MIAMI — Delta Air Lines has found another acquisition target, as it announced plans last week to take up to a 49% ownership stake in SkyTeam partner Aeromexico. Delta tendered a cash offer for an additional 32% stake in Mexico’s largest airline, building upon its existing 4.1% ownership of the company and purchase options for an additional 12.7% ownership shared with a pension trust for Delta’s employees. Delta’s offer would value the company at roughly $1.7 billion (versus a market cap of $1.2 billion when Delta made the offer), and while the deal is subject to regulatory approval, there are no immediate stumbling blocks apparent on the legal front.

Delta needs a JV – this increases the Mexican Impetus

While the deal is ostensibly about a cash investment opportunity in an airline in a strategic market, there is also some evidence that Delta’s purchase was actually driven by its desire to gain antitrust immunity (ATI) and a joint venture (JV) with Aeromexico for the US-Mexico market. Delta and Aeromexico first proposed a $1.5 billion joint venture to the US Department of Transportation in March of 2015. The proposed JV was tied to a liberalization of the bilateral air services agreement (ASA) between Mexico and the United States.

The new ASA would abolish the previous restriction that allowed just two carriers per nation per city pair to offer service, but it would not create an Open Skies Agreement between the US and Mexico, which would allow free entry and unlimited capacity by any US or Mexican carrier on any US-Mexico city pair. US aviation policy to date has been clear that ATI and JVs will only be allowed for US and foreign carriers in markets governed by OpenSkies agreements, and accordingly, the Delta-Aeromexico JV has been held up by US government.

Aeromexico is still the Mexican flag carrier, so even though it passed out of government ownership back in 2007, it still has close ties to the Mexican government at every level (akin to the access and power enjoyed by All Nippon Airways in Japan). With the new equity stake, Delta will become the largest individual shareholder in Aeromexico, and in turn will be able to pressure the Mexican government to be faster, more decisive, and more aggressive in its negotiations with the US government. This could take the form of the US government conceding to allow a JV without OpenSkies, or the Mexican government to concede and allow OpenSkies (they are currently the party that doesn’t want Open Skies).

There is strategic value beyond the JV

To be sure restarting the JV process is not Delta’s only incentive in purchasing the Aeromexico stake. With or without a JV, buying the 49% stake in Aeromexico gives Delta the ability to enact direct control over the strategic decisions of a key player and competitor in an important and growing market (Mexico). While there are nominally restrictions on Delta’s ability to shape Aeromexico’s decision making, as was witnessed through their 49% ownership of Virgin Atlantic, Delta would not have gotten into this deal if they won’t have the ability to significantly shape and alter Aeromexico’s strategic decision making moving forward.

This ability becomes even more valuable if Delta and Aeromexico do end up getting that JV. Normally JVs are joint business agreements, which means that both parties make decisions together and each party has 40-60% input on the overall decisions. And in the past, Delta has run into some issues where JV partners have different preferences for things like overall capacity planning or product segmentation. But in this scenario, Delta would have near dominant input on overall JV strategy, because it represents 100% of the US side as well as nearly 50% of the Mexican side.

Delta-Aeromexico reshapes the US-Mexico Market

In order to get a better sense of the effects of the Delta-Aeromexico tie-up (JV or otherwise), we utilized masflight’s database to get a sense of some aggregate figures and trends for the market to get a sense of the US-Mexico market in calendar 2014 and Delta/Aeromexico’s place within it. Our analysis looked at all US-Mexico passenger markets in that direction (i.e. uni-directional). To get a sense of the overall market, you can simply multiply our figures by 2.

In 2014, there were 4,531,662 one way seats offered by US and Mexican carriers in the market on 35,397 departing flights, corresponding to an average aircraft size of 128 seats and 97 daily departures from the US to Mexico. Load factor on a seats basis was 79.9%, while it was 81.1% on a capacity (revenue passenger miles flown / available seat miles offered).

As it currently configured, the US-Mexico market is dominated by American Airlines and United Airlines, who collectively have the three best located US hubs for Mexican flights (Dallas Fort Worth and Phoenix for American, Houston for United) and represent 19.2% and 17.0% of the market respectively by seats offered (~870,000 for American, ~770,000 for United). Aeromexico is a distant third, offering ~590,000 seats for a 13.0% market share despite having the best hub on the Mexican side at Mexico City. Delta is a cut below Aeromexico at ~436,000 annual one-way seats, good for 9.6% share of the market.

Combining Delta and Aeromexico’s networks changes all of that in one-fell swoop. The combined carrier would instantly control 22.6% of the overall market, offering more than 1 million one-way seats annually. This would instantly propel Delta to first place in a market of heavy strategic importance, perhaps helping it win several corporate contracts that currently belong to American and United by virtue of their Mexican service profiles. And thanks to this equity investment, Delta will get some facsimile of a joint business to Mexico, either directly (through a JV) or indirectly (by exerting control over Aeromexico’s strategic decision making process).