Delta Airlines is expecting $1 billion in additional earnings in South American traffic over the next five years thanks to the codeshare and strategic partnership with Chile’s LATAM Airlines Group, CEO and director Ed Bastian said in an investors’ call on September 27. Delta and LATAM expect to benefit from connecting their networks to create one big North to South America network.
Delta and LATAM surprised a few on September 26, when after the closing of the stock exchange they announced an extensive relationship. The US-based powerhouse and Chile’s LATAM will begin codesharing before this year’s end, but Delta hopes to receive regulatory approval within 24 months of taking a 20 percent share into LATAM for $1.9 billion. Funding will be raised through a public tender offer of $16 per share.
As part of the agreement, Delta will acquire four Airbus A350-900s and take over delivery slots for ten other -900s that are up for delivery until 2025.
The Delta-LATAM agreement means that Delta will end its partnership with Brazil’s GOL, while LATAM will leave OneWorld to become an unaligned airline. It has ended its long-term partnership with American Airlines. Delta is paying another $350 million to cover additional costs that come with creating the new partnership and ending the old one.
South American opportunity
During the investor’s call, Ed Bastian explained the thinking behind the agreement with LATAM, which came along as a sudden opportunity. “South America is an attractive and fast-growing market. It generates roughly $8 billion in annual revenues from the US, which represents approximately ten percent of US international revenue and over half of all US to Latin and South American revenues. LATAM is the premier carrier in the region. It has an industry-leading global brand with excellent customer experience, a commitment to operational reliability and a passion for service. LATAM’s US to South America business is approximately $1.6 billion a year, a revenue pool we’ve not had meaningful access to, historically, and is a big driver of the opportunity for Delta.” Delta will now assume a leadership position in six important markets: Chile, Argentina, Brazil, Colombia, Ecuador, and Peru.
Flashback 2016: LATAM receives its fourth A350-900 and first A320neo. (Airbus)
LATAM carried 71 million in the last twelve months to 140+ destinations in 25 countries. The airline expects to benefit from extended travel choices, as Delta’s network is highly complementary to LATAMs. As there are no overlapping routes, LATAM’s Ricardo Cueto expects no regulatory problems. Financially, the deal will reduce LATAM’s debt by $2 billion.
Cueto acknowledged in his own investor’s call that the OneWorld alliance with European airlines like Iberia has worked well. LATAM will keep its bilateral agreements with OneWorld partners while exploring new partnerships with EU-airlines. For now, the focus is on getting the one with Delta started and seek opportunities as an unaligned airline
GOL partnership was too restricted
Bastian added that Delta had been looking at opportunities in South America for some time: “This is, to us, the region of the world that we’ve been focused on for a number of years and we think has easily the greatest growth potential of the best return potential or the most efficient deployment of capital.” While Delta was happy with the partnership with GOL, it had restrictions: “While GOL has many great partners, they really have not had access to be able to generate beyond traffic in Brazil to us.”
So when LATAM came along, Bastian immediately saw opportunities for both airlines: “When we land, for example, from Atlanta into Lima today, that’s an endpoint on our network. And so, we would expect as we can start putting those codeshares on and begin cooperation that our core markets will see a significant expansion that will come through first gauge and then over time, frequency. When we have approval, we can get into a much more coordinated and planning growth scenario where we can leverage each other’s networks and really plan the network out together. So it’s a multi-step process. It begins right now.” Bastian will be in Chile already this week to explore network options even before he has got government approvals. He is not expecting any regulatory issues that constrained the LATAM-American relationship, which after a recent Chilean court ruling restricted it even more.
Delta has no plans to raise its share into LATAM beyond the 20 percent announced now. “I think 20 percent is the right level for Delta. I do not anticipate any increase about that level. The Cueto family are the main owners (27.91 percent share – RS) and they will continue to be the main owners of the group, which we are – is very important to us that they be there, and there’s obviously meaningful public participation as well down there as well as the Qatar interest. So, now we’re very comfortable that 20 percent is the right threshold for Delta.” Qatar Airways has a 10.03 percent share in the 2012-founded airline. LATAM said in their investors call that Qatar could participate in the tender offer. Which could lead to some interesting Board meetings, with opponents Bastian and Akbar Al Baker sitting next to each other to discuss their joint investment position.
A350-purchase not the main driver
The opportunity to buy into LATAM and purchase 14 A350s was an important factor in Delta’s decision, Bastian said: “It wasn’t the main driver, but certainly it was an opportunity because we were looking to grow our subscale fleet on the Airbus side and they had an opportunity to help us accelerate that. So I think it was a nice add-on but it wasn’t the main driver of the deal.” Two A350s will join Delta in 2020, the remaining 12 by 2025. Delta currently operates 13 A350-900s and has 12 more on order.
LATAM operates seven A350-900s, of which four are owned and three leased from Qatar The Airbus order book shows LATAM has had a total of 17 -900s on order, plus 8 -1000s. It is not clear if they will join LATAM. Cueto confirmed the purchase of the A350 had impacted its cash flow position.
In what seems a quick reaction from American Airlines, the airline announced on September 30 that it will increase services from Miami to Sao Paolo and Santiago de Chile this coming winter and to Lima from April 7.
