Delta has announced a $1.9 billion investment in South America’s dominant airline, LATAM. Coinciding with the announcement, LATAM also said it will be leaving the Oneworld alliance. Notably, that means it will no longer be a major partner of American Airlines.
What Does Delta’s Investment in LATAM Look Like?
Delta is not only investing in LATAM, it also is looking to form a joint venture in a region where they’ve historically been very weak. If approved, this would be a big blow to American Airlines. In fact, American’s joint venture request with LATAM was denied in Chilean court just this past May. We can only assume that is when Delta decided to swoop in.
Here is what Delta is paying and what Delta is getting as part of this deal:
- Delta will invest $1.9 billion for a 20 percent stake in LATAM
- Delta will also invest $350 million to support the establishment of the strategic partnership.
- Delta will acquire 14 more Airbus A350s — four A350 aircraft from LATAM as well as LATAM’s commitment to purchase 10 additional A350 aircraft to be delivered beginning in 2020 through 2025
Why Is Delta’s Investment In LATAM A Big Deal?
Among the US airlines, Delta will now go from a distant third to the leading airline in South America with its investment in LATAM.
- Delta and LATAM will hold the leading position in five of the top six Latin American markets from the US
- They will serve 435 destinations worldwide and carry more passengers between North America and Latin America than any other partnership.
Delta CEO Ed Bastian has been on record saying that the SkyTeam alliance — that Delta is a founding member of — has not “brought a lot of great value to customers..[or] to member airlines.” To his credit, Delta has been working to establish investments in its partners and create a quasi-global alliance of its own.
Delta’s investment in LATAM isn’t without precedent — Delta has stakes in airlines like Aeromexico in Mexico, Virgin Atlantic in Europe, Virgin Australia in Australia, and Korean Air in Asia. However, this news certainly came out of left field and surprised both industry insiders and American Airlines.
Bastian and company is also sticking it to its Middle Eastern arch-nemesis Qatar Airways, who made an investment in LATAM back in 2016. However, that was only a 10% investment compared to Delta’s 20%.
Oneworld: The Smallest Alliance Is Now Getting Smaller
Oneworld released a statement about LATAM leaving the alliance.
LATAM advised oneworld earlier today of their decision to partner with an airline outside of the oneworld alliance. LATAM further advised oneworld that they intend to leave the alliance in due course and in accordance with formal contractual requirements. We are disappointed, but we respect their decision. They have been a valued long-term member of the alliance, and we wish them well.
With Qatar Airways threatening to leave the alliance (not to mention losing Air Berlin in recent years), Oneworld is in trouble as it now loses a huge carrier that dominated South America. The addition of Royal Air Maroc to Oneworld in 2020 seems relatively unsubstantial in the grand scheme of things.
LATAM’s Impact On American Airlines
The news of LATAM leaving Oneworld is particularly a blow to American who now will have to directly compete with an airline it codeshares and has close ties with.
As a real world example from Miami, both American and LATAM flies their own metal to Bogota, Lima, Santiago, and Sao Paulo, among other routes. They also had a complementary schedule and codeshared flights. Now, it seems like they’ll be in direct competition with each other.
American is also losing significant market share in South America where it basically had a stronghold in thanks to its partner network. Will American invest more on its own metal in South America now? And will the airline step up and find new, smaller airlines to form partnerships with? Or will it let Delta just win this fight as it has in many instances in the past?
And as for American’s Miami hub, what will become of it once LATAM leaves Oneworld? So many questions to be answered by American in the months and years to come.
How Is American Airlines Responding To Losing LATAM?
What American Said About LATAM Before
American was clearly aiming to bolster its dominance in South America by applying for a joint venture agreement. Instead of investing in the airline though, American went for approval directly with the courts. Here is a statement from American CEO Doug Parker about the potential joint venture with LATAM from a couple of years ago (before the joint venture was rejected).
When great airlines can work together, customers win with more choices for when and how they travel.
Customers will gain seamless access to more frequent and convenient schedule options than either carrier could offer individually. In the eight countries covered by this new joint business agreement, customers will have access to nearly 330 destinations, including 100 more South American destinations than American’s network serves today.” – Doug Parker, American Airlines CEO
What American Is Saying About LATAM Now
Compare that to what American is saying now about LATAM. They issued the following statement yesterday about the news that LATAM was parting ways with Oneworld.
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 U.S. carrier that isn’t burdened by the ruling.
Further, this change in partnership is not expected to have a significant financial impact to American, as the current relationship provided less than $20 million of incremental revenue to American, and the proposed joint business without Chile would have provided limited upside.
During the transition period, American will work with LATAM to ensure a seamless experience for customers. American Airlines remains the largest U.S. carrier to both Latin and South America and we look forward to competing and growing in this region of the world.”
Clearly, American is trying to downplay the situation even though they are the biggest losers in Delta’s LATAM investment. They are basically saying “good riddance” to LATAM.
While it is pretty eye opening that the American and LATAM relationship only provided $20 million in revenue (not even profits), I wonder how that number was calculated and over what time period it entails.
It isn’t so much that Delta grabbing LATAM is news in and of itself. It is more so that Delta was able to do this quietly and score a coup over American Airlines and Oneworld.
American and Oneworld will be scrambling with the departure of LATAM to Delta. American had a huge strategic and competitive advantage in South America which it is now losing. The airline isn’t particularly strong in either Europe or Asia compared to its competitors, but they could at least rely on South America.
Now, that is all changing. So what now for American? And did Delta overpay its investment in LATAM just to stick to American? Will be interesting to see how this all plays out.
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