The proposed strategic partnership with LATAM Airlines [NYSE: LTM] represents Delta Air Lines [NYSE: DAL] largest investment in a foreign carrier and is a major competitive strike against American Airlines in Latin America.
The deal will allow Delta Air Lines to tap into an $8 billion market for U.S. travel in which it has limited access now, resulting in much greater travel choices for customers and $1 billion in projected incremental revenue over the next five years, Delta CEO Ed Bastian said Friday.
Delta destinations, such as Lima, Peru, today are end points for travelers and belly freight. Under the new arrangement, the Atlanta-based carrier will plug into a much wider feeder network and open service in new cities, making it more attractive for customers, especially coveted U.S. corporate travelers who tend to pay top fares. The deal, announced Sept. 26 and starting as a code-share arrangement as soon as year-end, also gives Delta greater presence in the South Florida and Brazil markets and will generate savings in aircraft maintenance, ground handling, procurement and loyalty programs, Delta officials told analysts on a conference call Sept. 27.
LATAM Airlines, a global carrier with a Latin American-leading 18% market share, has annual sales of $1.6 billion on U.S.-Latin America lanes and “that’s a revenue pull that we’ve not had meaningful access to,” Bastian said.
Delta will provide spend $350 million over several years to help with transition costs and invest $1.9 billion for a 20% share of LATAM, the airline’s largest investment since it acquired Northwest Airlines in 2008.
Bastian said he expects government approvals for the ownership stake to take 12 to 24 months.
The big losers from Delta’s tie-up with LATAM are Brazilian carrier Gol Linhas and American Airlines.
Delta will exit its eight-year partnership with Gol, which only covered domestic connections in Brazil. Executives said LATAM’s wider network will easily make up for the Brazil traffic and generate superior returns.
American, which has the largest market share in Latin America among U.S. carriers, previously pursued a joint venture with LATAM, but it was blocked by the Chilean Supreme Court. Restrictions it imposed would have reduced the partnership’s benefits and the airlines, which both belong to the OneWorld alliance, abandoned the plan. LATAM will now pull out of OneWorld.
American has a huge presence at Miami International Airport, a key hub for connecting to Latin America. It produces operating revenues of $6 billion in Latin America, twice as much as Delta.
Delta officials said the two airlines’ networks are complementary and they don’t anticipate any problems with competition authorities.
As part of the deal, Delta will also acquire 14 Airbus A350 widebody jets. Four of them will be planes currently operated by LATAM and 10 will come from taking LATAM’s future order positions with Airbus. Delta will receive two aircraft in late 2020 and the remaining 12 by 2025, Bastian said. Delta operates more than 800 mainline aircraft, but only 15 A350s and has publicly indicated a desire to increase the size of its A350 fleet.
The transfer of planes won’t compromise LATAM’s growth strategy, CFO Ramiro Alfonsin said, because Qatar Airways is returning several widebody aicraft it subleased.
The CEO said the $16 share offer was a premium price, but was justified by the opportunity in the fast-growing South American market, which represents about 10% of all U.S. international air revenue.
Delta, which has several international joint ventures, does not intend to buy a larger piece of LATAM in the future, Bastian said. It owns 4% of China Eastern, 10% of Korean Airlines and 49% of both Aeroméxico and Virgin Atlantic.
“We’re very comfortable that 20% is the right threshold for Delta,” Bastian said.
He anticipated that Delta’s share of JV route operations will narrow over time from the current 70:30 ratio in favor of LATAM.
Shares of LATAM are up 30% to $11.75 in Friday trading, while Delta is essentially flat, (-0.3%) to $58.60.
LATAM has more than 300 planes in its fleet with an average age of nine years and flew 71 million passengers in the last 12 months. It serves 25 countries, including several in Europe.