Delta’s global growth drive stalled
NEW YORK: Delta Air Lines had a strategy for years: expand worldwide by buying stakes in airlines and partner with them while avoiding the cost and red tape of full acquisitions.
That strategy, more aggressive than those of any rival, could now backfire. Aeromexico this week became the third Delta partner to file for bankruptcy due to the coronavirus pandemic, following LATAM Airlines Group and Virgin Australia.
In Latin America, Delta spent nearly $3 billion to build up stakes in Aeromexico and LATAM over the past three years.
The investments had promise before the pandemic, but their valuations have since been crushed and could be leveled entirely if equity holders are wiped out, as is common in Chapter 11 reorganizations.
Even if that does not happen, Delta faces diluted equity stakes if other partners come in through the two airlines’ reorganizations, as well as a probable downsizing. Both factors could make them less promising partners to connect with its flights.
In the worst case scenario, it would be at the back of the queue if either company liquidates, getting pennies on the dollar.
But over the longer term, partnerships could be a way for US airlines to reboot international travel, which is expected to recover more slowly than domestic travel.
“A restructured set of partners… could end up being the way that the US majors reconstruct their global networks,” said Vik Krishnan, who leads McKinsey’s Travel practice in North America. “In other words, they become more reliant on these partnerships rather than less.”
Even if Delta did want to trim back its global partnerships, the bankruptcies mean that any stake sale would make little sense, at a time when Aeromexico and LATAM are valued at record lows.
One consultant said there was a chance Delta could chip in some funds to help Aeromexico survive, given the importance of the market across the southern US border.
“Delta has spent time, money and effort on Aeromexico. If they had to rescue them, I think they would,” said Carlos Ozores, an aviation consultant at ICF.
It might not be as inclined to rescue LATAM, Ozores said, partly because the relationship is much newer.
Delta Chief Executive Ed Bastian has said the company stands by its partners.
Following Aeromexico’s bankruptcy, Bastian forecast it would emerge from Chapter 11 “well positioned to succeed and will be a stronger partner for Delta.”
But the carrier, which has received $5.4 billion in US government aid to pay employees through September, has shown no willingness to put cash into foreign partners’ restructurings.
The Financial Times on Wednesday reported Delta would support Virgin Atlantic, in which it holds a 49% stake, with deferred payments on branding fees and shared IT platforms. (Reuters)