MIAMI— Delta Air Lines lost out on its bid for a stake in Japanese carrier Skymark, as creditors led by airframe manufacturer Airbus instead opted for a restructuring plan led by an investment from Japanese full service carrier All Nippon Airways (ANA). While Delta was backed by leasing company Intrepid, Skymark’s largest creditor, the second largest creditor Airbus instead drove the decision in favor of ANA. By losing in its bid for Skymark, Delta once again missed out on gaining critical domestic feed for its ailing Japanese operations and Tokyo hub, six years after it was unable to wrest former national carrier Japan Airlines away from the oneworld Alliance and rival American Airlines.

At first glance, Airbus’ decision to back ANA seems odd, given that Delta is a reliable Airbus customer with 103 frames currently on order (including 58 wide bodies). ANA is still a Boeing dominated company though it recently pivoted to order 37 Airbus A320 ceos and news, giving Airbus a rare victory in an RFP from the two big Japanese carriers. That, combined with the fact that ANA is extremely close with the current Japanese government (who exerts a major role in business decision making) perhaps made the combined value of keeping ANA and the Japanese government happy higher than that of placating one of its largest and most financially powerful customers.


Regardless of Airbus’ motivation, the result leaves Delta back at square one with regards to fixing its fundamental weakness in the Japanese market, a hub that has served as a valuable gateway to Asia for decades starting under Northwest Orient/Northwest Airlines. Delta specifically developed its Seattle hub and international gateway in response to the weakness at Narita, and the loss of Skymark could be the final nail in the coffin for the once robust intra-Asia and trans-Pacific operation in Tokyo.

China Eastern is a great consolation prize though

Even as Delta’s Japanese ambitions floundered, it managed to secure a stake in another Asian giant, one that might have an even larger impact on Delta’s long run prospects in the region. With its decision to purchase a 3.5% stake in China Eastern for $450 million, Delta became the first US major to invest into China and took a step towards securing its future in what will become the world’s most important aviation market. The irony is that Delta already has the best partnership situation of any US major in China thanks to the simultaneous SkyTeam affiliation of China Southern and China Eastern. The best way to visualize this is to talk about cities where these airlines have focus cities and/or connecting complexes. While many of these cities are secondary on the world stage today, as China’s per-capita GDP ascends, many will gain nonstop service to the US (some already have to Europe). Having partners in these cities thus benefits Delta in two ways.

First, it provides connecting feed for future Delta nonstops to these cities and existing Delta flights to China (i.e. China Eastern’s Xian – Shanghai feeds Delta’s Shanghai – Detroit and vice-versa). Second, it provides a source of origin and destination (O&D) demand for future Delta flights to these cities due to latent customer loyalty to its partners. So if you actually look at cities covered, China Southern covers Beijing, Guangzhou, Shenzhen, Chongqing, Urumqi, Hangzhou, Wuhan, Shenyang, and Dalian. China Eastern meanwhile covers, Shanghai, Xian, Kunming, Chengdu, and Nanjing, while adding additional strength in Beijing and Guangzhou. The only major gaps, if they can be called that, are Qingdao, Haikou, and maybe Macau. Not all of these are direct hubs of the parent airline China Eastern/Southern, but thanks to the incestuous nature of Chinese airline ownership, several supposedly standalone carriers are actually controlled by the two SkyTeam members (and of course the whole industry’s strategy to some extent is shaped by the national government).


The current Chinese investment climate, driven particularly by the recent stock market crash and Yen devaluation makes for an attractive time for US carriers, who are cash rich but lack access, tangible partnerships, and political connections in the Chinese market. Given that Delta is the most aggressive US legacy with investments, a logical question is to ask whether it will invest in China Southern next. United recently got into the investment game with its purchase of a stake in Brazilian carrier Azul, so it could conceivably invest in Star Alliance partner Air China. Air China is more financially secure than China Southern/Eastern however, and its ownership situation is complicated by the large stake held in Air China by oneworld Alliance member Cathay Pacific. The third big US legacy, American Airlines Group, is mostly focused on fully completing its own merger integration with US Airways. But once American gets its house in order, a play for a stake in either China Southern or unaligned Hainan Group would make a lot of sense, especially in conjunction with close partner International Airlines Group (IAG). Oneworld has long been the weakest of the big 3 alliances in China; either China Southern or Hainan would change that.

Delta still chasing Korean JV

Even with the long term strategic importance of China Eastern, the investment represents yet another instance of Delta trying to pick up alternatives to its desired East Asia play, a joint venture with SkyTeam member Korean Air. Delta has been pursuing a JV with Korean Air for some time, but Korean is reticent, despite the two carriers already having received anti trust immunity (ATI). The primary holdup is that Korean doesn’t want Delta having input on capacity decisions, as it would have the right to in a JV, because Korean prefers far more aggressive capacity growth than Delta is comfortable with or thinks is optimal.

Delta for its part wants the JV for more feed and all of the knock on benefits (many of which are appealing to Korean Air ironically). One elephant in the room is that Seoul Incheon Airport, Korean Air’s hub, is simultaneously courting Delta to move its diminished Tokyo Narita scissor hub over to Seoul. Seoul has steadily grown to match Tokyo in O&D on an 80-85% basis to most cities in the US, and with a massive Korean Air hub, much of Delta’s existing Narita route portfolio makes sense in Seoul as well, sort of like its operations to Amsterdam and Paris Charles de Gaulle. After pruning away the remaining intra-Asia routes (save those that could be covered under a JV, like Singapore), this would probably be tenable for Korean Air under a JV, even if it isn’t today.


And on the US side, this would be beneficial for Korean Air with more feed at Los Angeles, New York JFK, and Seattle, plus decent interlines at places like Las Vegas, San Francisco, and Honolulu, as Delta is a big carrier in those markets with strong product and reliability. Ultimately, they’ll get a deal done, it just will be on terms favorable to both Korean and Delta with some concessions on Delta’s part, as opposed to the one-sidedness for Delta in recent deals. And of course it will require US investors to abandon their current fear of headline capacity (ASM as opposed to seats) growth to accede to Korean Air’s preferred strategy.

Delta crafts an investment portfolio with cash on hand

Delta’s overall international investment strategy is aimed at increasing its reach in big air travel markets to overcome the latent O&D weakness of its hubs, particularly looking at markets with some sort of restriction. Ultimately, Delta will benefit from increased market cap and profits accrued by these carriers as a shareholder, but the primary driver has been market access. All of their investments fit this pattern: Virgin Atlantic at London Heathrow, Aeromexico in Mexico, and Gol in Brazil all represent value plays in attractive and/or restricted markets. The same with China Eastern, whose home market is both attractive and restricted. This has been Delta’s goal, ever since it tried this with Japan Airlines in 2009/10.

In the long run Delta wants to turn these investment stakes into JVs. They have one with Virgin Atlantic and asked for one with Aeromexico, though that will not be settled until the broader question of US – Mexico OpenSkies is answered definitively in 2016 or so. And they will probably get a JV with Gol once Brazil OpenSkies happens in October of this year.

The more interesting question is who’s next? Outside of the aforementioned China Southern, the immediate opportunities are hard to find. Europe is sowed up between Virgin and Air France – KLM, and there’s nothing viable left in Central America (where Copa and Avianca are the only carriers that matter), or South America (Conviasa isn’t worth the paper it’s tickets are printed on and TAME is too small and a secondary carrier at its own hub behind LATAM). Aerolineas Argentina could use the cash, but with a meddling government and no guarantee that the capital will be deployed wisely, they might be too risky for Delta to bite. Aeroflot might have made sense 24 months ago, but Russia’s recent fall from international grace makes that a non-starter.

Africa is the one market where it could make some sense, in the form of SkyTeam member Kenya Airways. Kenya Airways has a lot in common with Gol, as it is based in an important market and Nairobi is well positioned as a hub for two thirds of Africa.The problem is financial viability, as Kenya Airways has experienced massive losses amidst over expansion and the sinking tourism industry in Kenya due to terrorist concerns. Moreover, for US airlines, the big money markets are largely in North and West Africa, save for Kenya itself and South Africa. Perhaps Delta could look to acquire a stake in Ethiopian Airlines as a means of prying Africa’s most viable hub carrier away from Star Alliance. But in all likelihood, Delta’s cash from here on out will have to wait for special opportunities, things like, for example, Singapore Airlines and Star Alliance falling out (this is a hypothetical), like the Japan Airlines scenario.