October 29, 2018 Atlanta: Delta CEO Ed Bastian arrives to unveil the new A220 aircraft while celebrating the 10-year anniversary of merging with Northwest at the Delta Air Lines TechOps on Monday, Oct 29, 2018, in Atlanta. The aircraft features 109 seats total, including seating for 12 in First Class, 15 in Delta Comfort, plus 82 in the main cabin. Innovations include high-capcity overhead bins, extra-large windows and full-spectrum LED ambient lighting. Curtis Comptonfirstname.lastname@example.org
Airlines are limited in flying within and between foreign countries, which is why they turn to partnerships with foreign airlines to allow travelers to move around the world with a single booking.
With plans for an expansion in service to South America, Delta also plans to expand in Miami. Delta has long used its Atlanta hub as a gateway to Latin America. The LATAM partnership means "it's going to be a balance" between Miami and Atlanta, Bastian said.
Delta and Chile-based LATAM Airlines Group plan to form a joint venture for flights between the United States and Latin America that would become the largest player in the U.S.-South America airline market, ahead of the current No. 1 American Airlines and No. 2 United Airlines, Bastian said.
The deal is subject to regulatory approvals for the acquisition of a stake in LATAM and for antitrust immunity for the joint venture, which is expected to take up to two years. According to LATAM, the only overlapping nonstop route between the two carriers is Sao Paulo-New York.
Delta plans to fund its acquisition of the stake at $16 per share largely with debt. It will also invest $350 million to establish the partnership.
The new LATAM deal also means Delta will end its partnership and 10 percent ownership stake in Brazilian carrier GOL.
“The regulatory concerns would lead us to selling [GOL’s] shares,” Bastian said.
Meanwhile, Delta will continue its partnership with Aeromexico, which Bastian said will benefit from the partnership with LATAM.
The deal also marks a major shift for LATAM away from efforts to get approval for a joint venture with American Airlines, which was disrupted in Chile by a court that struck down the deal, according to reports.
“Our proposed agreement was rejected,” said LATAM chief financial officer Ramiro Alfonsin. “As you know, LATAM’s board has the obligation to evaluate other options.”
For Delta, Bastian said the deal “presented itself, and when you have opportunities and you have the capability to move, you move.”
LATAM will exit American’s Oneworld alliance as part of the agreement with Delta. Delta is part of the SkyTeam alliance, but Bastian said Delta is working more on building bilateral partnerships because global alliances “have not fulfilled some of those promises” to make travel more seamless.
Raymond James analyst Savanthi Syth wrote in a note to investors that the deal shakes up global alliaances, and for Delta it “should narrow the South American network gap with American,” though at a “hefty price.” Formerly known as LAN, LATAM was formed in 2012 out of the merger of LAN in Chile and TAM airlines in Brazil.
As part of the deal, Delta will acquire four Airbus A350 jets from LATAM and assume LATAM's order to buy 10 more A350s to be delivered from 2020 until 2025.
Delta will also gain representation on LATAM’s board of directors, where its rival Qatar Airways also has a seat.
LATAM reported a $62.8 million loss in the second quarter of 2019, an improvement from a year earlier, and had operating income of $40.2 million.
“The reason they’re losing money is largely because of foreign currency movements,” Bastian said. “If you look at their operating margins, they’ve consistently been profitable.”
The deal is larger than Southwest's $1 billion acquisition of AirTran, though Delta will acquire only a stake in LATAM.
Delta has made moves to expand in Latin America through partnerships with Aeromexico and GOL, but GOL has in recent years struggled financially amid a recession in Brazil.
“South America has been a challenge for us,” Bastian said. Yet Latin America is still “one of the best and most fertile opportunities for growth.”
Delta has acquired other stakes in foreign carriers including Air France-KLM, Aeromexico, Virgin Atlantic, Korean Air and China Eastern, and potentially plans to invest about $100 million in a 10 percent stake in Alitalia.
But, Bastian said, the LATAM deal “is the biggest one we’ve done on the investment in international partners, and I think it will be the most meaningful.”