DELTA’S FOREIGN CARRIER PARTNERS
Partners Can Enable More International Flying
The previous part of this series, Scope and Delta Pilot Careers, examined how Delta pilot careers are intrinsically linked to the Delta fleet. When Delta grows the fleet by purchasing widebody aircraft and increases Delta international flying, that is considered organic growth. Most international long-haul flying performed by airlines worldwide today is in one way or another dependent on partnerships, and these partnerships can take on various forms.
Beyond the Codeshare, Delta’s Joint Ventures with Foreign Airlines
The most common way for Delta to enter into partnerships with foreign airlines is a codeshare agreement. Codeshare agreements permit Delta to offer flights for sale operated by other airlines that appear to be Delta flights when booking an itinerary. Other than flight numbers and reciprocity arrangements for miles and lounge access, codeshare agreements typically don’t involve coordination, and each carrier is considered having independent control and profit motivation by the respective regulators.
The next step in deepening an existing partnership beyond a codeshare agreement is for Delta to enter into a Joint Venture (JV) agreement with a foreign airline. Joint Ventures require government approval and part of the approval process is the grant of anti trust immunity (ATI). With ATI, the JV partners can coordinate schedules, routes and flights and share profits and losses.
In May 2009, Delta entered into the Transatlantic Joint Venture (JV) with AirFrance/KLM. At the time, Delta had no other joint ventures with foreign carriers. Fast forward 10 years, and by year-end 2019, Delta had JVs with seven foreign air carriers and a JV with LATAM on the way and the potential for another JV with WestJet.
Delta’s Joint Ventures with Foreign Carriers Timeline
More JVs with Foreign Carriers, Fewer Delta Widebody Aircraft
In December 2009, Delta had one Joint Venture agreement with two foreign airlines, Air France and KLM, and a fleet of 170 Delta widebody aircraft.
By December of 2019, the number of JVs Delta had entered into with foreign airlines had grown to seven, with two more in the works. Over the same time as the number of JVs increased, the fleet of Delta widebody aircraft had decreased from 170 to 154. In December 2021, Delta’s fleet stood at 134 widebody aircraft.
Joint Ventures are positive for Delta employees if the JV results in shared Delta growth with the foreign partner. The expectation was that Joint Ventures would enable more widebody flying, yet as JVs multiplied, the number of widebody aircraft in the fleet declined.
OWNERSHIP IN FOREIGN AIRLINES
Beyond the Joint Venture, Delta’s Ownership in Foreign Airlines
While a Joint Venture permits coordination of schedules, routes, flights, and sharing of profits and losses between partners, when the interests of the partners diverge, a JV partnership can struggle.
By taking ownership stakes in foreign airlines, Delta is able to increase its influence on foreign partners. With a large enough ownership stake in a foreign airline Delta is able to extend influence not just as a shareholder but by gaining seats on the board of Directors.
In 2011, Delta made an investment in the Brazilian airline GOL. Over the following years, Delta has continued to invest in foreign airlines and bolster existing investments. By December 2019, Delta held financial stakes in seven foreign airlines.
Delta’s Ownership Stakes in Foreign Carriers Timeline
More Investments in Foreign Partners, Fewer Delta Widebody Aircraft
In 2011, Delta made an investment in the Brazilian airline GOL. Over the following years, Delta has continued to expand investments in foreign airlines. By year-end 2019, Delta held financial stakes in seven foreign airlines.
Ownership Stakes or Joint Ventures are positive for Delta employees if the partnership results in shared Delta growth with the foreign partner.
From the start of Delta’s first ownership stake in a foreign airline, the expectation was that ownership stakes in foreign carriers would enable more Delta widebody flying and a larger Delta widebody fleet. Yet in the subsequent years, as Delta increased the number of ownership stakes in foreign airlines, the number of widebody aircraft in the Delta fleet declined.
OWNERSHIP STAKES IN LIEU OF
Strategy for Global Growth: Invest in Foreign Carriers
Joint Ventures and Ownership Stakes are positive for all Delta employees, including pilots, if the Joint Venture or Ownership stake results in shared Delta growth with the foreign partner. Over 10 years, ending in December 2019, Delta spent $4.5B on investments in foreign carriers while at the same time, the number of Delta widebody aircraft shrank from 170 in 2009 to 154 in 2019. None of this was accidental but rather by design.
DELTA INVESTS IN FOREIGN AIRLINES
The Delta Difference: Invest in Foreign Carriers Instead of Widebody Aircraft
Among US airlines, Delta stands alone. Unlike United and American, Delta invested heavily in Foreign airlines starting in 2011.
According to former Delta CFO Paul Jacobsen, Delta found better returns investing in foreign airlines than investing in additional widebody aircraft resulting in organic growth at Delta.
Three foreign airlines Delta held substantial stakes in, Virgin Atlantic, Aeromexico and LATAM, entered bankruptcy restructuring in 2020. As Delta put it in their 2020 annual report, “…these actions…caused us to reduce our carrying value in the equity investments we have in certain of these carriers to zero…if our commercial arrangements with these partners are not maintained, any investments or other assets associated with those partners could become impaired, and our business and results of operations could be materially adversely affected…”
In Dec. 2021, Delta announced a combined additional $1.2 billion investment to bolster the distressed foreign carriers. https://news.delta.com
In all, Delta has spent more than $5.7B on foreign airlines since 2011. More than half of Delta’s spending on foreign airlines, over $3.7 billion, was between Dec. 2019 and Dec. 2021. For comparison, in 2020, Delta was granted $5.4 billion in emergency relief by the US through the CARES Act to preserve and maintain US airline jobs.
A CHANGE IN GLOBAL STRATEGY?
A Dramatically Reshaped Airline Industry
In March 2020, the COVID crisis dramatically reshaped the airline industry. One of Delta’s former JV partners, Virgin Australia, has ceased long-haul international flying altogether. Aeromexico, LATAM, and Virgin Atlantic are reorganizing under various forms of bankruptcy protection with smaller resultant widebody fleets.
Delta took the opportunity to reduce the widebody fleet by 29 aircraft by retiring the entire 777 fleet of 18 and eleven 767-300ERs.
Delta went from the most profitable to the highest loss as a result of impairments on early aircraft retirements and the bankruptcy/restructuring of airlines Delta had ownership stakes in.
In contrast to most foreign partners, Delta was able to weather the crisis relatively intact, largely due to $5.7 billion in US federal aid through the CARES Act.
A Threat and an Opportunity in Depressed Widebody Aircraft Valuation
As long-haul passenger demand remained depressed in 2021 a second year in a row, values for widebody aircraft values have fallen to historic lows.
The threat is that lower lease rates and ownership costs for widebodies make them attractive to new entrants, as the reduced capital requirements to stand up a fleet of widebody aircraft lower one of the biggest barriers to entry in long-haul international flying.
To the point, while Norwegian Air’s long-haul operation is defunct, a replacement airline, Norse Atlantic Airways, is starting up, using the same leased aircraft but at reduced rates.
The opportunity is for Delta to take advantage of historic low aircraft valuations and modernize and grow Delta’s widebody fleet.
Already Delta has announced that it had agreed to lease seven A350 aircraft from lessor AerCap and in addition two more from lessor VMO. These nine used former LATAM A350-900s in addition to four new A350 deliveries in 2022 will help replace some of the retired 777 fleet.