Commercial aviation is shaped by nationhood and foundations agreed by countries at the Chicago Convention of 1944. This event also…
Opinion: Delta is Building an Aerial Empire Right Under Our Noses
Delta Air Lines is one of the world’s largest air carriers and, now, certainly the most formidable force in the global aviation market. In a shocking announcement on Thursday afternoon, the Atlanta-based company said it would be taking a 20 percent stake in LATAM, Latin America’s biggest airline conglomerate. Delta will be taking approximately $1.9 billion worth of LATAM shares.
This is significant for many reasons but is yet another tell-tail example of Delta’s strategic market planning, which extends far beyond its own fleet and route network. First of all, Thursday’s mind-blowing announcement was a major swipe at American Airlines who, for years, has largely based much of their Latin American route network around LATAM codeshares.
Of all the major U.S. carriers, American has long had the largest South American presence. One could even say that the premise behind its ever-so-chaotic Miami hub is to connect the two continents. American purchased several Latin and Central American routes from the now-defunct Eastern Air Lines in the 1990s, which opened the door to what is now an extremely expansive network in the region. The Fort Worth-based carrier’s agreements with LATAM only furthered this. Even as American suffered through mergers, bankruptcies, and even September 11th, their South American network stayed strong.
A New York Times article from June 1990 highlighted American’s ambitious South American route plans from Miami. “But starting on Sunday, American Airlines will begin flying to Central and South America, using Miami as its gateway, in what will be the largest route expansion for the nation’s largest airline. American, which bought the routes to 20 cities in 15 countries from Eastern Airlines for $330 million,” the story read.
Nevertheless, though, Delta’s investment in LATAM will completely shake-up the market — one that is already extremely complicated.
While a large chunk of LATAM’s operations is centered in Brazil, the company has subsidiaries in other South American countries including Peru and Argentina. For this deal to be effective for both parties, each local anti-trust regulator must approve it, keeping in mind each country’s laws regarding how many shares a foreign entity can take in a local company.
Thursday’s announcement also ruffles feathers in the oneworld alliance and at GOL, another Brazillian airline of which Delta has a stake in. LATAM has been a major player within the oneworld alliance, joining the ranks of American Airlines, of course, along with British Airways and Qantas among others. With the news of Delta’s stake, LATAM also announced that it plans to leave the alliance, which will create a gaping hole in the inter-connected network.
Other oneworld airlines and their subsequent passengers will now be reliant upon American’s network in the region.
On the other hand, Brazil’s GOL Airlines will lose a long-time backer as a result of this announcement. According to reports, Delta will sell its remaining shares in GOL, should the deal with LATAM be cleared by regulators. Due to this, shareholders got shaky over the news late in the week with GOL’s stock dipping over six percent. The airline tried to downplay the news, adding in a statement, “It [The news] has no significant financial impact.”
Delta is clearly looking to shake-up the Sao Paulo market, along with other Latin American cities, no matter the toll it may take on shareholders and consumers.
At the end of the day, this news plays right into Delta’s continued strategy: to have a piece of every market in almost all corners of the world. This is yet another key move as Delta continues to build an empire of partner airlines by securing stakes in them, rather than a traditional codeshare agreement or alliance.
The Atlanta-based carrier has done this on nearly every continent. In Europe, Delta maintains a massive 49 percent stake in the U.K.’s Virgin Atlantic. In China, the carrier owns a 3.55 percent stake in China Eastern Airlines valued at $450 million. In North America specifically, Delta has a 49 percent stake in Mexico’s flag carrier Aeromexico and a deeply integrated joint venture with Canada’s second-largest airline WestJet.
Of course, with such a widely diverse selection of stakes, Delta is taking a huge risk, too. When the economy tanks, it is no secret that the airline business is typically one of the first to feel the heat. So, in this event, Delta could be heavily dragged down by one of these investments.
Joint ventures, codeshare agreements and alliances are the backbone of global airline markets. Inter-connectivity is the name of the game. It is clear that Delta is doing something different, though, and the LATAM announcement on Thursday was a perfect example. Instead of simply partnering with another company, Delta wants imperial control and a say in how its ‘partners’ — investments — operate to enrich it as the stockholder. What Delta is doing now has the potential to completely shift future competitive strategies in the airline business.
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