CHICAGO (Reuters) - Delta Air Lines (DAL.N) on Thursday announced it would buy a 20% stake in LATAM Airlines Group (LTM.SN), Latin America’s largest, for $1.9 billion, creating a major new airline partnership and ending the Chilean carrier’s ties with American Airlines.
The surprise deal will give Delta a much bigger footprint in Latin America, a key growth market and where Chilean LATAM flies to dozens of destinations including Argentina, Peru and Brazil.
American Airlines Group Inc (AAL.O), which has long been the leading U.S. carrier in the region, said the loss of LATAM as a partner would not have a significant impact on its financial results.
American said its LATAM partnership had limited upside after the Chilean Supreme Court struck down the two carrier’s pursuit of deeper route alliances alongside Oneworld alliance members British Airways and Iberia.
“This is a body blow for American, but not a lethal body blow. It means that Delta will have more access to Latin America than it did before, but American already has much of that in its back pocket,” aviation analyst Mike Boyd said.
Following its tie-up with Delta, LATAM will exit Oneworld and pursue route options alongside Delta and its partner Grupo Aeromexico (AEROMEX.MX), which are both part of the rival SkyTeam alliance. It has not, however, decided whether to officially join SkyTeam.
Meanwhile, Delta will sell its stake in Brazil’s largest airline Gol (GOLL4.SA), a competitor of LATAM.
Delta does not expect regulatory obstacles for its tie-up with LATAM, where it will gain representation on the board of directors. The plan envisions growth for both carriers, which currently overlap on only one route, Chief Executive Ed Bastian told Reuters.
“I think it’s a great fit,” he said.
Atlanta-based Delta expects the LATAM deal to be accretive to earnings per share over the next two years and add $1 billion in revenue growth over five years, Bastian said.
Delta is using newly issued debt and available cash for the deal. It will also provide LATAM an additional $350 million to help it transition out of Oneworld and plug into Delta’s network.
The two can start code-sharing before they receive government, regulatory and anti-trust approval for the larger tie-up, a process Bastian said he expects to take between 12 and 24 months.
As part of the deal, Delta will also acquire four A350 aircraft from LATAM and assume LATAM’s commitment to purchase another 10 A350s to be delivered between 2020 and 2025 for an undisclosed sum.
It has also been negotiating a 10% stake in Alitalia as part of its strategy to boost its international presence through equity investments. That plan has not changed with the LATAM deal, which Delta started studying about three months ago after an approach by a third party, Bastian said.
Delta’s shares, which have far outperformed its U.S. rivals this year, closed 0.8% higher before the announcement.
The LATAM deal is its largest investment since it merged with Northwest Airlines a decade ago.
Reporting by Tracy Rucinski; Additional reporting by David Sherwood in Santiago and Marcelo Rochabrun in Miami; Editing by Dan Grebler and Tom Brown