Yesterday, LATAM and Delta Air Lines (yes Air Lines not Airlines)  announced that, pending regulatory approvals, Delta was acquiring 20% of LATAM stock and that LATAM was leaving the oneworld alliance.  That’s big and particularly bad news for American Airlines which had established LATAM as its primary partner in South America.

Delta’s is paying $1.9 billion for LATAM stock.  That’s a lot of money to pay for a minority stake in an average airline with limited growth prospects.  Delta will also be spending $350 Million “to expand its partnership with the carrier” and acquire four Airbus A350 planes and assume LATAM’s commitment to buy 10 more A350s between 2020 and 2025.

20190523_091650 (1)
LATAM 777-200 business class

This acquisition is inline with Delta’s recent statements from CEO Ed Bastian about finding little value in airline alliances and instead turning to minority ownership in foreign airlines to create its own system of loosely affiliated airlines that will somehow be controlled to make Delta the primary beneficiary.

The acquisition also seems to be in line with Delta becoming an airbus dominated airline.  After the assumption of LATAM’s obligation for 14 A350-900s, Delta will have a long-haul fleet dominated by Airbus with another 289 Airbus planes on order.  Delta has no Boeing planes on order currently.  That’s a shame because Delta passengers cannot enjoy flying on 787s.

Bastian was not specific as to why Delta considered SkyTeam as a strategic failure.  My guess is Delta found the alliance did not give it the leverage and information that would facilitate controlling route capacity and therefore price.  Controlling price and capacity on intentional routes to extract even larger profits from its customers seems to be Delta’s goal.

20190219_230113
Delta’s worst business-class seat 767-300.

Delta’s agreement with LATAM is a blow to American Airlines, which had attempted to enter into a joint venture with LATAM last year.  That deal was blocked by the Supreme Court of Chile, and American elected to abandon the joint venture if it could not include flights to/from Chile.

20190527_185723
American 777-200 Super Diamond seat, American’s best business-class seat.

It is said that LATAM will withdraw from oneworld alliance, but no definitive date has been set that I know of.   American has issued no guidance to its frequent flyers as to the effect, if any, LATAM’s oneworld departure will have on their ability to earn and use AA miles on LATAM.

While Delta has thrown a monkey wrench onto American Airlines South American operations, I think this move is in part payback for American seeming to pry China Southern from SkyTeam where it was a Delta partner.  Delta claims China Southern’s departure from SkyTeam was inconsequential because its primary partner in China is China Eastern.

However, if China Southern and LATAM are viewed as a trade, American wins because China Southern, which possesses the largest fleet in Asia and is the largest airline in China, has growth prospects that are much greater than LATAM’s.  In terms of air traffic, no one can claim that South America will grow faster than China and Asia.

Overall Impression

Delta is bold to think acquiring minority ownership stakes in foreign airlines will enable it to manipulate those airlines in a fashion that benefits Delta at the expense of the foreign airline and the travelling public.

What d you think of the news from Delta and LATAM?

Advertisements