MIAMI — Delta Air Lines (DL) plans to purchase a 20% stake in LATAM Airlines (LA), the largest carrier in Latin America, for $1.9 billion—a move that will send shockwaves throughout the US-Latin America market.
The two carriers will also launch a Joint Venture (JV), pulling LATAM away from its current membership in the oneworld alliance and the proposed JV with Delta’s rival, American Airlines (AA).
As part of the deal, Delta further plans to acquire four Airbus A350-900s from LATAM and assume the Latin American carrier’s commitment to purchase 10 additional A350 aircraft between 2020 and 2025.
In a surprising move, Delta will also divest its current 9% stake in Brazil’s second-largest airline, the low-cost carrier (LCC) GOL.
This major investment by Delta comes as a shock given that LATAM had spent the past few years (since the US and Brazil created an Open Skies agreement) trying to put together a joint venture of their own.
That JV was initially blocked by the slow ratification of the Brazil-US Open Skies agreement by the Brazilian Senate and faced a further roadblock earlier this year when Chile’s government also blocked it, while Brazil, Colombia, and Uruguay all signed off.
Delta Finally Gets The Partner It Needs In South America
Delta has evolved its post-recession global strategy to focus on making strategic investments in airlines in key US markets. That strategy has found success across the Atlantic via a 49% stake in Virgin Atlantic (VS) and a 10% stake in Air France-KLM (AF-KL) that are now being combined with a four-way JV.
They’ve also secured an important JV in Asia with Korean Air (KE), plus an ownership stake now up to 10%, and buying a smaller (3.55%) stake in China Eastern (MU).
In North America, Delta purchased 49% of the Mexican flag carrier, Aeromexico (AM), including a major JV, and also plans to set up an additional JV with WestJet (WS) in Canada.
However, in South America, Delta has had a difficult time securing a sizeable partner.
In Brazil—by far the largest US-South America market—Delta purchased a 9% stake in GOL. But unlike LATAM, GOL does not have a substantial intercontinental presence as its entire fleet is made up of Boeing 737 narrowbody aircraft.
GOL operates nonstop flights from Fortaleza and Manaus to Orlando and from Fortaleza to Miami, as well as one-stop flights from Brasilia to both US airports with a fuel stop in Punta Cana—hardly competitive with LATAM, American Airlines, or the other two Latin American giants, Avianca (AV) and Copa (CM).
Delta also tried to build a partnership with Aerolineas Argentinas (AR) and reportedly mulled investing in the Argentinian flag carrier and SkyTeam member.
But AR is a basket case of an airline under government ownership, and its primary hub at Buenos Aires-Ezeiza (EZE) suffers from poor geography (too far south to effectively connect much of South America) and split operations with Buenos Aires’ city airport, Aeroparque (AEP), which pulls away domestic connecting feed and demand. Neither of these worked well for Delta.
Delta: From Worst To First In US-South America
Prior to this move, Delta was the US carrier with the worst position in the US-South America market.
American had the benefit of having hubs in Miami (MIA) and Dallas/Fort Worth (DFW), so even without LATAM, it was in a formidable position.
United (UA) was somewhere in between, largely based on the strength of its partnerships with Avianca and Copa.
And even the LCCs JetBlue (B6) and Spirit (NK) were in a much more competitive advantage on flights from Florida and New York (in the case of B6) to Northern South America.
On the US side, MIA remains as the most important hub for flights between the US and South America. Miami and its surrounding cities have the largest Latin American population in the US and can be considered a major center for US-Latin America business and finance operations.
This puts American, with its fortress hub at MIA, in a privileged position relative to other carriers in the US-South America market.
The second and third largest origin and destination (O&D) markets to South America are New York City and Orlando. But Orlando is full of low-yield traffic (and very Brazil centric) and New York City is too far north to be an effective connecting point.
This leaves Delta and United with less than optimal options—namely Atlanta (ATL) and Houston (IAH) respectively. Both airports rely on connectivity over O&D, as does American’s secondary South American gateway at DFW.
From the South American side, the only two real players on nonstop US-South America are LATAM and Avianca, though Copa and (increasingly) Aeromexico also carry a lot of connecting traffic between the two continents.
The best positioned connecting hubs are Bogota (BOG) and Lima (LIM) as both airports have ample O&D and can be reached from the Southern US with narrowbody jets.
We should also pour one out for Caracas (CCS), which for decades had potential to be what Panama City (PTY) is today thanks to its ultra high yield oil traffic.
São Paulo (GRU) also wins some connections just by virtue of its massive O&D volume to the US and within South America, as does Santiago (SCL) in Chile. Buenos Aires is too far south, and Rio De Janeiro-Galaeo (GIG) is South America’s Montréal-Mirabel with LCCs.
The Imminent Death Of Global Airline Alliances?
LATAM has a long history with oneworld, dating back to 1999 when LAN Chile entered the oneworld alliance as a member-elect.
When LAN Airlines took over TAM, Brazil’s largest carrier, the new combined airline adopted the name LATAM Airlines. Even though Brazil’s TAM was an important member of the Star Alliance, the new carrier elected to stay in oneworld post-merger.
The addition of TAM to the already potent AA-LAN combination gave oneworld a stranglehold on the US – South America market—at least in nonstop flying (though Star Alliance’s Copa Airlines has also built a massive business on connections in that market).
The proposed JV between LATAM and AA was expected to extend that oneworld dominance between the US and Latin American markets. But once the Chilean courts killed the JV’s proceedings, Delta swooped in and changed the fundamental dynamics of the US-South America market.
In theory, a move of this nature would imply that LATAM would be planning to leave the oneworld alliance and switch over to SkyTeam (which Delta is a member of).
However, in light of Ed Bastian’s recent commentary on the “failure of SkyTeam” the case for that shift is not as clear.
Bastian told Bloomberg during an interview that “One of the things that has not been successful in the airline world are the alliances. We, self-critical, SkyTeam alliance I don’t think we’ve brought a lot of great value to customers, I don’t think we’ve brought a lot of great value to our member airlines. And we’re going at this thing in a very different approach.”
Bastian explained that Delta’s goal is to continue “making bilateral investments in the most important partners. We own 49% of Virgin Atlantic, we own 49% of Aeromexico, the two closest carriers to us on either side of the country. We’re invested in Air France KLM. We invested in Korean. We invested in China Eastern. We invested in Gol down in Brazil,” he said.
“As a consequence what you see is this network of influence that we’re having within those companies. Those companies want to know what Delta has learned about operational efficiency and prowess and premium, we want to learn what it takes to win in those local markets. And over time while we can’t own them in terms of whole-owned consolidation we can have meaningful enough investment that we create an international network of carriers that will be uniquely tied where you have Delta as the centerpiece. That’s our goal,” Bastian affirmed.
With Delta’s increased presence not only as. a shareholder but also as a partner in Asia, Europe, North America, and now South America, it’s obvious that its preference lies in the form of Joint Ventures and not necessarily alliances.
American Airlines Responds, Delta Follows
In response to Delta’s sudden investment in LATAM Airlines, American Airlines did not wait for a second and released a statement.
“LATAM and the Cueto family have been terrific partners of American Airlines for decades. Given the recent negative ruling by the Chilean Supreme Court, which would have significantly reduced the benefits of our partnership since Chile was not approved as a part of the potential joint business arrangement, we understand LATAM’s decision to partner with a U.S. carrier that isn’t burdened by the ruling,” said the airline.
“Further, this change in partnership is not expected to have a significant financial impact to American, as the current relationship provided less than $20 million of incremental revenue to American, and the proposed joint business without Chile would have provided limited upside.”
Minutes later, Delta issued a press release in which Ed Bastian noted that “This transformative partnership with LATAM will bring together our leading global brands, enabling us to provide the very best service and reliability for travelers to, from and throughout the Americas.”
Likewise, Enrique Cueto, LATAM Airlines’ departing CEO, explained that this alliance with Delta “strengthens our company and enhances our leadership in Latin America by providing the best connectivity through our highly complementary route networks.”
According to Delta, the combined network from both carriers will serve 435 destinations worldwide and “carry more passengers between North America and Latin America than any other partnership.”
As far as LATAM Airlines is concerned, this investment will “improve free cash flow generation, reduce forecasted debt by over $2 billion by 2025 and improve its capital structure,” according to the release.