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LATAM’s exit from oneworld is likely to drive a loosening, or even end, of its commercial ties with British Airways and Iberia, which will cost those two carriers a major source of traffic to and from a key strategic region, says airline industry consultant Judson Rollins.
Delta Air Lines’ surprise announcement that it was taking a 20 percent stake in Chile’s LATAM Airlines Group S.A. represents a major shakeup in the dominance of North and South America air travel, as the combination of the two airlines is effectively in a leading position in five of the top six Latin American markets from the U.S.
The $2.25 billion deal has Delta displacing American Airlines and the oneworld Alliance as LATAM’s partner. American, which has had a decades-long partnership with LATAM, had been attempting to form its own strategic partnership with the Santiago-based carrier.
Delta will acquire four A350 aircraft from LATAM. Delta has also pledged to assume LATAM’s commitment to purchase 10 additional A350s to be delivered beginning in 2020 through 2025.
In its official comment on the Delta/LATAM deal, American cited a “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.”
While American said it understood LATAM’s decision to partner with a U.S. carrier that wasn’t “burdened” by the Chilean court’s ruling, it sought to diminish any perceived impact. The change in this alliance is not expected to have a significant financial impact to American, “as the current relationship provided less than $20 million of incremental revenue” to the carrier.
“The proposed joint business without Chile would have provided limited upside,” American added.
Naturally, Delta and LATAM executives see things differently.
“This transformative partnership with LATAM will bring together our leading global brands, enabling us to provide the very best service and reliability for travelers to, from and throughout the Americas,” said Delta CEO Ed Bastian, in a statement.
“This alliance with Delta strengthens our company and enhances our leadership in Latin America by providing the best connectivity through our highly complementary route networks,” added LATAM CEO Enrique Cueto Plaza, in the same Delta release. “We look forward to working alongside one of the world’s best airlines to enhance the travel experience for our passengers.”
Delta’s Dismissal Of SkyTeam?
While the announcement noted that LATAM would be exiting oneworld, there was no mention of whether it would join Delta’s SkyTeam network. Membership in oneworld rival SkyTeam is not necessarily off the table for LATAM. But it is looking less likely when considering the relationship between SkyTeam and Delta, one of the alliance's founding members.
Most notably, Bastian hinted at a potentially different direction for LATAM’s place when he suggested SkyTeam’s value to the airline was not as great as he’d like it be in an online video interview with Bloomberg News last week. In that interview, Bastian said that operational efficiencies that were the original promise of network alliances has not been realized by member airlines. He specifically alluded to investments and joint ventures were where the true benefit for Delta is. Bastian highlighted Delta's 49 percent stake Virgin Atlantic, its 49 percent ownership of Aeromexico, as well as investments in Korean Air, Air France-KLM, and China Eastern.
Shifting Alliances
The comment points changes in the shape of network alliances and how Delta, which noted during the carrier's Q2 earnings call that Latin America is positioned to remain the airline's best performing region, appears interested in changing the landscape.
The impact will be felt acutely across the 20-year-old oneworld, which represents 13 airlines (including LATAM, for now) across 180 countries, and 19-year-old SkyTeam, which has 19 members serving 175 countries.
To get a sense of the implications of the Delta/LATAM deal means for the airlines involved and the wider regional and global aviation alliances, we checked in with airline industry consultant Judson Rollins.
Kambr Media: How significant a shift is this in the region? Are there wider global implications?
Judson Rollins: This puts Delta in the lead position among US carriers serving Latin America. Delta’s hubs aren’t particularly well located for Latin connectivity, so it has compensated through strong partnerships with Aeroméxico and GOL. Trading its GOL partnership for an even larger one in South America will put Delta leagues ahead of American and United in serving Latin America from the US. Meanwhile, American will be left with the fewest and smallest partners in the region.
Why is Delta taking a 20 percent stake in LATAM? Was LATAM struggling?
LATAM had a rather healthy 2018 and nearly breakeven first half of 2019, which is quite an achievement considering the economic woes of Argentina and Brazil. Delta’s approach to airline partnerships almost always involves taking significant ownership stakes, which usually gets it board seats and more influence in steering the strategies of its airline partners.
Delta’s ability to acquire such a large stake for cash is another advantage of its fortress-like balance sheet and healthy free cash flow, something that American and United simply haven’t been able to match to date.
How big a blow is this for AA?
In May, Chile’s Supreme Court rejected a four-way JV between LATAM, American, BA, and Iberia. American said Thursday that limited the benefit of future cooperation with LATAM, but this feels like an after-the-fact justification as the two could have negotiated a more limited agreement that could have passed judicial scrutiny. Now American has lost its largest partner in Latin America and a major source of traffic to and from cities outside its network. It’s certainly not a lethal blow, but it will cost American market share in what has traditionally been one of its strongest regions.
Are other airlines likely to be impacted positively or negatively by this change?
LATAM’s exit from oneworld is likely to drive a loosening, or even end, of its commercial ties with British Airways and Iberia, which will cost those two carriers a major source of traffic to and from a key strategic region.
What does this mean for competition between oneworld and SkyTeam?
LATAM’s pending exit from oneworld is a major loss as it is the alliance’s only Latin American member. Meanwhile, if LATAM joins SkyTeam – which hasn’t yet been confirmed – that alliance will add its third and largest Latin member. Given Delta CEO Ed Bastian’s comments last week about SkyTeam, it’s quite possible that LATAM may not join the alliance and may instead join one of Delta’s own multilateral partnerships.
