October 2, 2019                                                                                                                                                                  19-05

More on Delta’s Investment in LATAM

  • Delta intends to form a South American Joint Venture with LATAM Airlines Group
  • Potential for significant growth in Florida and South America
  • ALPA and Delta are required to meet to negotiate PWA terms that will apply to the Joint Venture

Another Joint Venture: The Background

On September 26, Delta announced its intent to spend $1.9 billion to acquire a 20% stake in the Chilean- headquartered LATAM Airlines Group. Delta is also spending another $350 million to support the establishment of the partnership. This investment is the largest transaction for Delta since it merged with Northwest Airlines in 2008. Additionally, Delta is expected to take seats on LATAM’s Board of Directors. This JV is intended to fill the most sizeable hole in the Company’s international network: South America.

LATAM formed when LAN Airlines – previously LAN Chile – was merged with Brazil’s TAM in 2012. LATAM, currently a Oneworld alliance member, was expected to form a Joint Venture (JV) with fellow Oneworld member American Airlines, which has been underway since 2016. However, in May of this year, the Supreme Court of Chile rejected the deal citing an excessive number of overlapping routes.

How does Delta benefit from its $1.9B equity stake?

Gauging the stock market’s reaction to the news and analysts’ views on this purchase, consensus indicates that Delta’s plan has been well-received. According to Delta’s press release:

  • Delta will receive unprecedented access to the South American market while plugging a long-existing hole in our network. This JV establishes the leading airline partnership throughout the Americas and upends the balance of power in the region.
  • Delta vaults from #4 in the top six markets between the U.S. and South America to #1 in five of the top six South American destination countries.
  • Delta acquires four A350s from LATAM and assumes the “commitment to purchase” 10 additional LATAM A350s “pending government approval of the agreement.”
  • The partnership serves 435 destinations worldwide and carries more passengers between North and South America than any other alliance.

ALPA View: The Knowns and Unknowns

No deal, much less a JV, comes without risks and rewards. As career-long stakeholders in Delta, pilots have a keen interest in working for a financially viable company, and good business decisions ultimately support pilot priorities

by ensuring the survivability and growth of the airline. Those priorities must be reflected and properly balanced with the business decisions as the JV evolves.

Possible benefits to Delta pilots

  • Potential for greater domestic and international growth.
  • Transfer of 14 A350s, a mix of A350-900s and A350-1000s, beginning in 2020 through 2025 contingent upon government approval of the deal.
  • A greater presence in Florida as Miami, the most significant South America gateway, will see significant expansion.

The Risks

Delta has stated that this “new partnership builds on our successful strategy of teaming up with top international airlines to fuel our growth.” Furthermore, the Company specified, “the strategic partnership will unlock new, attractive growth opportunities on Delta metal in the region.” While hopeful those words prove to be sincere, we have been here before at the onset of preceding JVs that did not evolve into growth as promoted.

  • Delta proclaimed that the partnership will fuel our growth. Is that revenue growth, capacity growth or both? Currently LATAM’s flying between the US and South America dwarfs what Delta flies.
  • “Attractive growth opportunities on Delta metal.” Are those opportunities on widebody airframes, narrowbody or both? How much will LATAM grow as Delta grows?
  • 14 A350s: Are those growth widebodies or are they replacement hulls for some of the current fleet? In recent history Delta has canceled or reduced widebody orders.
  • Scope compliance: Will Delta comply with our current agreement (Section 1 E. 10.) and negotiate a production balance that benefits the careers of Delta piliots?
  • The unknown unknowns:
    • How will this JV interact with Delta’s other JVs, especially the upcoming Blue Skies JV and the current Aeroméxico JV in Latin and South America?
      How will the LATAM investment and transition affect the current Contract 2019 negotiating environment?
    • Conclusion

While optimistic that the Company’s plans for growth and the additional aircraft will materialize and benefit the careers of the Delta pilots, future actions must reflect current contractual assurances.

  • The Company must, per Section 1 E. 10., meet for the purposes of negotiating a production balance applicable to the LATAM JV prior to finalizing the JV. Delta has recognized the pilots’ needs for equitable growth and have stated such regarding this deal.
  • If a production balance is agreed upon, the Company must comply.
  • Contract 2019 is a high priority for the Delta pilots and progress must not be impeded by current events.

Bottom Line

ALPA has spent the last six months educating the pilot group about the importance of scope, highlighting the history and contractual language that has had career-altering effects. The solution going forward is clear – Delta pilots want equitable growth with Delta’s partners. Further, we are standing shoulder-to-shoulder to defend our Pilot Working Agreement by standing up to Section 1 violations.

Delta pilots look forward to partnering with Delta for an equitable transition on the LATAM JV. Similarly, we must also reach a fair and balanced Blue Skies agreement assuring equitable growth on Delta metal and compliance with

all sections of the Delta PWA, including new and existing JV provisions. Scope is one of the crucial four pillars that must be improved upon in Contract 2019 – and we are aggressively pursuing solutions to ensure we obtain equitable growth that is vital to our long-term interests.

This MEC Brief is a product of the Delta MEC Communications Committee