporateIncomeTaxCode,thecompaniesoftheGrouparesubjecttoautonomoustaxationonseveralexpenses,at the tax rates listed therein.

Under the terms of the Corporate Tax Code, the revenues and gains, the costs and losses and asset changes that were recorded using the equity methoddonotcounttowardsthedeterminationoftaxableprofit.

As at 31 December 2010 and 2009, the "Taxes" is broken down as follows:

31-Dec-10 31-Dec-09

Current tax 8,893 7,267

Deferred tax (396) 20

8,497 7,287

The current tax for 2010 refers essentially to the current tax of the subsidiary TAP S.A., which totalises 4,337 thousand Euros (2009: 3,060 thousand Euros),composedmainlyofthemunicipaltaxontaxableprofitandtheautonomoustaxationofthedailyallowanceoftheaircrew.

The reconciliation of the effective tax rate for 2010 and 2009 is detailed as follows:

31-Dec-10 31-Dec-09

PRE-TAX PROFIT (44,418) 7,288

Nominal tax rate 29.0% 26.5%

(12,881) 1,931

Permanent differences 1,502 19,492

Reversal/(reinforcement) of deferred tax assets relative to tax losses 709 (2,437)

Insufficientestimateoftaxforthepreviousyear (340) (427)

UseofReportablefiscallossesfrompreviousyearswithouttaxondef.assets (11,171) (13,037)

Reportablefiscallossesfromtheyearwithouttaxondeferredassets 15,072 –

Autonomous tax and others 2,725 3,696

INCOME TAX 8,497 7,287

EFFECTIVE TAX RATE -19.13% 99.99%

Current tax 8,893 7,267

Deferred tax (396) 20

8,497 7,287


53. Minority interests – net income

TheMinorityinterestsdetailedintheProfitandlossstatementsasat31December2010and2009arebrokendownasfollows:

31-Dec-10 31-Dec-09

MINORITY INTERESTS OF NET INCOME

TAP Group

Cateringpor 584 546

LFP 3,604 2,997

4,188 3,543

55. Reporting by segments

Theinformationbysegmentsisassociatedtotheidentifiedbusinesssegments,namelyAirTransport,Maintenance,theDutyFreeShop,Cateringandothers. The net income, assets and liabilities of each segment correspond to those that are directly attributable to each segment, as well as those that can be attributable to them based on a reasonable basis.

Business segments

Thefinancialinformationbybusinesssegmentfor2010isanalysedasfollows:

Maintenance

2010 Air Transport Portugal Brazil Free shop CateringHoldings

and OthersIntersegmental

AnnulmentsConsolidated

INCOME

Income 2,054,592 126,541 52,495 134,056 36,326 41,371 (129,860) 2,315,521

Net operating income 75,824 25,685 (74,149) 10,102 1,613 (39,496) – (421)

Externalnetfinancialresults (37,502) – (621) 127 32 (6,033) – (43,997)

Share of net losses in associated companies – – – – – (44,066) – (44,066)

Income tax (5,210) – – (2,881) (397) (9) – (8,497)

Minority interests – – – 3,604 584 – – 4,188

NET INCOME FOR THE YEAR 33,112 25,685 (74,770) 7,348 1,248 (45,538) – (52,915)

OTHER INFORMATION

Total Segmental Assets 2,096,272 – 165,627 24,438 12,801 623,565 (835,880) 2,086,823

Total Segmental Liabilities 2,049,114 – 418,682 14,805 7,497 697,416 (835,880) 2,351,634

Depreciation and impairment losses (124,267) (8,797) (3,866) (710) (793) (1,129) – (139,562)

CAPEX 2,764 6,927 4,100 1,000 312 2,066 – 17,169

REMUNERATED NET DEBT 1,014,228 – (3,294) (7,933) (4,332) 55,709 – 1,054,378

Thefinancialinformationbybusinesssegmentfor2009isanalysedasfollows:

Maintenance




INCOME

Income 1,839,516 113,316 53,790 119,157 33,665 47,502 (131,936) 2,075,010

Net operating income 90,028 12,190 7,031 8,371 1,515 (66,962) – 52,173

Externalnetfinancialresults (38,402) – (2,306) 69 41 (4,287) – (44,885)

Share of net losses in associated companies – – – – – (29,596) – (29,596)

Income tax (3,680) – – (2,223) (443) (941) – (7,287)

Minority interests – – – 2,997 546 – – 3,543

NET INCOME FOR THE YEAR 47,946 12,190 4,725 6,217 1,113 (72,190) – 1

OTHER INFORMATION

Total Segmental Assets 2,006,058 – 135,154 18,198 11,943 421,133 (568,091) 2,024,395

Total Segmental Liabilities 2,008,973 – 290,315 10,780 6,822 480,222 (568,091) 2,229,021

Depreciation and impairment losses (126,677) (8,327) (4,917) (428) (769) (32,462) – (173,580)

CAPEX 4,048 19,610 630 288 639 7,092 – 32,307

REMUNERATED NET DEBT 1,177,749 – (2,017) (4,571) (3,009) 3,309 – 1,171,461

The Maintenance – Portugal segment is included in the structure of the subsidiary Transportes Aéreos Portugueses, S.A., the reason why its assets and liabilities are not presented separately.


Geographic segments Maintenance




SALES AND SERVICES RENDERED:

Continent and Islands 200,640 31,045 – 16,180 36,326 41,095 (129,860) 195,426

Europe 693,698 64,788 – 77,759 – – – 836,245

South Atlantic 699,420 6,920 52,495 19,637 – – – 778,472

North Atlantic 72,102 9,863 – 2,259 – – – 84,224

Mid Atlantic 43,187 – – 1,321 – – – 44,508

África 345,543 13,532 – 15,697 – 276 – 375,048

Other 2 393 – 1,203 – – – 1,598

2,054,592 126,541 52,495 134,056 36,326 41,371 (129,860) 2,315,521

Maintenance




SALES AND SERVICES RENDERED:

Continent and islands 212,844 26,942 – 14,827 33,665 47,236 (131,936) 203,578

Europe 679,129 53,526 – 80,868 – – – 813,523

South Atlantic 522,727 5,765 53,790 10,120 – – – 592,402

North Atlantic 58,602 13,962 – 2,325 – – – 74,889

Mid Atlantic 50,341 – – 1,482 – – – 51,823

África 315,873 6,207 – 8,860 – 266 – 331,206

Other – 6,914 – 675 – – – 7,589

1,839,516 113,316 53,790 119,157 33,665 47,502 (131,936) 2,075,010

56. Related entities

Balances and transactions between companies of the Group which are included in the consolidation perimeter are eliminated through the con-solidation process, and, therefore, are not disclosed in this Note. The balances and transactions between the Group and the associated companies (consolidated through the equity method) are presented in the tables below. The terms and conditions enforced between the Group and the related parties are similar in substance to the terms which would normally be contracted between independent entities in comparable operations.

As at 31 December 2010 and 2009, the balances with related parties are broken down as follows:

31-Dec-10 Assets Liabilities

CustomersOther accounts

receivableDeferrals Suppliers Deferrals

Other accounts payable

SHAREHOLDER

Parpública, Participações Públicas (SGPS), S.A. – – – – – –

ASSOCIATED COMPANIES

SPdH–Sociedade Portuguesa de Handling, S.A. 3,610 74,382 – (12,436) (403) –

OTHER RELATED ENTITIES

ANA–Aeroportos de Portugal, S.A. 270 – 558 (7,761) (1,980) (1)

3,880 74,382 558 (20,197) (2,383) (1)

31-Dec-09 Assets Liabilities

CustomersOther accounts

receivableDeferrals Suppliers Deferrals

Other accounts payable

SHAREHOLDER

Parpública, Participações Públicas (SGPS), S.A. – – – – – –


SPdH–Sociedade Portuguesa de Handling, S.A. 7,042 36,222 2 (2,968) (796) (3,307)

OTHER RELATED ENTITIES

ANA–Aeroportos de Portugal, S.A. 5,957 1 437 (7,534) (1,655) –

12,999 36,223 439 (10,502) (2,451) (3,307)

The amount of “Other debtors” related to the associate SPdH includes a loan contract of 73,000 thousand Euros with a repayment schedule of less than 1 year, earning interest at normal market rates.


As at 31 December 2010 and 2009, the transactions with related parties are broken down as follows:

31-Dec-10 Costs related to services consumed

Other costs and losses

Sales and services rendered

Other revenues and gains

SHAREHOLDER

Parpública, Participações Públicas (SGPS), S.A. – – – –


SPdH–Sociedade Portuguesa de Handling, S.A. 78,278 19 10,414 1,565

OTHER RELATED ENTITIES – – – –

ANA–Aeroportos de Portugal, S.A. 67,640 155 82 468

145,918 174 10,496 2,033

31-Dec-09 Costs related to services consumed

Other costs and losses

Sales and services rendered

Other revenues and gains

SHAREHOLDER

Parpública, Participações Públicas (SGPS), S.A. – – – –


SPdH–Sociedade Portuguesa de Handling, S.A. 77,278 21 10,293 2,342

OTHER RELATED ENTITIES – – – –

ANA–Aeroportos de Portugal, S.A. 62,525 118 1,213 74

139,803 139 11,506 2,416

57. Contingent assets and liabilities

Contingent assets

As at 31 December 2010 and 2009, the Group did not own any contingent assets.

Contingent liabilities

TheBraziliansubsidiaryTAPManutençãoeEngenhariaBrasil,S.A.isinvolvedintaxation,civilandlabourclaims,wheretherisksoflossareclassifiedby the Management as possible, based on the evaluation of its legal consultants, but for which no provision has been constituted. These lawsuits are described below:

Contingency Description Current Developments 31-Dec-10 31-Dec-09

(i) Labour-related FGTS not deposited between 2002/ 2004 and Syndicate action.Probable success of TAP Manutenção e Engenharia Brasil, S.A.

90,329 81,973

(ii) Tax-relatedTax foreclosure relative to the payment of ICMS duties for the importofgoodsorfixedassetsforuseorconsumption

Probability of possible loss in the administrative sphere and remote in the judicialsphere.

74,378 61,808

(iii) Tax-related Tax foreclosure relative to accessory obligations of ICMS.Awaiting the suspension of the call-in of the loan. Probability of success of TAP Manutenção Brasil.

5,590 4,913

(iv) Tax-related IRPJ/CSLL – DIPJ for 2002.Awaitingjudgementandimpugnationwithprobability of success.

71,192 60,862

(v) Tax-relatedAIPOA–insufficientcollectionoftaxonimportsfortheperiodof08/2002 to 12/2004.

Awaitingjudgementandimpugnationwithprobability of success.

13,231 11,089


Labour claims

ρ (i) FGTS not deposited between 2002/ 2004 and Hazard/UnfitnessValue: 90,329 thousand

ThemainlabouractioninvolvesalawsuitfiledbytheunionclaimingtheFGTSdepositbetween2002and2004foralltheemployeesofPortoAlegre.

The other lawsuit refers to the request for additional insalubrity and hazard payments for all employees who work as aircraft maintenance auxiliaries in Porto Alegre. Following the analysis of the expert's report, it was concluded that the activities exercised are not characterised as dangerous or insa-lubrious.TheUnionhasfiledanappealandthelegalactionisnowattheTST(Brasília)awaitingjudgement.

Based on information provided by its lawyers, TAP Manutenção e Engenharia Brasil, S.A. believes that these legal actions will have no materially rel-evantimpactonitsfinancialstatementsasat31December2010.

Tax claims

ρ (ii) Tax foreclosure relative to compulsory payment of ICMS – Tax on the import of goods Value: 74,378 thousand

In March 2009, legal proceedings were brought against TAP Manutenção e Engenharia Brasil, S.A. on the supposed responsibility to pay ICMS on imported goods. The subsidiary contested the legal proceedings and its arguments were considered well founded. In December 2009, the appeal of the State was considered well founded by the Taxpayers' Council. According to the lawyers of this subsidiary, the probability of loss is likely in the administrativesphereandremoteinthejudicialsphere.

ρ (iii) Tax foreclosure relative to accessory obligations of ICMS – Tax on import of goods Value: 5,590 thousand

InDecember2007,thesubsidiarywasnotified,inthecontextoftaxforeclosure,proposedbytheNationalTreasuryoftheStateofSãoPaulo(Guarulhos),relativetoaccessoryobligationsofICMS.Thesubsidiarypledged2%ofitsinvoicing,andsuspendedtheforeclosurebyarguingforareview of the tax foreclosure. The subsidiary is currently awaiting a decision by the Judge in relation to the suspension of the foreclosure. The prob-ability of success on the part of the subsidiary is considered as likely.

ρ (iv) Notice of Infraction of IRPJ/CSLL/PIS/COFINS Value: 71,192 thousand

ThenoticeofinfractionwasfiledagainstthesubsidiaryinApril2007,wheretheFederalRevenueOfficeclaimstaxcreditsofIRPJ,CSLL,PISandCOFINS, from 2002, arguing: (i) the alleged omission of revenues; and (ii) the deduction of non-documented costs by the subsidiary, which, therefore,shouldnothavebeendeductedbythecompany.Inaddition,afineischargedresultingfromdifferencesbetweentheamountsintheaccounting documents and those declared by the subsidiary in its DCTF and DIPJ declarations. The subsidiary presented its administrative defence arguing that there was no omission of revenues and that the costs and expenses not accepted by the Tax Authorities were effectively proven during the tax inspection. The trial is pending at the Administrative Court of First Instance. Based on information provided by its lawyers, TAP Manutenção eEngenhariaBrasil,S.A.believesthattheselegalactionswillhavenomateriallyrelevantimpactonitsfinancialstatementsasat31December2010.

ρ (v) Notice of Infraction of II/IPI/PIS/COFINS – Import Value: 13,231 thousand

ThesubsidiarywasnotifiedbytheFederalReserveOffice,on16October2007,whichconsideredthattheexemptionofIIandIPIandthe0%rateofPISandCOFINSarenotapplicabletotheimportoperationsofthesubsidiary.Thesubsidiary'sdefencehasbeenfiledandawaitstrial.Basedoninformation provided by its lawyers, TAP Manutenção e Engenharia Brasil, S.A. believes that this lawsuit will have no materially relevant impact which mightaffectitsfinancialstatementsasat31December2010.

Other

ρ (i) On 2009 the holding company of the AERUS fund (Brazilian pension fund) alleged that TAP Manutenção e Engenharia Brasil, S.A. had debts that were not recognised in the transfer of liabilities with post-employment benefits to the said fund of approximately 16 million Euros (40 mil-lion R$), since it was co-responsible for the pension fund deficits of other sponsors (VARIG and VASP). According to the assessment made by the Management of TAP Manutenção e Engenharia Brasil, S.A., based on the opinion of its legal advisers, the debt presented by AERUS has no legal justification.TheestimatedprobabilitythatTAPManutençãoeEngenhariaBrasil,S.A.willbeforcedtopaythisdebtisremote.Consequently,asat 31 December 2010, the subsidiary did not record any provision to meet this contingency.

ρ (ii) The subsidiary TAP Manutenção e Engenharia Brasil, S.A. has pledged various assets of 25,852 thousand Euros (30,265 thousand Euros in 2009), relative to guaranties required in tax and labour actions. These assets include vehicles, computers, and components, items of the hangars of Rio de Janeiro and Porto Alegre, amongst others.

ρ (iii) In previous years, Lisbon Municipality appealed to the Supreme Administrative Court, which is currently awaiting the decision of the Portuguese Government, as established in Decree-Law No. 351/89 of October 13, against the transfer to the ownership of TAP S.A. of land, build-ings and other constructions used by TAP, situated next to Lisbon Airport, thus removing them from the public domain. At the same time, a civil action was also filed and its result depends on the outcome of the abovementioned case. TAP S.A. believes that the outcome of these legal actions will have no materially relevant impact on TAP S.A.


58. Breakdown of financial assets and liabilities

Thereconciliationoftheconsolidatedbalancesheetasat31December2010and2009relativetothedifferentcategoriesofthefinancialassetsandliabilities included therein is broken down as follows:

31-Dec-10

Derivative financial instruments

designated as hedging instruments

Credit and receivables

Other financial liabilities

Non-financial assets and liabilities

TOTAL

ASSETS

Other non-current assets – 30,197 – – 30,197

Current receivables – 351,346 – 28,141 379,487

Cash and cash equivalents – 222,677 – – 222,677

TOTAL ASSETS – 604,220 – 28,141 632,361

LIABILITIES

Non-current remunerated liabilities – – (1,028,060) – (1,028,060)

Other non-current liabilities (747) – (285) – (1,032)

Current remunerated liabilities – – (248,995) – (248,995)

Current payables (259) – (600,958) (199,679) (800,896)

TOTAL LIABILITIES (1,006) – (1,878,298) (199,679) (2,078,983)

31-Dec-09


designated as hedging instruments

Credit and receivables


Non-financial assets and liabilities

TOTAL

ASSETS

Other non-current assets – 30,058 – – 30,058

Current receivables 6,285 283,367 – 32,641 322,293

Cash and cash equivalents – 131,077 – – 131,077

TOTAL ASSETS 6,285 444,502 – 32,641 483,428

LIABILITIES

Non-current remunerated liabilities – – (1,037,208) – (1,037,208)

Other non-current liabilities (1,275) – – – (1,275)

Current remunerated liabilities – – (265,330) – (265,330)

Current payables (662) – (511,725) (166,934) (679,321)

TOTAL LIABILITIES (1,937) – (1,814,263) (166,934) (1,983,134)

The table below presents the assets and liabilities measured at fair value as at 31 December 2010 and 2009, according to the following hierarchical levels of fair value established in IFRS 7:

Level 1:fairvalueoffinancialinstrumentsbasedonactivenetmarketpricesontheendofreportingperiod;

Level 2: thefairvalueoffinancialinstrumentsisnotdeterminedbasedonactivemarketprices,butratherthroughtheuseofevaluationmodels.Themaininputsofthese models are observable on the market; and

Level 3:thefairvalueoffinancialinstrumentsisnotcalculatedbasedonactivemarketprices,butratherthroughtheuseofevaluationmodels,whosemaininputsarenot observable on the market.

31-Dez-10 TOTAL Level 1 Level 2 Level 3

Financial Assets at Fair Value recognised in reserves – hedging derivatives – – – –

31-Dec-09 TOTAL Level 1 Level 2 Level 3

Financial Assets at Fair Value recognised in reserves – hedging derivatives 6,285 – 6,285 –


Financial Liabilities at Fair Value recognised in reserves – hedging derivatives 1,006 – 1,006 –


Financial Liabilities at Fair Value recognised in reserves – hedging derivatives 1,937 – 1,937 –


Thefairvalueofthederivativefinancialinstrumentsisrecordedas“accountspayable”whennegativeandas“accountsreceivable”whenpositive.


During2010and2009,thechangesinthefairvalueofthederivativefinancialinstrumentswererecordedasequity.

ThebreakdownofthefairvalueofthederivativefinancialinstrumentsispresentedinNote24.

Other financial assets

These items are recognised at fair value, corresponding to their market value, minus any impairment.

Credit and other receivables

Theseitemsarerecognisedatfairvalue,correspondingtotheirnominalvalue,minusanyimpairmentidentifiedduringtheanalysisofthecreditrisksof the loan portfolios held.


Theseitemsarerecognisedattheiramortisedcost,correspondingtothevalueoftherespectivecashflows,discountedusingtheeffectiveinterestrate associated to each liability.

60. Commitments

As at 31 December 2010 and 2009, the Guarantees provided by the Group are broken down as follows:

31-Dec-10 31-Dec-09

BANK GUARANTEES PROVIDED BY THE HEAD OFFICE OF TAP S.A.

Portuguese State – Agreement covering the Azores routes 4,460 4,910

Natwest – "Acquiring" relative to credit cards 5,855 5,855

Labour Court 2,674 2,522

Aircraft 10,318 6,636

Fuel 2,997 3,116

Other 4,198 3,883

BANK GUARANTEES PROVIDED BY L.F.P., S.A.

Duty free shop operating license concession contracts 6,336 6,699

BANK GUARANTEES PROVIDED BY OTHER COMPANIES OF THE GROUP 399 387

GUARANTEES AND COMFORT LETTERS PROVIDED TO ASSOCIATED COMPANIES

2,854 2,916

SECURITIES PROVIDED TO INSURANCE COMPANIES 762 742

40,853 37,666

ThereinforcementcarriedoutduringthecurrentfinancialyearregardingtheBankguaranteesprovidedbyTAPGrouprelativetoaircraftisessentiallydue to the new operating leasing contracts.

Purchase commitments

Asat31December2010,thefinancialcommitmentsassumedbythesubsidiaryTAPS.A.associatedwithoperatingleasingcontractsforaircrafttotalise 241,871 thousand Euros (259,777 thousand Euros as at 31 December 2009).

In addition, a contract has been signed with Airbus for the future acquisition of twelve Airbus A350, with the option of three further aircraft, to be received between 2014 and 2018.

ACCOUNTANT

Sandra Candeias Matos da Luz

EXECUTIVE BOARD OF DIRECTORS


Voting Member Luís Manuel da Silva RodriguesVoting Member Fernando Jorge Alves SobralVoting Member Luiz da Gama MórVoting Member Manoel José Fontes TorresVoting Member Michael Anthony Conolly


Legal Certification of the Consolidated Accounts

Introduction

1.Wehaveexamined theattachedconsolidatedfinancialstatements of TAP–Transportes Aéreos Portugueses, SGPS, S.A., which include the Consolidated statement of the financialpositionasat31December2010(showingatotal of 2,086,823 thousand euros and negative equity of 264,811 thousand euros, which includes total minority interests of 7,355 thousand euros and a negative con-solidated net income of 57,103 thousand euros), the Consolidated income statement, the Consolidated full income statement, the Consolidated statement of the changesinequityandtheConsolidatedcashflowsofthefinancialyearendedonthatdate,aswellasthecorrespondingNotestotheconsolidatedfinancialstatements.

AuditReport


Opinion

7. Inouropinion,theabovementionedconsolidatedfinancialstate-ments present a fair and appropriate view, in all materially relevant aspects,oftheconsolidatedfinancialpositionofTAP–Transportes Aéreos Portugueses, SGPS, S.A., as at 31 December 2010, the consolidated net income and full income of its operations, the con-solidatedchangesinequityandconsolidatedcashflowsfortheyearended on that date, in accordance with the International Financial Reporting Standards as adopted in the European Union.

Reporting on other legal requirements

8.Itisalsoouropinionthatthefinancialinformationpresentedintheconsolidated management report is concordant with the consoli-datedfinancialstatementsfortheyear.

Emphasis

9. Without affecting the opinion expressed in the previous paragraphs, we would like to draw attention to the fact that half of the share cap-ital of the Company has been lost, a situation that falls under article 35oftheCommercialCompaniesCode,whichrequiresitsrectifica-tion under the conditions established therein.

Lisbon, 6th April 2011OLIVEIRA, REIS & ASSOCIADOS, SROC, LDA.Represented by

José Vieira dos Reis, ROC no. 359

Responsibilities

2. It is the responsibility of the Executive Board of Directors to prepare consolidatedfinancialstatementsthatpresentatrueandappropri-ateviewofthefinancialpositionofthegroupofcompaniesincludedin the consolidation, the consolidated net income and full income of their operations, the consolidated changes in equity and the consoli-datedcashflows,theadoptionofadequateaccountingpoliciesandthe maintenance of appropriate internal control systems, as well as informationonanyrelevantfactsthathaveinfluencedtheactivity,financialpositionornetincomeofthecompaniesincludedintheconsolidation perimeter.

3. Our responsibility consists of expressing a professional and independ-entopinionbasedonourexaminationofthosefinancialstatements.

Scope

4. The examination we carried out was performed in accordance with the Standards and Technical Directives of Review /Auditing issued by the Portuguese Institute of Statutory Auditors (“Ordem dos Revisores OficiaisdeContas”),whichrequirethattheexaminationbeplannedandperformedwiththeobjectiveofobtaininganacceptablelevelofassurancethattheconsolidatedfinancialstatementsarefreefrommaterially relevant distortions. For this purpose, this examination includedtheverificationofasampleofsupportingdocumentsoftheamountsandinformationdisclosedinthefinancialstatementsandtheassessmentoftheestimates,basedonjudgementsandcriteriadefinedbytheExecutiveBoardofDirectors,usedintheirprepara-tion,verificationoftheconsolidationoperations,assessmentoftheadequacy of the adopted accounting policies, their uniform applica-tionandtheirdisclosure,consideringthecircumstances,verificationof the applicability of the going concern principle and assessment of theadequacyoftheoverallpresentationoftheconsolidatedfinan-cial statements.a verificação, numa base de amostragem, do suporte das quantias e divulgações constantes das demonstrações finan-ceiraseaavaliaçãodasestimativas,baseadasemjuízosecritériosdefinidos pelo Conselho de Administração Executivo, utilizadas na sua preparação;

5. Ourexaminationalsocoveredverificationoftheconcordanceofthefinancialinformationpresentedintheconsolidatedmanagementreportwiththeconsolidatedfinancialstatement.

6. We believe that the examination carried out provides an acceptable basis for expressing our opinion.


ProposedApplicationof Results

TAP–Transportes Aéreos Portugueses, SGPS, S.A. presented a nega-tivenetincomeofthevalueof145,079,387Euros,forthefinancialyear of 2010.

Itisthusproposedthatthenegativenetincomeforthefinancialyear be fully transferred to retained earnings, in accordance with current legislation and the Company’s statutes.


In view of the negative amount of the net income at the end of the year, and since equity is negative by 302,151,363 Euros, and in compliance with the provisions in article 35 of the Commercial Companies Code, the Board of Directors shall propose the following for its coverage:

ρ Cash entry to the value of 309,700,000 Euros.

Lisbon, 30th March 2011





Financial Statements

174 STATEMENT OF THE FINANCIAL POSITION175 PROFIT AND LOSS STATEMENT 176 FULL INCOME STATEMENT STATEMENT OF CHANGES IN EQUITY 177 CASH FLOW STATEMENT


178 Introduction 179 1. Summary of the main accounting policies 1.1. Basis of Presentation 1.2.Comparabilityofthefinancialstatements 1.3. First-time adoption of the IFRS180 1.4. New standards, amendments and interpretations of existing standards 1.5. Shareholdings in subsidiaries and associated companies181 1.6. Currency conversion 1.7. Impairment of assets182 1.8. Financial assets 1.9. Current accounts receivable183 1.10. Cash and cash equivalents 1.11. Share capital 1.12. Remunerated liabilities 1.13. Financial costs related to loans 1.14. Income tax 1.15. Provisions184 1.16.Contingent assets and liabilities 1.17. Accrual principle 1.18.Cashflowstatement 1.19. Subsequent events


174 STATEMENT OF THE FINANCIAL POSITION175 PROFIT AND LOSS STATEMENT 176 FULL INCOME STATEMENT STATEMENT OF CHANGES IN EQUITY 177 CASH FLOW STATEMENT


178 Introduction 179 1. Summary of the main accounting policies 1.1. Basis of Presentation 1.2.Comparabilityofthefinancialstatements 1.3. First-time adoption of the IFRS180 1.4. New standards, amendments and interpretations of existing standards 1.5. Shareholdings in subsidiaries and associated companies181 1.6. Currency conversion 1.7. Impairment of assets182 1.8. Financial assets 1.9. Current accounts receivable183 1.10. Cash and cash equivalents 1.11. Share capital 1.12. Remunerated liabilities 1.13. Financial costs related to loans 1.14. Income tax 1.15. Provisions184 1.16.Contingent assets and liabilities 1.17. Accrual principle 1.18.Cashflowstatement 1.19. Subsequent events

184 2. Judgements and estimates 185 3. Financial risk management policies 187 4.Categoriesoffinancialinstruments 5. Other accounts receivable 188 6.Stakes in the share capital of subsidiaries and associated companies 189 7. State 8. Cash and equivalent 9. Share capital 10. Reserves 190 11. Provisions 12. Remunerated liabilities 191 13. Other accounts payable 192 14. Gains/(losses) relative to stakes in share capital 15. External supplies and services 16. Payroll expenses 17. Other costs and losses 18. Depreciation, amortisations and impairment losses 19.Netfinancingcosts 193 20. Tax for the year 21. Net income per share 194 22. Related entities


Statement of the Financial PositionAS AT 31 DECEMBER 2010 AND 2009VALUES IN EUROS

Note 2010 2009

ASSETSNON-CURRENT ASSETS

Accounts receivable 5 220,246,123 104,109,332

Shareholdings in subsidiaries and associated companies 6 25,118,375 21,911,669

5 245,364,498 126,021,001

CURRENT ASSETS

Accounts receivable 75,006,643 35,017,942

State 7 30 7,777

Cash and cash equivalents 8 353,568 20,012

75,360,241 35,045,731

TOTAL ASSETS 320,724,739 161,066,732

EQUITY AND LIABILITIESCAPITAL AND RESERVES

Share capital 9 15,000,000 15,000,000

Legal reserve 10 3,000,000 3,000,000

Currency conversion reserves 10 25,949,018 7,498,109

Other reserves 10 (7,744,323) –

Retainedprofits (193,276,671) (133,258,153)

Retainedprofitsfortheyear (145,079,387) (60,018,518)

TOTAL EQUITY (302,151,363) (167,778,562)

NON-CURRENT LIABILITIES

Provisions 11 220,775,124 64,078,566

Remunerated liabilities 12 54,460,072 4,866,953

Accounts payable 13 3,237,522 3,475,542 278,472,718 72,421,061

CURRENT LIABILITIES

Remunerated liabilities 12 1,993,342 142,378

Accounts payable 13 342,410,042 256,274,337

State 7 – 7,518 344,403,384 256,424,233

TOTAL LIABILITIES 622,876,102 328,845,294

TOTAL EQUITY AND LIABILITIES 320,724,739 161,066,732

The notes are an integral part of the Statement of the Financial Position as at 31 December 2010.


Profit and Loss Statement AS AT 31 DECEMBER 2010 AND 2009VALUES IN EUROS

Note 2010 2009

Gains/(losses) relative to shareholdings 14 (142,145,502) (25,175,418)

(142,145,502) (25,175,418)

COSTS AND LOSSES

External supplies and services 15 (733,257) (66,506)

Payroll expenses 16 (4,906) (2,740)

Impairment of accounts receivable 5 (7,951) –

Other costs and losses 17 (154,145) (7,651)(143,045,761) (25,252,315)

Depreciation, amortisations and impairment losses – (31,600,000)

NET OPERATING INCOME 18 (143,045,761) (56,852,315)

Netfinancingcosts 19 (2,033,626) (3,166,203)

PRE-TAX NET INCOME (145,079,387) (60,018,518)

Income tax 20 – –

NET INCOME FOR THE YEAR (145,079,387) (60,018,518)

RETAINED PROFITS FOR THE YEAR (145,079,387) (60,018,518)

NET INCOME PER SHARE

Basic and diluted net income per share 21 (97) (40)

ThenotesareanintegralpartoftheProfitandLossStatementasat31December2010.


Full Income Statement AS AT 31 DECEMBER 2010 AND 2009VALUES IN EUROS

Statement of Changes in EquityAS AT 31 DECEMBER 2010 AND 2009VALUES IN EUROS

2010 2009

RETAINED PROFITS FOR THE YEAR (145,079,387) (60,018,518)

Currency conversion differences 18,450,909 13,339,698

INCOME RECORDED DIRECTLY IN EQUITY 18,450,909 13,339,698

TOTAL INCOME AND COSTS RECORDED IN THE YEAR (126,628,478) (46,678,820)

ATTRIBUTABLE TO:

TAP SGPS Shareholders (126,628,478) (46,678,820)

Minority interests – –

(126,628,478) (46,678,820)

The notes are an integral part of the Full Income Statement as at 31 December 2010.

ShareCapital

Adjustments of shareholdings

Legal reserve

Currency conversion

reserves

Otherreserves

Profits retained

Retained profits

for the yearTOTAL

EQUITY AS AT 01 JANUARY 2009 (POC) 15,000,000 (7,364,032) 3,000,000 (7,452,093) – 51,606,532 (289,352,800) (234,562,393)

First adoption of the new accounting standards – 7,364,032 – 1,610,504 – 104,488,115 – 113,462,651

EQUITY AS AT 01 JANUARY 2009 (IFRS) 15,000,000 – 3,000,000 (5,841,589) – 156,094,647 (289,352,800) (121,099,742)

Application of the net income for 2008 – – – – – (289,352,800) 289,352,800 –

Currency conversion of the extension of the net investment – – – 13,339,698 – – – 13,339,698

Fair value of derivative financialinstruments* – – – – – – – –

Other movements – – – – – – – –

Retainedprofitsfortheyear – – – – – – (60,018,518) (60,018,518)

EQUITY AS AT 31 DECEMBER 2009 15,000,000 – 3,000,000 7,498,109 – (133,258,153) (60,018,518) (167,778,562)

Application of the net income for 2009 – – – – (60,018,518) 60,018,518 –

Merger with Reaching Force – S.G.P.S., S.A. – – – – (7,744,323) – – (7,744,323)

Currency conversion of the extension of the net investment – – – 18,450,909 – – – 18,450,909

Retainedprofitsfortheyear – – – – – – (145,079,387) (145,079,387)

EQUITY AS AT 31 DECEMBER 2010 15,000,000 – 3,000,000 25,949,018 (7,744,323) (193,276,671) (145,079,387) (302,151,363)

The notes are an integral part of the Statement of Changes in Equity as at 31 December 2010.


Cash Flow Statement AS AT 31 DECEMBER 2010 AND 2009VALUES IN EUROS

Note 2010 2009

OPERATING ACTIVITIES

Receipts from customers – –

Payments to suppliers (55,599) (64,429)

Payments to staff (1,040) (2,080)

Flows from operations (56,639) (66,509)

(Payments)/receipts of income tax (2,004) (618)

Other (payments)/receipts related to operating activity (405,488) (2,378,412)

FLOWS FROM OPERATING ACTIVITIES (1) (464,131) (2,445,539)

INVESTMENT ACTIVITIES

Receipts from:

Dividends 2,795,000 2,644,397

Loans granted 35,000,000 500,000

Interest and similar income 293,677 38,637

38,088,677 3,183,034

Payments relative to:

Loans granted (168,328,447) (89,602,000)

(168,328,447) (89,602,000)

FLOWS FROM INVESTMENT ACTIVITIES (2) (130,239,770) (86,418,966)

FINANCING ACTIVITIES

Receipts from:

Loans obtained 388,960,003 190,021,000

Payments relative to:

Loans obtained (257,536,942) (102,162,000)

Interest and similar costs (385,604) (1,519,772)

(257,922,546) (103,681,772)

FLOWS FROM FINANCING ACTIVITIES (3) 131,037,457 86,339,228

VARIATION IN CASH AND CASH EQUIVALENTS (1)+(2)+(3) 333,556 (2,525,277)

EFFECT OF EXCHANGE RATE DIFFERENCES – –

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 20,012 2,545,289

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 8 353,568 20,012

The notes are an integral part of the Cash Flow Statement as at 31 December 2010.


Introduction

TAP–Transportes Aéreos Portugueses, SGPS, S.A. (“Company” or “TAP SGPS”) isastate-ownedlimitedcompanywithheadofficeinLisbon.Itwasincor-porated on 25 June 2003, under Decree-Law number 87/2003, of 26 April, and its share capital was fully subscribed and paid in kind by Parpública–Participações Públicas, SGPS, S.A., through transfer of the shares representing the total share capital of Transportes Aéreos Portugueses, S.A. (“TAP S.A.”).

Registered Office Aeroporto de Lisboa, Edifício 25 Share Capital Euros 15,000,000Taxpayer Number 506 623 602

ThecorporateobjectoftheCompanyisthemanagementofshare-holdings in other companies as an indirect form of carrying out economic activities.

ThesefinancialstatementswereapprovedbytheBoardofDirectors on 30 March 2011

The members of the Board of Directors who sign this report declare that, to the best of their knowledge, the informa-tion provided herein was drafted in conformity with the applicable Accounting Standards, presenting a true and appropriateviewoftheassetsandliabilities,financialsitu-ation and results of the Company.

Notes to the Financial Statements


1. Summary of the main accounting policies

Themainaccountingpoliciesappliedinthepreparationoftheseconsolidatedfinancialstatementsaredescribedbelow.

1.1.Basis of Presentation

ThefinancialstatementswerepreparedinaccordancewiththeInternationalFinancialReportingStandardsadoptedbytheEuropeanUnion(IFRS–previously designated International Accounting Standards – IAS), issued by the International Standards Accounting Board (IASB) and Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) or by the former Standing Interpretations Committee (SIC), in force onthedateofpreparationofthesaidfinancialstatements.

Theattachedfinancialstatementswerepreparedundertheassumptionofthecontinuityofthebusiness,basedontheCompany'saccountingledg-ers and records at historical cost.

ThepreparationofthefinancialstatementsrequirestheuseofrelevantestimatesandjudgementsintheapplicationoftheGroup´saccountingpoli-cies.Themainstatementsthatinvolveamoresignificantlevelofjudgementorcomplexity,orthemoresignificantassumptionsandestimatesforthepreparationofthesaidfinancialstatementsaredisclosedinNote2.

1.2.Comparability of the financial statements

The values included in the present Financial Statements are comparable with those of the previous year.

1.3.First-time adoption of the IFRS

The Company adopted the International Financial Reporting Standards, issued and in force on 1 January 2010, and applied these standards ret-rospectively for all the periods presented. The transition date was 1 January 2009 and TAP SGPS prepared its opening balance sheet on that date, considering the exemptions and exclusions to other existing standards permitted by IFRS 1 – First-time adoption of the International Financial Reporting Standards.

IFRS 1 permits exemptions, regarding namely retrospective application, relative to the treatment recommended by other IFRS, with TAP SGPS having chosen the following exemption on the transition date:

i) Accumulated transposition differences TheCompanychosetotransfertoretainedprofitstheaccumulatedvalue,onthetransitiondate,ofthecurrencyconversionreservesofthefinancialstatements of the subsidiaries. It should be noted that this decision has no impact whatsoever on the reported equity.

Reconciliation of the IFRS transition adjustmentsAs at 31 December 2009 and 1 January 2009, the adoption of the accounting principles and policies in accordance with the IFRS had the following result on equity:

Reconciliation of EquityTheIFRStransitionadjustmentswithimpactontheCompany'sequityasat1January2009andsubsequentlyasat31December2009andtherespec-tive impact on net income as at 31 December 2009 are as follows:

Equity Adjust.As at 31-DEC-09 (date of the last

report in POC)

As at 01-JAN-09 (transition date)

Net income for 2009 (date of the last

report in POC)

EQUITY (POC) (289,802,431) (234,562,393) (17,754,883)

Adjustmenttofinancialshareholdings 1) 114,445,730 113,462,651 (49,841,774)

Annulment of Goodwill amortisations 2) 7,578,139 – 7,578,139

Totaladjustments 122,023,869 113,462,651 (42,263,635)

EQUITY (IFRS) (167,778,562) (121,099,742) (60,018,518)

Breakdown of the adjustmentsTheadjustmentsreferredtoaboveresultfromtheidentifieddifferencesbetweenthePOCandIFRSrules,summarisedasfollows:

1) Under the transition to the IFRS, TAP SGPS no longer applies the equity method in the valuation of the financial investments in its individ-ual financial statements, which are considered at deemed cost on the transition date. In the cases where it was negative and provisioned (149,721,402 Euros), TAP SGPS considered that there was no additional liability in the situation since (i) it did not incur additional obligations and (ii) the present value of the future cash flows of the said investments are sufficient to meet their liabilities. As a result of the abovemen-tionedalteration,theCompanycarriedoutthetransitionadjustmentofthetotalvalueof113,462,651Euros.

2) TAP SGPS adopted the IFRS, with effect reported as at 1 January 2009. Consequently, the goodwill amortisations carried out after that date wereannulledandtherespectivevalue,inthedifferentcasesapplicable,issubject,sincethen,toannualimpairmenttests.Asaresultoftheabovementionedalteration,theCompanycarriedoutthetransitionadjustmentofthetotalvalueof7,578,139Euros.


1.4. New standards, amendments and interpretations of existing standards

TheinterpretationsandamendmentsoftheexistingstandardsidentifiedbelowareenforceablebytheIASB,forfinancialyearswhichbeganon1January 2010:

New standards in force Date of application

IFRS 3 (review) – Business combinations 1 January 2010

IAS27(review)–Consolidatedandseparatefinancialstatements 1 January 2010

IFRS 5 (Improved 2008) – Non-current assets held for sale and discontinued operations 1 January 2010

IFRS 1 (amendment) – First-time adoption of IFRS 1 January 2010

IFRS2(amendment)–Share-basedpayments–transactionspaidfinanciallybytheGroup 1 January 2010

IAS 39 (amended) – Financial instruments – Items eligible for coverage 1 January 2010

IFRIC 12 – Service concession arrangements 1 January 2010

IFRIC 15 – Agreements for construction of real estate 1 January 2010

IFRIC 16 – Hedges of a net investment in a foreign operation 1 January 2010

IFRIC 17 – Distributions of non-cash assets to owners 1 January 2010

IFRIC 18 – Transfer of assets from customers 1 January 2010


Furthermore, as part of the process to review the consistency of the practical application of the IAS/IFRS, the IASB decided to improve the standards inordertoclarifysomeofidentifiedinconsistencies.ThemostsignificantimprovementsrefertotheamendmentsmadetoIAS17,IAS36andIAS38.

The introduction of these interpretations and amendments of the standards referred to above did not have any relevant impact on the Company's financialstatements.

New standards and interpretations whose application is not mandatory as at 31 December 2010:There are new standards, amendments and interpretations of existing standards, which, in spite of having been published, are enforceable only for annual periods which begin on or after 1 January 2011. The company has decided not to adopt the following standards in advance:

Annual improvement of standards in 2009 (applicable for years commencing on or after 1 January 2010) Date of application *

IAS 17 – Leasing 1 January 2010

IAS 36 – Impairment of Assets 1 January 2010

IAS 38 – Intangible Assets 1 January 2010


New standards not approved by the European Commission Date of application *

IAS 24 (amendment) – Related parties 1 January 2010

IFRS 9 (new) – Financial instruments – classification and measurement 1 January 2013

IFRIC 19 – Extinguishing financial liabilities with equity instruments 1 July 2011

PROJECT OF ANNUAL IMPROVEMENT OF STANDARDS IN 2010

IFRS 1 – First-time adoption of IFRS 1 January 2011

IFRS 3 – Business combinations 1 January 2011

IFRS 7 – Financial instruments – Disclosures 1 January 2011

IAS 1 – Presentation of the Financial Statements 1 January 2011

IAS 27 – Consolidated and separate financial statements 1 January 2011

IAS 34 – Interim financial reporting 1 January 2011

IFRIC 13 – Customer loyalty programmes 1 January 2011


1.5.Shareholdings in subsidiaries and associated companies

Investments representing shareholdings in subsidiaries and associated companies are recorded at acquisition cost, minus impairment losses, when they occur.

After the interest of the investor has fallen to zero, TAP SGPS recognises a liability in order to meet any additional liabilities arising from (i) legal or constructive obligations incurred or payments made in favour of subsidiaries and associated companies, (ii) expectations of the generation of cash flowsbythesubsidiaryorassociatedcompanywhichareinsufficienttomeetanylegalorconstructiveliabilitiesincurred,and(iii)theimpossibilityofcalculating the fair value of the said investments reliably.

Dividendsreceivedfromsubsidiaryandassociatedcompaniesarerecordedasfinancialincomewhenattributed.

UnderthetransitiontotheIFRS,TAPSGPSnolongerappliestheequitymethodinthevaluationofthefinancialinvestmentsinitsindividualfinancialstatements, which are considered at deemed cost on the transition date.


1.6. Currency conversion

i) Functional and reporting currencyTheitemsincludedintheCompany'sfinancialstatementsaremeasuredusingthecurrencyoftheireconomicenvironment,theEuro.Therefore,TAPSGPSfinancialstatementsandtherespectiveattachednotesarepresentedinEuros,unlessexplicitlyindicatedotherwise.

ii) Transactions and balancesTransactions in currencies different from the Euro are converted into the functional currency using the exchange rate on the date of the transactions. Any gains or losses arising from the payment/ receipts of the transactions, as well as from the conversion at the exchange rate at the end of the report-ingperiodoftheassetsandliabilitiesexpressedinforeigncurrency,arerecognisedintheprofitandlossstatementunderthecostsnetoffinancingitem, when related to loans or under operating gains or losses, with the exception of the updating of the extension of the net investment in the sub-sidiaries where the currency conversion updating is considered as currency conversion reserves under Equity.

iii) Exchange rates usedThe exchange rates used in the conversion of balances expressed in foreign currency were as follows:

Currency 2010 2009

USD 1.3362 1.4406

BRL 2.2177 2.5113

1.7. Impairment of assets

i) Impairment of non-financial assetsThe assets of TAP SGPS are reviewed on the date of each balance sheet in order to detect indications of any possible impairment losses. If this indi-cation exists, the recoverable value of the asset is valued.

The recoverable value of the assets of TAP SGPS is determined for assets where there is indication of potential impairment losses. Whenever the book valueofanasset,orofacashflowgeneratingunitinwhichtheassetisincluded,exceedstherecoverablevalue,itisreviseddownwardstotherecov-erablevaluewiththisimpairmentlossbeingrecognisedthroughprofitorlossfortheyear.

ii) Determination of the recoverable value of the assetsThe recoverable value of the accounts receivable corresponds to the present value of the expected future receipts with the discount rate used being the effective interest rate implicit in the original operation.

For all other assets, the recoverable value is the highest value between its net sales price and its use value.

Inthedeterminationoftheusevalueofanasset,theestimatedfuturecashflowsarediscountedusingadiscountratebeforetaxwhichreflectsthecurrentmarketevaluationsofthetimevalueofmoneyandthespecificrisksofthesaidasset.

Therecoverablevalueofassetswhichdonotinthemselvesgenerateindependentcashflows,isdeterminedtogetherwiththecashflowgeneratingunit where the assets are included.

Animpairmentlossrecognisedinamediumandlongtermreceivablevalueisreversedonlywhenthejustificationfortheincreaseoftherespectiverecoverable value is based on an event which takes place after the date of recognition of the impairment loss.

Impairment losses related with other assets are always reversed when there are changes in the estimates used to determine the respective recoverable value. Impairment losses are reversed up to the value that the asset would have had if the impairment loss had not been recognised.

iii) Impairment of financial assetsTAPSGPSanalyses,oneverybalancesheetdate,whetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetsisimpaired.

iv) Debtors and other financial assetsImpairmentlossesarerecordedwhenthereisobjectiveindicationthatTAPSGPSwillnotreceivealltheamountstowhichitwasentitledinaccord-ance with the original terms of the established contracts.

Theadjustmentduetoimpairmentlossesisdeterminedbythedifferencebetweentherecoverablevalueandthebalancesheetvalueofthefinancialasset,andisrecordedasaprofitorlossfortheyear.Thebalancesheetvalueoftheseassetsisreviseddownwardstotherecoverablevaluethroughtheuseofanadjustmentsaccount.Whenavaluereceivablefromcustomersanddebtorsisconsideredirrecoverable,itiswrittenoffthroughtheaccountofadjustmentsduetoimpairmentlosses.Anysubsequentrecoveriesofvalueswhichhavebeenwrittenoffarerecordedasprofitorloss.

When the overdue values receivable from customers or other debtors are renegotiated, these values are no longer considered overdue but are treated as new credit.


1.8. Financial assets

Financial assets are recognised in the balance sheet on the negotiation or contracting date, which is the date on which the Company undertakes to acquireordisposeoftheasset.Initially,financialassetsarerecognisedatfairvalueplusdirectlyassignedtransactioncosts,exceptforassetsatfairvaluethroughprofitorlosswherethetransactioncostsarerecognisedimmediatelythroughprofitorloss.Theseassetsarederecognisedwhen:(i)theCompany'scontractualrightsexpireonthereceiptoftheircashflow;(ii)theCompanyhassubstantiallytransferredalltherisksandbenefitsassoci-atedtotheirownership;or(iii)eveniftheCompanyretainspart,butnotsubstantiallyalltherisksandbenefitsassociatedtotheirownership,ithastransferred the control over the assets.

Thefinancialassetsandliabilitiesarecompensatedandpresentedatnetvalue,whenandonlywhen,theCompanyhastherighttocompensatetherecognised values and intend to settle them at their net value.

TAPSGPSclassifiesitsfinancialassetsintothefollowingcategories:financialassetsatfairvaluethroughprofitorloss,loansgrantedandaccountsreceivable,financialassetsavailableforsaleandinvestmentsheld-to-maturity.Theclassificationdependsonthepurposeforwhichtheinvestmentwasacquired.Theclassificationismadewhentheinvestmentsarerecorded,withthisclassificationbeingreviewedoneachreportingdate.

All procurements and disposals of these investments are recognised on the respective purchase and sale contracts signing date, regardless of the financialsettlementdate.

Investments are initially recorded at their acquisition value, with their fair value being equivalent to the price paid, including transaction costs. Thereafter,measurementdependsonthecategoryintowhichtheinvestmentisclassified,asfollows:

Financial assets at fair value through profit or lossNon-derivativefinancialassetsareclassifiedintothiscategoryifacquiredforthepurposeofsaleintheshorttermorifdesignatedsobythemanage-ment. This category also includes derivatives which do not qualify for hedging accountancy. Any gains and losses arising from the alteration on the fairvalueofassetsmeasuredatfairvaluethroughprofitorlossarerecognisedasaprofitorlossoftheperiodwhentheyoccur.

Financial assets available for saleFinancialassetsavailableforsalearenon-derivativefinancialassetsthatareeitherrecordedinthiscategoryorarenotclassifiedintoanyothercatego-ries. They are included in non-current assets, unless the management intends to dispose of the investment within 12 months after the balance sheet date.Thesefinancialinvestmentsarerecognisedatmarketvalue,definedastherespectivestockmarketpriceontheendofthereportingperiod.

Ifthereisnoactivefinancialmarket,theCompanydecidesthefairvaluethroughtheapplicationofvaluationtechniques,whichincludetheuseofrecentcommercialbusiness,referencetootherinstrumentswithsimilarcharacteristics,discountedcash-flowanalysisandoptionpricingmodelsmodifiedtoreflecttheissuer’sspecificcircumstances.

Potentialgainsandlossesarisinginthiswayarerecordeddirectlyinthefairvaluereserveuntilthefinancialinvestmentissold,received,ordisposedofin any way, at which time the accumulated gain or loss formerly recognised in the fair value reserve is included in net income for the period.

If there is no market value or if it is not possible to determine it, the said investments are maintained at acquisition cost. Any loss of value is recognised asanimpairmentlosswhenjustified.

TheCompanyassesses,oneachbalancesheetdate,whetherthereisobjectiveevidencethatafinancialassetorgroupoffinancialassetshasunder-goneanimpairmentloss.Ifthereisaprolongeddecreaseinthefairvalueofthefinancialassetsavailableforsale,thenthecumulativeloss–measuredasthedifferencebetweentheacquisitioncostandcurrentfairvalue,minusanyimpairmentlossonthatfinancialassetpreviouslyrecognisedasprofitorloss–isannulledfromtheequityandrecognisedasprofitorlossfortheperiod.

Arecognisedimpairmentlossonfinancialassetsavailableforsaleisreversedifthelosshasbeencausedbyspecificexternaleventsofanexceptionalnature that are not expected to recur but which subsequent external events have reversed. Under these circumstances, the reversal does not affect theprofitandlossstatement,andthesubsequentpositivefluctuationoftheassetisrecordedunderthefairvaluereserve.

Held-to-maturity InvestmentsHeld-to-maturityinvestmentsarenon-derivativefinancialassets,withfixedordeterminablepaymentsandfixedmaturitiesthattheCompanyhastheintention and capacity to hold to the maturity. Investments in this category are recorded at amortised cost through the effective interest rate method.

Loans granted and accounts receivableLoansgrantedandaccountsreceivablearenon-derivativefinancialassetswithfixedordeterminablepaymentsandnotlistedonanactivemarket.They arise when the Company provides money, goods or services directly to a debtor, with no intention of negotiating the debt.

Theyareincludedincurrentassets,exceptformaturitiesabove12monthsafterthebalancesheetdate,inwhichcasetheyareclassifiedasnon-current assets.

1.9. Current accounts receivable

Customer balances and other current receivables are initially recorded at fair value and subsequently recognised at amortised cost, minus the impair-ment losses required to place them at their expected net realisable value (Note 5).

ImpairmentlossesarerecordedwhenthereisobjectiveevidencethattheCompanywillnotreceivethesaidbalancesinaccordancewiththeoriginalconditions of the accounts receivable.


1.10. Cash and cash equivalents

The cash and cash equivalents item includes cash, bank deposits and other short-term investments with initial maturity up to 3 months, which can be mobilisedimmediatelywithoutanysignificantriskofvaluefluctuations.Onthecashflowstatement,thisitemalsoincludesbankoverdrafts,whicharerecordedinthestatementofthefinancialposition,incurrentliabilities,under"Remuneratedliabilities".

1.11. Share capital

Ordinary shares are recorded as equity. Costs directly assigned to the issuance of new shares or options are recorded on equity as a deduction, net of tax, from the value received as a result of the issuance.

Costs directly imputable to the issuance of new shares or options, for the acquisition of a business are included in the acquisition cost, as part of the value of the purchase.

1.12. Remunerated liabilities

Remunerated liabilities are recognised initially at fair value, net of transaction costs incurred, and are subsequently stated at amortised cost. Any dif-ferencebetweenthereceipts(netoftransactioncosts)andtherepaymentvalueisrecognisedintheprofitandlossstatementovertheperiodofthedebt, using the effective interest rate method.

Remunerateddebtisclassifiedundercurrentliabilities,unlesstheCompanyhasanunconditionalrighttopostponethesettlementoftheliabilityforatleast12monthsafterthefinancialreportingdate(Note12).

1.13. Financial costs related to loans

Financialcostsrelatedtoloansareusuallyrecognisedasfinancialcostsinaccordancewiththeaccrualprinciple.

Thefinancialcostsofloansdirectlyrelatedtotheacquisition,construction(iftheperiodofconstructionordevelopmentexceedsoneyear)ortheproductionoffixedassetsarecapitalised,andbecomepartoftheasset’scost.

The capitalisation of these costs begins after the start-up of the preparations for the construction or development of the asset and is suspended after thebeginningofitsuseorwhentheexecutionoftheprojectinquestionissuspendedorsubstantiallyconcluded.

Anyrevenuedirectlyrelatedtoaspecificinvestmentissubtractedfromthecostoftheasset.

1.14. Income tax

Incometaxfortheperiodincludescurrentanddeferredtaxes.Incometaxisrecordedintheprofitandlossstatement,exceptwhenitisrelatedtoitemswhicharerecogniseddirectlyasequity.Thevalueofthecurrentincometaxpayableisdeterminedbasedonearningsbeforetax,adjustedinaccordance with tax rules in force.

Deferred tax is calculated on the basis of the liability shown on the balance sheet, over temporary differences between the book value of the assets and liabilities and the respective tax base. In order to calculate the deferred tax, the tax rate used is that expected to be in force during the period when the temporary differences will be reversed.

Deferredtaxassetsarerecognisedasassetswheneverthereisreasonableassurancethatfutureprofitwillbegenerated,againstwhichtheycanbeused. Deferred tax assets are reviewed periodically and revised downwards whenever it no longer appears probable that they can be used.

Deferredtaxassetsarerecognisedwheneverthereisreasonableassurancethatfuturetaxableprofitwillbeavailablefortheuseofthetemporarydifference. Deferred tax liabilities are recognised for all taxable temporary differences, except those related to: i) the initial recognition of goodwill; or ii) the initial recognition of assets and liabilities, which do not result from a business concentration, and which on the date of the transaction do not affect the book value of net income or net income for tax purposes. However, taxable temporary differences related to investments in subsidiaries should not be recognised when: i) the parent company has the capacity to control the period of the reversal of the temporary difference; and ii) it is probable that the temporary difference will not be reversed in the near future.

Deferred taxes are recorded as costs or revenues for the period, unless they arise from values recorded directly under equity, in which case the deferred tax is also recorded under the same item.

1.15. Provisions

Provisions are recognised whenever the Company has a present legal or constructive obligation, as a result of past events, where it is likely than an outflowofresourceswillberequiredtosettletheobligationandthevalueoftheobligationmaybeestimatedreliably.

Provisionsforfutureoperatinglossesarenotrecognised.Provisionsarereviewedonthebalancesheetdateandareadjustedtoreflectthebestesti-mate on that date (Note 11).


1.16. Contingent assets and liabilities

Contingentliabilitiesrelativetowhichthelikelihoodofanoutflowoffundstothedetrimentoffutureeconomicbenefitsisonlyapossibilityarenotrecognisedinthefinancialstatements,butaredisclosedinthenotes,unlessthepossibilityoftheoccurrenceofanactualoutflowoffundsaffectingfutureeconomicbenefitsisremote,inwhichcasetheyarenotdisclosed.

Provisions for liabilities that meet the conditions established in Note 1.15 are recognised.

Contingentassetsarenotrecognisedinthefinancialstatements,butaredisclosedinthenoteswhenafutureeconomicbenefitisprobable.

1.17. Accrual principle

Income and costs are recorded in the period to which they refer, independently of their payment or receipt, in accordance with the accrual principle. The differences between the values received and paid and the corresponding revenues and costs are recorded as assets or liabilities, if they qualify as such.

1.18. Cash flow statement

Thecashflowstatementispreparedinaccordancewiththedirectmethod.TheCompanyclassifiesassetswithmaturitybelowthreemonthsandforwhichtheriskofalterationofvalueisinsignificantundertheitemofcashandcashequivalents.Onthecashflowstatement,thisitemalsoincludesbankoverdrafts,whicharerecordedinthestatementofthefinancialposition,incurrentliabilities,as"Remuneratedliabilities".

Thecashflowstatementisclassifiedintooperating,investmentandfinancingactivities.Operatingactivitiesincluderevenuesfromcustomersandpayments to suppliers, staff and others related to the operating activity.

Thecashflowsofinvestmentactivitiesinclude,namely,acquisitionsanddisposalsofinvestmentsinparticipatedcompaniesandrevenuesandpay-ments from the sale and purchase of tangible and intangible assets.

Financingactivitiesincludesnamely,paymentsandrevenuesrelatedwithloansreceived,financialleasingcontracts,thepurchaseandsaleofownshares and the payment of dividends.

1.19. Subsequent events

Eventswhichhaveoccurredafterthedateofthestatementofthefinancialpositionandprovideadditionalinformationonconditionsexistingatthatdatearereflectedinthefinancialstatementsfortheperiod.

Eventswhichhaveoccurredafterthedateofthestatementofthefinancialpositionandprovideadditionalinformationonconditionsthatoccurafterthatdatearedisclosedinthenotestothefinancialstatements,iftheyaremateriallyrelevant.

2. Judgements and estimates

ThepreparationofthefinancialstatementsrequiresthattheCompany'smanagementmadejudgementsandestimateswhichaffectthevaluesofincome, costs, assets, liabilities and disclosures on the date of the balance sheet.

TheseestimatesaredeterminedbythejudgementsofthemanagementofTAPSGPS,based:(i)onthebestinformationandknowledgeofpresentevents and, in some cases, on reports prepared by independent experts, and (ii) on the actions the Company considers it may develop in the future. However, on the execution date of the operations, their results may be different from these estimates.

Theestimatesandassumptionsthatpresentasignificantriskofleadingtoamaterialadjustmentinthebookvalueoftheassetsandliabilitiesinthefollowing year are presented below:

i) Impairment of shareholdingsAs a rule, the recording of impairment in an investment in accordance with the IFRS is made when the balance sheet value of the investment exceeds thecurrentvalueofthefuturecashflows.Thecalculationofthecurrentvalueoftheestimatedcashflowsandthedecisiontoconsidertheimpair-mentaspermanentinvolvesjudgementandsubstantiallytakesinaccountthemanagement'sanalysisofthefuturedevelopmentofitsassociatedcompanies. For the calculation of impairment, market prices are used when available, or other valuation parameters based on the information pro-videdbytheassociatedcompanies.Inordertodefineifanimpairmentispermanent,theCompanyconsidersthecapacityandintentionofholdingtheinvestmentforareasonableperiodoftimewhichissufficientforaforecastoftherecoveryofthefairvalueupto(orabove)thebalancesheetvalue, including an analysis of factors such as the expected net income of the associated company, the economic circumstances and the conditions of the sector. The recoverable values of the cash generating units are determined based on the calculation of the use values. These calculations require the use of estimates.

ii) ProvisionsThe Company periodically analyses any obligations which might arise from past events and which should be recognised or disclosed.

Thesubjectivityinherenttothedeterminationoftheprobabilityandvalueoftheinternalresourcesrequiredtopaytheobligationsmightleadtosignificantadjustments,whetherthroughvariationoftheassumptionsused,orthroughthefuturerecognitionofprovisionspreviouslydisclosedascontingent liabilities.


3. Financial risk management policies

TAP SGPS, as a holding company (SGPS), directly and indirectly develops management activities related with its participated companies. Therefore, theCompany'scompliancewithitsobligationsdependsonthecashflowsgeneratedbyitsparticipatedcompanies.TheCompanythusdependsonthepossibledistributionofdividendsbyitssubsidiaries,thepaymentofinterest,therepaymentofloansgrantedandothercashflowsgeneratedby these companies.

ThefinancialriskmanagementofTAPSGPS,asaCompanyresponsibleforthestrategiccoordinationofTAPGroup,takesondimensionsandimplicationswhicharemuchbroaderthanthoseofthefinancialmanagementappliedtoacompanywhoseactivityislimitedtoaspecificareaofactivity.InitsstatutorycapacityastheParentCompanyofGrupo,TAPSGPSassesses,reflectsanddecidesonthemajorguidelinesofitsparticipatedcompanies and takes long term decisions relative to investment and divestment in shareholdings according to their structural relevance for the functioning of the Group.

However, the consequence of the strategic and long term nature of the Company's action, which cannot be unconnected from the assessment of theeconomiccircumstancesandfluctuations,sometimesviolent,ofthemarketsinwhichtheGroupoperates,isapolicyofdecentralisationandsubsidiarityinthespecificactionsofhedgingagainstthefinancialorcommodity-relatedriskofitsparticipatedcompanies.ThereforetheindividualcompaniestakeandimplementtheirowndecisionsinobservanceofthestrategicguidelinesdefinedfortheGroup,inanautonomousmanner.

Inparticular,TAPS.A.whichtendstorepresentaproportionofapproximately90%oftheGroup'sincome,carriesoutnumerousriskmanagementactions in the areas of debt, liquidity and treasury management, in the areas of protection against interest rate risk or exchange rate risk, in the area of risk of exposure to the price of fuel, in the management of market risks, and so on. Other companies of the Group, such as TAP Manutenção e Engenharia Brasil, S.A. also manage their market exposure and credit risk, for example, in accordance with their geographical base of action and the business opportunities present at any given time.

TAP SGPS, as the aggregating entity of the Group, carries out intra-group liquidity distribution operations which are remunerated at market levels and in accordance with the actual conditions obtained by the participated companies which present high liquidity surpluses and usually place them on the market.

ThefinancialexposureofTAPSGPSessentiallyresultsfromtherepercussiononitsbalancesheetoftheperformanceoftheparticipatedandassoci-ated companies, where TAP S.A., TAP Manutenção e Engenharia Brasil, S.A. and SPdH – Serviços Portugueses de Handling, S.A. (“SPdH”) assume a determinant importance.

Credit and liquidity risk

Creditriskisdefinedastheprobabilityoftheoccurrenceofafinanciallossarisingfromnon-compliancewithcontractualobligationsofpaymentof a counterparty. The Company is a Holding Company, and has no relevant commercial activity apart from the normal activities of a manager of a portfolio of shareholdings and those relative to the services provided to its subsidiaries. Therefore, the Company is only exposed on a regular basis to creditriskarisingfromfinancialinstruments(investmentsanddepositsinbanksandotherfinancialinstitutions)orloansgrantedtoitssubsidiaries.

The credit risk of TAP SGPS namely results from the prospects and potentialities of the participated companies, within the global economic context andunderthenationalandinternationallegalframework,whichmightbereflectedinthesaleofshareholdingswithradicallydifferentcharacteris-tics, as happened in the cases of SEAP–Serviços, Administração e Participações, Lda. and SPdH.

Moreover, TAP SGPS might in some situations also be exposed to credit risk arising from its portfolio management activity (sale of shareholdings), but in these exceptional situations, mechanisms and actions are implemented, decided on a case-by-case basis (requirement of bank guarantees, obtaining of collateral, among others).

Inthecaseofloanstosubsidiaries,thereisnospecificcreditriskmanagementpolicy,sincethegrantingofloanstosubsidiariesispartofthenormalactivity of the Company.

The table below shows information related with the Company's liquidity as at 31 December 2010 and 2009, as well as balances of accounts receiv-able,whichreflectthecreditriskonthosesamedates:

2010 2009

ASSETS


State 30 7,777

Accounts receivable 75,006,643 35,017,942

75,360,241 35,045,731


Interest rate risk

As an individual Company, TAP SGPS does not usually carry out operations with derivatives to hedge against exposure to interest rates, which are implementedbyTAPS.A.However,itshouldbenotedthattheCompany'sbankdebtattheendof2010isapproximately91%composedoffixedratefinancing,withtheremainingvaluebeingindexedtotheEuribor.TheaverageremainingTAPSGPSdebtmaturityattheendof2010isabout4years.

In the table of remunerated liabilities presented below, covering principal and interest, the following assumptions were made concerning market interestrates:4.75%forthefixedinterestrateand3%forthevariableinterestrate.Itshouldbenotedthatthereferencerateformostoftheliabili-ties, with variable interest rate, is the 3-month or 6-month Euribor. The liability values show the values payable within the respective periods of time, includingtheestimateofallcontractedcashflowswithamortisationandinterest,notdiscounted,untilthematurityoftheloans.Asimplifyingassumption of a linear intra-annual amortisation rate to calculate future interest was considered:

2010 < 1 year 1 - 2 years 3 - 5 years 6 - 10 years > 10 years TOTAL

Loans 711,996 720,379 65,488,323 1,913,554 – 68,834,252

TOTAL 711,996 720,379 65,488,323 1,913,554 – 68,834,252

Loans–fixedrate – – 63,276,237 – – 63,276,237

TOTAL FIXED RATE – – 63,276,237 – – 63,276,237

2009 < 1 year 1 - 2 years 3 - 5 years 6 - 10 years > 10 years TOTAL

Loans 308,117 711,996 2,185,977 2,660,042 – 5,866,132

TOTAL 308,117 711,996 2,185,977 2,660,042 – 5,866,132

Loans–fixedrate – – – – – –

TOTAL FIXED RATE – – – – – –

Furthermore,Note12presentsthebreakdownoftheremuneratedbankdebt,indicatingthefinancingentityandrespectivereferencerate.

Exchange rate risk

The exposure to exchange rate risk of TAP SGPS currently occurs via its share participation in TAP Manutenção e Engenharia Brasil, S.A., through its participated company Aero-LB, Participações, S.A. (“Aero-LB”). It should be noted that the behaviour of the Brazilian Real has had a favourable effect on the balance sheet of TAP SGPS, due to the trend of appreciation of this currency against the Euro, since the end of 2008.

TheexposureoftheCompanytoexchangerateriskasat31December2010and2009,basedonthebalancesheetfinancialassetsandliabilitiesvalues, converted into Euros at the exchange rates in force on the balance sheet date, is shown below:

2010 BRL USD TOTAL

ASSETS

Accounts receivable 216,939,440 – 216,939,440

Shareholdings in subsidiaries and associated companies – 12,458,464 12,458,464

216,939,440 12,458,464 229,397,904

LIABILITIES

Accounts payable – (432,941) (432,941)

– (432,941) (432,941)

2009 BRL USD TOTAL

ASSETS

Accounts receivable 100,576,758 – 100,576,758

100,576,758 – 100,576,758

LIABILITIES

Accounts payable – – –

– – –

Price and market risk

TAPSGPSisexposedtorisksfromthevalueoftheinvestmentsmadeinitsfinancialshareholdings,althoughtheseareusuallymadeconsideringstra-tegicobjectives,sincetheCompanydoesnotrepeatedlytradetheseinvestments.TheseinvestmentsareshowninNote6.


4. Categories of financial instruments

The accounting policies detailed in Note 1.8 were applied in accordance with the categories shown below:

2010Credit and other

receivablesOther financial

liabilitiesTOTAL

ASSETS

Non-current accounts receivable 220,246,123 – 220,246,123

Current accounts receivable 75,006,673 – 75,006,673

Cash and cash equivalents 353,568 – 353,568

295,606,364 – 295,606,364

LIABILITIES

Non-current remunerated liabilities – (54,460,072) (54,460,072)

Non-current accounts payable – (3,237,522) (3,237,522)

Current remunerated liabilities – (1,993,342) (1,993,342)

Current accounts payable – (342,410,042) (342,410,042)

– (402,100,978) (402,100,978)

2009Credit and other

receivablesOther financial

liabilitiesTOTAL

ASSETS

Non-current accounts receivable 104,109,332 – 104,109,332

Current accounts receivable 35,025,719 – 35,025,719

Cash and cash equivalents 20,012 – 20,012

139,155,063 – 139,155,063

LIABILITIES

Non-current remunerated liabilities – (4,866,953) (4,866,953)

Non-current accounts payable – (3,475,542) (3,475,542)

Current remunerated liabilities – (142,378) (142,378)

Current accounts payable – (256,281,855) (256,281,855)

– (264,766,728) (264,766,728)

5. Other accounts receivable

During the year ended on 31 December 2010 and 2009, the breakdown of the item "Other accounts receivable" is as follows:

2010 2009

Current Non-current Total Current Non-current Total

Loans to group companies 75,006,643 216,939,440 291,946,083 35,017,907 100,576,758 135,594,665

Security deposits – 3,306,683 3,306,683 – 3,532,574 3,532,574

Other debtors 7,951 – 7,951 35 – 35

Adjustments (7,951) – (7,951) – – –

OTHER ACCOUNTS RECEIVABLE 75,006,643 220,246,123 295,252,766 35,017,942 104,109,332 139,127,274

For the periods stated in the table there are no differences between the book values and their fair value. Non-current balances receivable earn inter-est at market rates.

The non-current balance receivable related with Group companies, of the amount of 216,939,440 Euros (2009: 100,576,758 Euros) corresponds, namelywithaloangrantedtoAero-LB(99%ownedentity)inReais,whichearnsinterestatnormalmarketrates,ofwhich7,084,058Euros(2009:2,969,570 Euros) refers to the interest receivable from this loan.

The current balance receivable relative to Group companies of the amount of 75,006,643 Euros (2009: 35,017,907 Euros) essentially corresponds to: (i) a loan granted to SPdH of 73,000,000 Euros (2009: 35,000,000 Euros) which earns interest at normal market rates, plus interest payable of the amount of 519,873 Euros (2009: 2,922 Euros) and (ii) a value receivable from TAP S.A. for the sale of Air Macau of 1,486,685 Euros.


6. Stakes in the share capital of subsidiaries and associated companies

As at 31 December 2010 and 2009, the breakdown of the stakes in the share capital of the subsidiaries and associated companies was as follows:

2010 % held Opening balance Increases Reductions Closing balance Provision (Note 11)

SHAREHOLDINGS

Transportes Aéreos Portugueses, S,A, (TAP S,A,) 100.00% – – – – –

TAPGER – Soc, de Gestão e Serviços, S,A, (TAPGER) 100.00% 9,992,142 – – 9,992,142 –

Portugália – Comp, Portuguesa de Transp, Aéreos, S,A, (PGA) 100.00% 2,667,768 – – 2,667,768 –

SPdH – Serviços Portugueses de Handling, S,A, (SPdH) 43.90% – – – – 105,021,104

Reaching Force, SGPS, S,A, (Reaching Force) a) – 7,269,275 – (7,269,275) – –

Aero-LB, Participações, S,A, (Aero-LB) 99.00% – – – – 115,754,020

SEAP – Serviços, Administração e Participações, Lda, (SEAP) b) – 1,982,484 – (1,982,484) – –

OTHER EQUITY INSTRUMENTS

Aero-LB, Participações, S,A, (Aero-LB) 99.00% – 12,458,465 – 12,458,465 –

21,911,669 12,458,465 (9,251,759) 25,118,375 220,775,124

2009 % held Opening balance Increases Reductions Closing balance Provision (Note 11)

PARTES DE CAPITAL

Transportes Aéreos Portugueses, S,A, (TAP, S,A,) 100.00% – – – – –

TAPGER – Soc, de Gestão e Serviços, S,A, (TAPGER) 100.00% 9,992,142 – – 9,992,142 –

Portugália – Comp, Portuguesa de Transp, Aéreos, S,A, (PGA) 100.00% 2,667,768 – – 2,667,768 –

SPdH – Serviços Portugueses de Handling, S,A, (SPdH) 43.90% – – – – 64,078,566

Reaching Force, SGPS, S,A, (Reaching Force) 100.00% 7,269,275 – – 7,269,275 –

Aero-LB, Participações, S,A, (Aero-LB) – – – – – –

SEAP – Serviços, Administração e Participações, Lda, (SEAP) 75.00% 1,982,484 – – 1,982,484 –

21,911,669 – – 21,911,669 64,078,566

a) During 2010, TAP SGPS carried out the merger by incorporation of Reaching Force, which resulted in a merger reserve, recorded under the item "Other reserves" (Note 10).

b) During 2010, the Company disposed of the indirect shareholding in Air Macau and consequently extinguished SEAP, which resulted in a capital loss of the value of 494,885 Euros (Note 14).

InMarch2009,aconsortiumofthreebanks(BIG,BanifandBancoInvest)transferredthestakeinSPDH(50.1%)toTAPS.A.for31.6millionEuros.On the same date and during the pendency of the concentration process at the Competition Authority, TAP S.A. transferred the exercise of its voting andsupervisionrights,asmajorityshareholderofSPdH,toanindependententityofTAPGroup.

On 19 November 2009, the Competition Authority, following an in-depth investigation, decided to adopt a prohibition decision related with the concentrationoperationwhichconsistedintheacquisition,byTAPS.A.,oftheexclusivecontrolofSPdH,throughtheacquisitionofa50.1%stakeof the share capital of SPdH.

TheCompetitionAuthoritythusimposedtheobligationofseparationofSPdHthroughthesale,byTAPGroup,ofthesharesrelativetoatleast50.1%of the share capital of SPdH. Until the sale, the regulator imposed that SPdH be managed by an agent manager acting on behalf of the Competition Authority, managing SPdH independently from TAP Group.


7. State

As at 31 December 2010 and 2009, this item was detailed as follows:

2010 2009

Assets Liabilities Assets Liabilities

Corporate Income Tax:

Payments on account – – 7,777 –

Withholding made by/from third payments 30 – – 7,508

Stamp duty – – – 10

30 – 7,777 7,518

8. Cash and cash equivalents

As at 31 December 2010 and 2009, the cash and cash equivalents item shows the following amounts:

2010 2009

Cash – –

Bank overdrafts – –

Bank deposits 353,568 20,012


9. Share Capital

As at 31 December 2010 and 2009, the share capital of TAP SGPS was fully subscribed and paid up, represented by 1,500,000 shares with a nominal value of 10 Euros each.

As at 31.12.10 and 2009 the share capital of the Company was fully owned by Parpública, Participações Públicas (SGPS), S.A.

10. Reserves

As at 31 December 2010 and 2009 the "Legal reserve", "Currency conversion reserve" and "Other reserves" items were detailed as follows:

Legal reserve Currency conversion reserves Other reserves TOTAL

1 January 2009 3,000,000 (5,841,589) – (2,841,589)

Increases – 13,339,698 – 13,339,698

31 DECEMBER 2009 3,000,000 7,498,109 – 10,498,109

Increases – 18,450,909 (7,744,323) 10,706,586

31 DECEMBER 2010 3,000,000 25,949,018 (7,744,323) 21,204,695

Currency conversion reserves

Theincreaseof18,450,909EurosreferstotheforeignexchangerategainsfromthemediumandlongtermfinancinggrantedtoAero-LB,whosesettlement is unlikely to occur in the foreseeable future, being, in substance, an extension of the Company's net investment in this foreign entity (see Notes 3 and 5).

Legal reserve

Thecommerciallegislationestablishesthatatleast5%oftheannualnetincomefortheyearmustbeassignedtothelegalreserveuntilitrepresentsatleast20%ofthesharecapital.

This reserve cannot be distributed, except in case of the Company's liquidation, but may be used to absorb losses after the other reserves have been exhausted, or incorporated into the share capital.

Other reserves

This item with a negative amount of 7,744,323 Euros, refers to the merger reserve constituted in 2010, resulting from the merger by incorporation of Reaching Force, SGPS, S.A. (see Note 6).


11. Provisions

The changes in provisions, as at 31 December 2010 and 2009, are as follows:

2010 Opening balance Increases (Note 14) Closing balance

LiabilitiesresultingfromthefinancialinvestmentinSPdH 64,078,566 40,942,538 105,021,104

LiabilitiesresultingfromthefinancialinvestmentinAero-LB – 115,754,020 115,754,020

TOTAL 64,078,566 156,696,558 220,775,124

2009 Opening balance Increases (Note 14) Saldo final

LiabilitiesresultingfromthefinancialinvestmentinSPdH

TOTAL 36,258,751 27,819,815 64,078,566

The variations recorded in 2010 are the result of the increase in provision for additional liabilities arising from the participated companies SPdH and Aero-LB,weightedbythesecompanies'capacitytogeneratecashflowsandbythecommitmentsundertaken.

The amount of 115,754,020 Euros was recorded as follows:

Losses relative to shareholdings (Note 14) 103,503,079

Provision for liabilities resulting from the merger by incorporation of Reaching Force 12,250,941

115,754,020

12. Remunerated liabilities

As at 31 December 2010 and 2009, the remunerated net debt is detailed as follows:

2010 2009

REMUNERATED THIRD PARTY DEBT

Non-current 54,460,072 4,866,953

Current 1,993,342 142,378

56,453,414 5,009,331

CASH AND CASH EQUIVALENTS

Cash – –

Overnight bank deposits 353,568 20,012

Other cash investments – –

353,568 20,012

REMUNERATED NET DEBT 56,099,846 4,989,319

Remunerated bank debt

As at 31 December 2010 and 2009, the current and non-current remunerated bank debt are detailed as follows:

2010 2009 Reference Rate

NON-CURRENT

BCP bank loan 4,317,925 4,866,953 Euribor 3m

Deutsche Bank bank loan 50,142,147 – Fixed rate

54,460,072 4,866,953

CURRENT

BCP bank loan 559,964 142,378 Euribor 3m

Deutsche Bank bank loan 1,433,378 – Fixed rate

1,993,342 142,378

BALANCE AT THE END OF THE YEAR 56,453,414 5,009,331


The periods of repayment relative to the bank debt are detailed as follows:

2010 2009

Up to 1 year 1,993,342 142,378

1 to 2 years 576,999 549,028

2 to 3 years 606,394 576,999

3 to 4 years 637,287 606,394

4 to 5 years 50,811,901 637,287

Over 5 years 1,827,491 2,497,245

56,453,414 5,009,331

The total amount of the liabilities plus the interest due is shown in the chapter on interest rate risk.

The analysis by maturity of the debt by type of interest rate is detailed as follows:

2010 2009

VARIABLE RATE

Up to 1 year 559,964 142,378

1 to 2 years 576,999 549,028

2 to 3 years 606,394 576,999

Over 3 years 3,134,532 3,740,926

4,877889 5,009,331

FIXED RATE

Up to 1 year 1,433,378 –

Over 3 years 50,142,147 –

51,575,525 –

56,453,414 5,009,331

All the remunerated bank debt uses the Euro as the functional currency.

13. Other accounts payable

As at 31 December 2010 and 2009, the heading "Accounts payable" is detailed as follows:

2010 2009

Current Non-current Total Current Non-current Total

Loans from group companies 341,878,781 – 341,878,781 256,162,806 – 256,162,806

Other creditors – group companies 253,194 3,237,522 3,490,716 7,856 3,475,542 3,483,398

Other creditors 117,207 – 117,207 38,167 – 38,167

Accrued costs 91,699 – 91,699 8,476 – 8,476

Deferred income 69,161 – 69,161 57,032 – 57,032

342,410,042 3,237,522 345,647,564 256,274,337 3,475,542 259,749,879

Loans from companies of the Group

The balance payable is detailed as follows:

2010 2009

Transportes Aéreos Portugueses, S.A. (TAP S.A.) 332,793,084 241,527,204

TAPGER – Soc. de Gestão e Serviços, S.A. (TAPGER) 1,869,078 602,824

Portugália – Comp. Portuguesa de Transp. Aéreos, S.A. (PGA) 7,216,619 14,032,778

341,878,781 256,162,806

The balance payable to TAP S.A., of 332,793,084 Euros (2009: 241,527,204 Euros) includes, as at 31 December 2010, 317,465,000 Euros (2009: 229,371,000 Euros) related with a short term loan. The remaining debt refers to interest payable and to payments made by TAP S.A. on behalf of the Company.

In May 2009, PGA granted a short term loan to TAP SGPS of 9,000,000 Euros, which was renewed in May 2010. In November 2010, TAP SGPS par-tially repaid 2,000,000 Euros. Additionally, in December 2009, PGA granted a loan of 5,000,000 Euros which was repaid in November 2010. The loans are remunerated at normal market rates.


14. Gains/(losses) relative to stakes in share capital

As at 31 December 2010 and 2009, the detail of the gains/(losses) related with stakes in share capital was as follows:

2010 2009

Dividends received

TAPGER 2,795,000 2,644,397

Gains/(losses) in the disposal of investments (Note 6) (494,885) –

Provision for liabilities in the participated company SPdH (Note 11) (40,942,538) (27,819,815)

Provision for liabilities in the subsidiary Aero-LB (Note 11) (103,503,079) –

(142,145,502) (25,175,418)

15. External supplies and services

As at 31 December 2010 and 2009, this item was detailed as follows:

2010 2009

Specialised work 696,429 46,206

Fees 36,000 13,800

Legal and notary costs 828 6,500

733,257 66,506

16. Payroll expenses

Payroll expenses incurred during 2010 and 2009 were as follows:

2010 2009

Fixed remuneration 1,370 2,740

Life insurance 3,536 –

4,906 2,740

As at 31 December 2010 and 2009, the Company did not have any employees.

17. Other costs and losses

As at 31 December 2010 and 2009, the item "Other costs and losses" is detailed as follows:

2010 2009

Taxes 133,031 4,872

Bank services 2,799 2,779

Other 18,315 –

154,145 7,651

18. Depreciation, amortisations and impairment losses

Asat31December2009,theCompanyrecordedanimpairmentlossrelatedwiththeadvanceonfinancialinvestmentsintheparticipatedcompanySPdH of 31,600,000 Euros.

19. Net financing costs

Thedetailofthefinancialcostsandincomefor2010and2009isasfollows:

2010 2009

Interest paid (6,060,472) (4,931,732)

Interest received 4,026,846 1,765,529

(2,033,626) (3,166,203)


20. Tax for the year

Income tax is recorded as nonexistent as at 31 December 2010 and 2009.

The reconciliation of the annual amount of tax is as follows:

2010 2009

Current tax – –

2010 2009

Pre-taxprofit (145,079,387) (60,018,518)

Nominal tax rate 26.50% 26.50%

Expected tax (38,446,038) (15,904,907)

Permanent differences (a) 37,670,665 15,500,445

Autonomous taxation – –

Reportablefiscallossesfortheyearwithoutdef.taxassets 775,373 404,462

– –

Effective tax rate 0.00% 0.00%

(a) This value refers to:

2010 2009

Annulment of dividends received (2,795,000) (2,644,397)

Losses in the disposal of investments 494,885 –

Non-deductible provisions 144,445,617 27,819,815

Adjustments/impairmentnotacceptedasacost 7,951 31,600,000

Othernon-deductibleadjustments – 1,716,828

142,153,453 58,492,246

TAX IMPACT 26.5% 37,670,665 15,500,445

Thetaxrateusedtocalculatethetaxinthefinancialstatementsisasfollows:

2010 2009

Tax rate 25.00% 25.00%

Municipal tax 1.50% 1.50%

26.50% 26.50%

Sincetherearenoexpectationsofthegenerationoftaxableprofitinthefuture,theCompanydidnotrecognisedeferredtaxassetsassociatedtotheaccumulated tax losses, which are detailed as follows:

Year of origin Reportable value in the period Reporting year

2005 1,040,318 2011

2006 4,084,748 2012

2007 2,330,580 2013

2008 1,765,228 2014

2009 1,526,270 2015

2010 (estimated) 2,925,934 2016

13,673,078

21. Net income per share

TherearenoconvertiblefinancialinstrumentsrelativetoTAPSGPSshares,hencethereisnodilutednetincomepershare.

2010 2009

Net income attributable to the Shareholder (145,079,387) (60,018,518)

Weighted average number of shares 1,500,000 1,500,000

Basic net income per share (97) (40)

Diluted net income per share (97) (40)


22. Related entities

The balances and transactions with related entities as at 31 December 2010 and 2009 are as follows:

2010 TAP, S.A. TAPGER PGA SPdH Aero-LB SEAP UCS TOTAL

BALANCES:

Accounts receivable (Note 5)

Non-current – – – – 216,939,440 – – 216,939,440

Current 1,486,685 85 – 73,519,873 – – – 75,006,643

1,486,685 85 – 73,519,873 216,939,440 – – 291,946,083

Accounts payable (Note 13)

Non-current 3,237,522 – – – – – – 3,237,522

Current 333,046,278 1,869,078 7,216,619 – – – – 342,131,975

336,283,800 1,869,078 7,216,619 – – – – 345,369,497

TRANSACTIONS:

Purchases and services received (252,773) – – – – – – (252,773)

Interest paid (3,171,416) (53,473) (318,317) – – – – (3,543,206)

Interest received – – – 517,449 3,509,255 – – 4,026,704

Dividends received – 2,795,000 – – – – – 2,795,000

Saleoffinancialinvestments – – – – – (494,885) – (494,885)

(3,424,189) 2,741,527 (318,317) 517,449 3,509,255 (494,885) – 2,530,840

2009 TAP, S,A, TAPGER PGA SPdH Aero-LB SEAP UCS TOTAL

BALANCES:

Accounts receivable (Note 5)

Non-current – – – – 100,576,758 – – 100,576,758

Current 14,191 – – 35,003,220 496 – – 35,017,907

14,191 – – 35,003,220 100,577,254 – – 135,594,665

Accounts payable (Note 13)

Non-current 3,475,542 – – – – – – 3,475,542

Current 241,535,060 602,824 14,032,778 – – – – 256,170,662

245,010,602 602,824 14,032,778 – – – – 259,646,204

TRANSACTIONS:

Purchases and services received (6,156) – – – – – – (6,156)

Interest paid (3,658,083) (8,922) (145,959) – – – – (3,812,964)

Interest received – – – 2,425 1,752,573 – 10,152 1,765,150

Dividends received – 2,644,397 – – – – – 2,644,397

Saleoffinancialinvestments – – – – – – – –

(3,664,239) 2,635,475 (145,959) 2,425 1,752,573 – 10,152 590,427

Relatedpartiesaredefinedasallthesubsidiaries,associatedcompaniesandjointventuresbelongingtoTAPGroupasidentifiedintheconsolidatedfinancialstatements.

The members of the Executive Board of Directors and of the General and Supervisory Board are remunerated, exclusively, for the positions held at TAP, S.A., and do not earn any remuneration for positions held at TAP, SGPS.


TheremunerationsearnedbytheBoardoftheGeneralMeetingandOfficialAccountantofTAPSGPSin2010and2009arepresentedasfollows:

2010 2009

Attendance money

Chairman 640 1,280

Deputy Chairman 400 800

Secretary 330 660

OfficialAccountant 13,800 13,800

15,170 16,540

OFFICIAL ACCOUNTANT

Sandra Candeias Matos da Luz




Report of the General and

Supervisory Board2010

TAP, SGPS


1. In the performance of the duties entrusted statutorily, the General and Supervisory Board developed intense activity in 2010, with the work of the meetings having been documented in the respective minutes.

2. The Chairman of the Executive Board of Directors, the Directors responsible for the matters under analysis and the actual Executive Board of Directors also partici-pated in the meetings of the General and Supervisory Board, at the time of the assess-ment of the accounts for 2009 and budget for 2011. The Chairman of the General and Supervisory Board supervised the Company's management on a regular basis, and attended the formal meetings of the Executive Board of Directors.

3. The General and Supervisory Board acquainted itself in due time with the delib-erations of the Executive Board of Directors which, under the statutory terms, were sub-mitted to them for assessment, as well as the respective reasoning and clarifications.

4. The supervision carried out by the General and Supervisory Board over 2010 covered the entire universe of the companies of Grupo TAP, and in particular TAP, S.A., the core business of the Group, and was devel-oped both in the context of operating and financial management, as well as in the defi-nition of strategy. For the effect, the General and Supervisory Board proceeded with the analysis and thorough debate, with the exec-utive management, of the relevant issues faced by these areas, both at the level of the Group and regarding the associated com-panies, having issued, under the statutory terms, opinions or recommendations when-everjustifiedbythecircumstances.

business of these associated companies, assessing their impact on the Group's sus-tainability. In this context, it is important to note that the CESGS dedicated special atten-tion to the monitoring of the restructuring processes underway at Groundforce and TAP–Maintenance and Engineering Brazil, having extensively debated the develop-ment of these matters with the Specialised Auditing Commission, in order to enable the General and Supervisory Board to contribute, through its opinions and recommendations, to the definition of the strategic guidelines of these associated companies.

8. Under the scope of corporate governance, and following the entry into force of the new articles of association of TAP SGPS in 2009, the CESGS reviewed the memorandum of association of the associated company TAP, S.A., with a view to ensuring its conformity with the new statutory framework of the holding. This work resulted in a draft of new articles of association for TAP, S.A., which the General and Supervisory Board oppor-tunely submitted for higher approval.

9. The meetings of the General and Supervisory Board with the Executive Board of Directors, over the year, in addition to the general framework of the Group's activity and super-vision of the specific performance of the different business units, also carefully ana-lysed and debated issues of special acuity or strategic relevance to TAP's sustainability: reconfiguration of the operating network; implementation of the cost-cutting plan; incidence on the Company of the applica-tion of the additional measures of budgetary consolidation; evolution of the competitive position of TAP in the context of global air transport; restructuring of Groundforce and TAP–Maintenance and Engineering Brazil; disposal of the holding in SPdH; prospects for the recapitalisation of TAP.

5. In the performance of its duties, the General and Supervisory Board held ten formal meet-ings over the year, and was assisted by the Specialised Commissions for Auditing and for Sustainability and Corporate Governance, as well as by ad-hoc working groups cre-ated by this Board for dealing with specific matters, namely for the monitoring of the restructuring processes of TAP–Maintenance and Engineering Brazil, review of the articles of association of TAP, S.A., and application of the remunerative policy. These commis-sions and groups provided the Board with qualified assistance on matters of their com-petence, either their own or delegated, in particular those involving the verification of compliance with the articles of association and applicable legal rules.

6. Over the year, the Specialised Auditing Commission held eight meetings, some of which included the participation of the Official Accountant, External Auditor and Internal Auditing of the Company. The Specialised Auditing Commission dedicated special attention, amongst other matters, to the development of the restructuring processes underway of the participated com-panies Groundforce and TAP–Maintenance and Engineering Brazil, due to their impor-tant financial impact on the Group's accounts. Likewise, the Specialised Auditing Commission also attentively monitored the evolution of the Group's treasury, verifying that adequate liquidity levels were ensured over the year.

7. The Specialised Sustainability and Corporate Governance Commission (CESGS) held seven meetings during the year. This Commission supervised the process of preparation of the Corporate Governance and Sustainability Report of 2009, with this document hav-ing benefited from improvements relative to the previous edition. Also under its compe-tences, the CESGS supervised the different associated companies of the Group in the area of sustainability. Thus, through a series of meetings involving the active participa-tion of the respective executive directors, the CESGS carried out, over the year, the analysis and debate of the evolution of the


10. The Board assessed the management report and accounts for 2010, which evidenced the positive net income of the air transport busi-ness. This result was not, however, sufficient to compensate the losses of Groundforce and TAP–Maintenance and Engineering Brazil, therefore the consolidated net income continued negative for this financial year. Regarding the Group as a whole, in view of the evolution of the exogenous environment of the Company during 2010, affected by the strikes of the air traffic controllers, closure of the air space following the volcanic eruption in Iceland, as well as by the necessary internal adjustmenttostrictmeasuresofbudgetaryconsolidation, the General and Supervisory Board considered that it was important to highlight the performance of air transport, as well as the dedicated efforts developed by the Company, with a view to overcoming the problems of the less successful associ-ated companies. Thus, under the legal and statutory terms, and taking into account the recommendation of the Specialised Auditing Commission and the reports of the Official Account and External Auditor, the General and Supervisory Board deliberated to issue a favourable opinion on the abovemen-tioned management report and accounts, recommending their approval by the General Meeting of TAP, SGPS.

11. The General and Supervisory Board would like to thank the management, workers and employees of TAP, for their personal contri-bution to the notable performance of the Company during 2010.

Lisbon, 28th April, 2011

The General and Supervisory Board

Manuel Soares Pinto BarbosaCarlosAlbertoVeigaAnjos João Luís Traça Borges de AssunçãoLuís Manuel dos Santos Silva PatrãoMaria do Rosário Miranda Andrade Ribeiro VítorRui Manuel Azevedo Pereira da SilvaVítor Cabrita Neto


Abbreviations

AEAAssociation of European Airlines

APCERAssociação Portuguesa de Certificação (PortugueseCertificationAssociation)

EASAEuropean Aviation Safety Agency

IATAInternational Air Transport Association

INACInstituto Nacional de Aviação Civil (National Civil Aviation Institute)

IPACInstituto Português de Acreditação (Portuguese Accreditation Institute)

ISOInternational Standards Organization

QTCQuick Transfer Center

Glossary

ASK | Available seat-kilometresTotal number of seats available for sale multiplied bythenumberofkilometresflown.

Block Hours Number of hours between the departure and arrivalofaflight,withtimemeasuredbetweenwhen chocks are placed and removed.

Carbon Dioxide| CO2

Gas that is naturally-occurring in the atmosphere and which is also a waste product of combustion of fossil fuels (coal, oil). Increased levels of carbon dioxide in the atmosphere could lead to global warming and subsequent climate changes.

Cargo and Mail RTK Total number of tonnes of cargo and mail multi-pliedbythenumberofkilometresflown.

Code-Share Agreement between two companies operating as partners that agree to provide services on the same aircraft, whilst maintaining the respective IATAcodes,flightnumbersandbrands.

Abbreviations and Glossary


Global RTK | Revenue Tonne KilometresTotal number of tonnes of passengers, cargo and mail multiplied by the number of kilometres flown.

Hub Term used to describe an airline’s operating base, where arrivals and departures are coordinated in order to keep transit time to a minimum. TAP’s hub in Lisbon is structured in three daily waves of arrivals and departures in order to increase the number of connection opportunities for TAP Customers.

Hub and Spoke A model of operating that allows for connec-tionsbetweendestinationswithlesstrafficflow,throughanairporthubwheneveradirectflightis not feasible.

Multi-hub Systems of operation by connection through several hubs which makes it possible to offer a greater variety of destinations through access to the networks based at each hub.

Passenger Load Factor Total number of revenue passenger-kilometres (RPK) divided by the total number of available seat-kilometres (ASK).

Passenger Yield Revenuefrompassengertrafficdividedbythenumber of passenger-kilometres (RPK).

Punctuality Industry standard measured by the percentage of thenumberofflightsdepartingupto15minutesafter their scheduled departure time.

Regularity Percentageofflightsactuallycarriedout,ofthetotalflightsplanned.

Revenue Management Technique used for optimisation of revenue fromeachflightbyseekingsystematicbalancebetweentheflight’slevelofoccupationandtar-iff’s offered.

RPK | Revenue Passenger-KilometresTotal number of passengers multiplied by the numberofkilometresflown


Credits

TAP, SGPS, S.A. Apartado 50194, 1704-801 LisboaTel.+351218415000Fax+351218415774Taxpayer number 506623602

Design and Graphic Production

PhotographyAdd ComunicaçãoTAP PORTUGAL

Print Run330 copies

Legal Deposit182.801/11July 2011


TAP, SGPS, S.A.Apartado 50194, 1704-801 LisboaTel. +351 21 841 50 00 Fax +351 21 841 57 74

www.flytap.com


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