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ECONOMY | 27-09-2019 10:13

Delta expands in South America with US$2.25-billion Latam deal

Deal, which will see firm take 20% stake in LatAm, will likely turn Delta into largest US airline in the region, says experts.

Delta Air Lines Inc. is dramatically expanding its South American footprint, agreeing to a US$2.25-billion deal with Latam Airlines Group SA after a similar arrangement between the Chilean company and American Airlines Group Inc. ran into legal trouble.

The pact calls for Delta to pay US$1.9 billion for a 20-percent stake in Latam, Latin America’s largest carrier, the companies said in a statement Thursday.

Delta will also invest US$350 million to help the Santiago-based airline unwind ties with American’s Oneworld alliance. Chile’s Supreme Court blocked the country from inclusion in Latam’s proposed venture with American in May.

Delta’s agreement furthers the carrier’s ambitions to expand internationally by buying pieces of foreign airlines, adding Latam to a list of partners that includes Virgin Atlantic Airways Ltd., Air France-KLM and Korean Air Lines Co. Delta also owns a large stake in Grupo Aeroméxico SAB, so the tie-up with Latam will fill out its network throughout Latin America.

“The deal is likely to turn Delta into the largest US airline to the region,” Bloomberg Intelligence analyst George Ferguson said in a report. “A strong balance sheet and cash flow allows Delta to draw a key American Airlines partner into an alliance, even as it supports Latam’s stock price by buying at almost an 80-percent premium.”

For American, which is currently the largest US carrier on Latin American routes, the “loss of its Latam partnership to Delta is a significant blow that likely leads to dramatically reduced share in a vital market,” Ferguson said.

Delta will exit its nine-percent stake in Gol Linhas Aéreas Inteligentes SA, a Brazilian carrier. Gol’s US depositary receipts tumbled 9.4 percent to US$14.90 after the close of regular trading in New York. Latam’s ADRs surged 47 percent to S$13.23. Delta was little changed.

The Delta flight-sharing agreement accounts for only 0.3 pecent of Gol’s total revenue, a spokesman for the Brazilian company wrote in an email. The two airlines will honour all tickets acquired through the agreement, he said.

Growth opportunities

Delta and Latam will pursue a joint-business arrangement covering Brazil, the region’s top travel market, and three countries that have open skies agreements with the United States: Chile, Colombia and Peru. Argentina would eventually be included if a pending open-skies deal with the US is approved, the Atlanta-based airline said.

“We immediately saw a lot of opportunities together for growth,” Delta Chief Executive Officer Ed Bastian said in an interview. “This is a big change for Latam as they unplug from American and Oneworld.”

American attributed Latam’s decision to the court ruling. Chile’s National Economic Prosecutor had filed a petition to block Latam’s joint business deal with American on the grounds that it affected competition. Chile’s tour operators association, Achet, had alleged that the agreements were effectively price collusion.

‘Negative ruling’

“Given the recent negative ruling by the Chilean Supreme Court, which would have significantly reduced the benefits of our partnership since Chile was not approved as a part of the potential joint business arrangement, we understand Latam’s decision to partner with a US carrier that isn’t burdened by the ruling,” American said in a statement.

In April, American and Latam began seeking regulatory approvals for a deal that would allow them to jointly market and operate flights between the US and six South American countries. The Fort Worth, Texas-based company said the end of its plans with Latam wouldn’t have a major financial impact.

Delta’s talks with Latam began with “a third-party introduction,” Bastian said. Delta will buy its stake in Latam through a public tender offer at US$16 a share, funded mainly with newly issued debt and available cash. Brazil is Latam’s largest market, accounting for 30 percent of the company’s overall business, Bastian said.

A350 jets

As part of the deal, Delta will acquire four Airbus SE A350 jetliners in Latam’s long-haul fleet, plus 10 more scheduled for delivery through 2025. Latam will keep flying eight A350s already in its fleet.

“We’ve been considering our options to grow that fleet as well and so this is an opportunity for us to grow the fleet sooner than we were anticipating,” Bastian said.

Delta and Latam “do not anticipate any issues” winning regulatory blessings for their joint business, a process that will likely take one to two years, Bastian said. The deal is subject to regulatory approvals including antitrust immunity.

The US airline will gain representation on the Santiago-based carrier’s board of directors. Latam isn’t currently planning to join the Delta-led SkyTeam alliance, Bastian said.

‘Best connectivity’

The transaction comes six months before Latam CEO Enrique Cueto Plaza plans to leave the carrier he co-founded and ran for more than 20 years. He merged Chile’s Lan Airlines with Brazil’s TAM to form the group in 2012. Since then, Latam has struggled with a deep recession in Brazil and rising competition from budget carriers.

Cueto will be replaced by Roberto Alvo Milosawlewitsch, Latam’s commercial chief and former head of its Argentine unit.

“This alliance with Delta strengthens our company and enhances our leadership in Latin America by providing the best connectivity through our highly complementary route networks,” Cueto said in the statement.

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by Justin Bachman, Bloomberg


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