Delta expands in South America with USD2.25B Latam deal

BLOOMBERG – Delta Air Lines is dramatically expanding its South American footprint, agreeing to a USD2.25 billion deal with Latam Airlines after a similar arrangement between the Chilean company and American Airlines ran into legal trouble. The pact calls for Delta to pay USD1.9 billion for a 20 per cent stake in Latam, Latin America’s largest carrier, the companies said in a statement last Thursday. Delta will also invest USD350 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. Delta also owns a large stake in Grupo Aeromexico, so the tie-up with Latam will fill out its network throughout Latin America.

“The deal is likely to turn Delta into the largest United States (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 per cent 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 per cent stake in Gol Linhas Aereas Inteligentes, a Brazilian carrier. Gol’s American depositary receipts tumbled 9.4 per cent to USD14.90 after the close of regular trading in New York. Latam’s ADRs surged 47 per cent to USD13.23, while Delta was little changed. JPMorgan analyst Fernando Abdalla upgraded his recommendation on Latam to neutral and raised his target to USD14 from USD10.

The Delta flight-sharing agreement accounts for only 0.3 per cent 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. Morgan Stanley analysts including Josh Milberg said Gol’s stock would come under some pressure due to uncertainty over how and when Delta will divest its position, though any operating impact should be modest.

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 US: 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. “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 USD16 a share, funded mainly with newly issued debt and available cash.