Delta Air Lines plans to spend $1.9 billion to buy a 20 percent stake in South American airline group LATAM, in its largest acquisition since the Delta-Northwest merger in 2008.
If approved, Atlanta-based Delta expects the deal to make it stronger in South America, a crucial region of the world where it trails behind competitors.
With the partnership, Delta said travelers would have access to more destinations around the world.
"South America is one part of the world where we're not well represented," Delta CEO Ed Bastian said during an interview with The Atlanta Journal-Constitution. "The hubs that LATAM has in Sao Paulo and Santiago, Chile and Buenos Aires and Lima and Bogota – those are all rich markets, growing markets, markets that are not well served by Delta today.… Those will be the main areas we'll be growing."
Airlines are limited in cross-border acquisitions, and are also limited in flying within foreign countries 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 plans to expand in Miami.
For years, Delta has 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.
As part of the deal, Delta and 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.
That would put Delta and LATAM 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. The full regulatory review is expected to take one to two years.
In the deal to acquire the LATAM stake at $16 per share, Delta plans to fund the purchase largely through debt, along with some cash. Delta would also invest $350 million to establish the partnership.
The new LATAM deal will disrupt a partnership Delta has with Brazilian carrier GOL. Delta now plans to sell off its 10 percent ownership stake in GOL.
“The regulatory concerns would lead us to selling [GOL’s] shares,” Bastian said, which he called “a hard [decision] to make.”
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.
LATAM will exit American’s Oneworld alliance as part of the agreement with Delta.
It's yet to be seen what regulatory hurdles Delta and LATAM may face for their joint venture.
Chile-based LATAM is the largest airline group in Latin America with hubs in Santiago, Sao Paulo, Buenos Aires, Bogota, Lima, Quito and Guayaquil. 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 said that will support its fleet transformation.
Delta will also gain representation on LATAM's board of directors.
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 Delta-LATAM deal is larger than Southwest's $1 billion acquisition of AirTran, though Delta will acquire only a stake in LATAM.
Delta has acquired other stakes in foreign carriers including Air France-KLM, Aeromexico, Virgin Atlantic, Korean Air and China Eastern. But none have been as large in dollars as the LATAM deal.
Delta's $2.8 billion acquisition of Northwest Airlines allowed the carrier to gain a larger national and global presence and establish a stronger foothold in Asia. Since then, 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.”
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