Is Delta Brilliant, Etihad, or Rex Tillerson?

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Delta and Latam made news in the travel world last week with the announcement that Delta intends to purchase 20% of Latam for $1.9 billion. Latam will sever ties with American Airlines and leave Oneworld, though not to join SkyTeam at this time. Delta will sell its 9% stake in Brazil’s Gol in the hopes of smoothing regulatory approval.

Delta Latam announcement 2019

The coverage of the proposed transaction has focused on the chess moves that us travelers revel in. Yet, this is a business deal and is anyone looking at the numbers? The frequent flyer blogs are not, and even the WSJ and Barron’s articles are doing little more than reporting share prices movements. Delta, American Airlines, and Latam are all publicly traded companies with financials for all to see.

If everyone else can be lazy about the numbers, I might as well be, too. Allow me to suggest some skepticism on Delta’s purported strategic brilliance.

On buying companies:

  • Buying 20% is not buying 100%, is not buying 51%, and is not buying 50%.

On investing in airlines, the Etihad way:

  • The recent corollary to Delta is Etihad spraying airline investments around the world. That was brilliant or not, until it was definitely not. Delta is even considering investment in Alitalia, which previously was seen damaging…Etihad.

On Latam, a wonderful partner?:

  • Both when I briefly lived in Miami, and for a longer stretch in New York, I flew both AA and Latam without getting a sense that they had any more cooperation than typical alliance partners, which is to say, very little. Both airlines fly a lot to destinations in Latin America. AA may be right to say losing the relationship will not cost them much if only because little was made of it.
  • Latam is an airline holding company in Chile that is cobbled together from six country subsidiaries (Argentina, Brail, Colombia, Ecuador, Paraguay, and Peru). That is a lot of political and regulatory stuff to deal with every day of every year, indeed the reported trigger for the Delta deal is a Chilean court ruling against a proposed AA-Latam joint venture
  • Someone maliciously turned off ticketing and baggage arrangements between AA and Latam, and it might have been Latam. How someone treats their ex is something to note when entering a relationship.

On American Airlines:

On Delta’s strategic brilliance, or are they Rex Tillerson?:

  • How did Delta so badly blow Northwest’s strong position in Asia and Oceania? Neglect from the day the merger closed lost devoted customer bases in Japan, Philippines, Microneisa, and many more. (Part of this involved chasing a partnership with then in bankruptcy JAL to leave Oneworld.)
  • Why did Delta so gratuitously insult Korean Air and take years to repair the relationship with its key Asian partner?
  • What has come of Delta’s political campaign against the ME3 carriers (Emirates, Etihad, and Qatar), other than Delta executives often looking like asses? I wonder if current Delta CEO, Ed Bastian, goes along with the anti-ME3 political campaign because he believes in it or because he inherited from former CEO Richard Anderson?
  • What has come of Delta’s investment in Virgin Atlantic? This perhaps is the most commercially successful as the Delta pilots union is upset about Delta offloading routes it once operated to Virgin Atlantic to fly?
  • What has come of Delta’s investment in Aeromexico?
  • What has come of Delta’s investment in China Eastern other than losing a partnership with China Southern?
  • What has the Delta and WestJet joint venture produced?
  • What did Delta make of its investment in Gol (that it now plans offload to gain regulatory approval for the LATAM deal)?

Delta and its Partners

Delta runs a strong US-based airline operation and is highly profitable compared to peer airlines.

Delta is my preferred US airline (except for when I can fly JetBlue). I am a Diamond Medallion and Million Miler, dating my flying back to the Northwest days. I’ve flown every Delta and SkyTeam partner except Aerolineas Argentinas.

As a traveler I haven’t seen much to make me think Delta’s international investment strategy is necessarily brilliant because they are Delta. Maybe they are picking airlines with better prospects than did Etihad, except they have made an offer to be next in line for Alitalia. If Delta were to swallow its pride, one of the ME3 would fit Delta’s ‘coaltion of the willing’ non-alliance vision. Think of the military traffic of a Delta-Qatar tie-up.

There are some nice travel benefits on Virgin Atlantic and Virgin Australia, while the others are not much more than what SkyTeam already offers. The China Eastern stake has produced no meaningful improvement in the travel experience and is years away from being a workable international-to-international connection option compared to the smooth experiences of competing Asian airports.  I’ve been waiting years for meaningful reciprocal frequent flyer program benefits with WestJet. The Air France-KLM joint venture is most notable to me for Delta routinely blocking trans-Atlantic awards on Air Francel-KLM flights that other SkyTeam members can access. The partnership mainly seem to be a way to try to get people to buy exorbitant codeshares rather than shop around.

Gaps on the Map

There is lots of talk that Delta has a gap in Latin America or a gap in Africa that needs to be filled by an investment or joint venture. United relies on a few joint ventures to Europe and for the rest, its Star Alliance relationships, not an array of investments (update: United expert Seth Miller, in the comments, notes that I left out United’s trans-Pacific JV and investments in Latin Amerca). It also seems to work for American and Oneworld, with fewer and not necessarily better airlines than SkyTeam.  It is a paradox that the airline alliances work so well for many travelers, yet various airlines seem to want to hurry their demise.

I’d like to hear from the person that really digs into the numbers on all this.

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Phil
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Phil

Shouldn’t that last one be Trump?

Has any major ever done well buying a part of a smaller foreign airline?

Kannan
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Kannan

You raise a lot of valid points in this article. I thought I will share my comments on the alliance front. As long as some of the major players are still part of an alliance, their decision to downplay alliances will come back and bite them. Let us take LA as an example DL partner in the so called ‘Alliance of the Americas’. With MIA and MAD locked up, LA had all of its important FF base in hand, ranging from Europe to Japan to North America to Oceania. But now by leaving oneworld, here is what they want their… Read more »

Seth Miller
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The observation that AA/LATAM never really cooperated deeply is an accurate one and what the JV was supposed to fix. But the Chilean courts squashed that idea. Presumably the DL version will have no trouble being approved and the DL/LATAM version of operations will look very different in 3-5 years. Delta takes seats on the Board. It pushes its technology stack (which is pretty good, for an airlines) to its equity partners. And it forces the cooperation that it wants to see, on everything from route planning to loyalty to operations. Whether that’s good or bad in many ways depends… Read more »