Delta continued its efforts to take over the world last week with the announcement of its anticipated joint venture with Canada’s WestJet. For Delta, this is just another piece of the puzzle. It has spend years cobbling together a network of joint ventures and equity stakes to build its empire. And it’s not hard to see where the airline is looking next.
I suppose you could make the argument that Delta’s joint venture strategy now goes back 25 years to, well, the dawn of airline joint ventures. But in reality, that was all Northwest’s doing when it saddled up to KLM and started the trend. With Delta and Northwest merging along with Air France and KLM, that naturally morphed into the joint venture those guys have over the Atlantic today. (I do think it’s important to remember just how forward-thinking Northwest and KLM were back then. Oh, and remember this bad boy?)
This joint venture gave Delta a tremendous presence over the Atlantic. The addition of Alitalia to the mix… helped? (Ok, it was mostly irrelevant and I would expect to see Alitalia leave it soon enough.) But there was one big hole that Delta simply couldn’t fill. London.
Despite its country’s current isolationist tendencies, London still remains the important business hub in Europe (if you can still call it part of Europe), and Delta wanted to be a player. Unless you count the rightfully short-lived Air France attempt to fly London to LA, Delta’s existing partners weren’t going to help. So it went and made new friends. Virgin Atlantic was struggling and Singapore Airlines was looking to offload its stake. Delta picked up 49 percent and basically made Virgin Atlantic do its bidding. Earlier this year, Air France/KLM picked up 31 percent of Virgin Atlantic and Delta took 10 percent of Air France/KLM. So now they form a tight-knit group.
Why not just merge? I’m sure they would if they could. But except in very rare situations, there can’t be cross-border mergers. A tightly-controlled joint venture is the best they can do until governments change their minds.
Europe was obviously in good shape after all these moves, but Delta needed help elsewhere. It found itself looking south toward Latin America.
Delta’s Latin presence was relatively weak, especially compared to American’s. Back in 2011, it saw an opportunity to get a toehold when Brazil’s Gol was floundering. Delta bought 10 percent. (And oh, Air France/KLM owns a piece as well.)
But that wasn’t really going to help cover Latin America, just Brazil. So Delta made a move on something a little closer to home, Aeromexico. In 2012 it bought a small stake but then earlier this year it bought another third of the company. It has the ability to go up to 49 percent if it wants. The airlines entered into a joint venture which now allows Delta to act as the puppet master, as it seems to do with Virgin Atlantic. Heck, Aeromexico may even take C-Series aircraft that Delta has on order while the trade dispute gets worked out.
This gives the airline good coverage in Mexico and Brazil but not much else. There’s more work to be done.
Delta had locked up Australia early when it formed a joint venture with Virgin Australia, but Asia was a different story. Its most obvious partner, Korean, was long in purgatory as the two airlines couldn’t agree to a framework for working together. The best Delta could muster was a 3.5 percent stake in China Eastern in 2015. That’s helpful for building the groundwork for access into China, but with no open skies agreement between the two countries, there is no chance of a joint venture being approved. This was strategic, but it wasn’t something to cover the continent.
Once Richard Anderson left Delta, however, things changed rapidly. Delta gave up on its Narita hub and signed a joint venture with Korean. This gives Delta the ability to flow passengers through Incheon all throughout Asia. In a flash, Delta became far more relevant.
The latest piece in the puzzle, as mentioned, is Canada. Without an equity stake, this won’t look like Aeromexico, but it should allow for much deeper cooperation on transborder routes. As an added bonus, this forced WestJet to kick its other US partner, American, to the curb. WestJet has a lot of irons in the fire right now, so hopefully the airline can give this partnership the attention it deserves. Delta should be able to lend a great deal of expertise in WestJet’s quest to seemingly become a legacy carrier.
Now, the obvious question is.. what’s next on Delta’s world domination tour? Well, the airline certainly gives some clues. Take a look at this doc that the airlines’s corp comm team sent to me.
As you can see this doesn’t have the WestJet joint venture on it just yet, so it’s not completely up to date. What’s most interesting here, however, is that Delta has a lot of codeshare partners… but only a few have made the cut to get on this doc.
Certainly India is a huge area of focus right now. Air France/KLM has recently been making news as it gets closer with Jet Airways. Delta is right there in the mix as well. Jet, of course, is part of that mess they call the Etihad Airways Partners but that won’t stop it from doing what makes sense, hitching its wagon to the Delta/Air France/KLM train. This will be another strategic coup as the airlines get closer together.
The other notable inclusion here is Aerolineas Argentinas. That airline has long been a Skyteam member and partner, but it has also long been a complete and total train wreck. With a new market-oriented government in place in Argentina, however, things have begun to change. Maybe someday Aerolineas Argentinas can actually step up and join the fold, but I remain highly skeptical. That market is still a mess, but as talked about earlier, Delta needs more heft in Latin America.
The only other airline on this map is China Southern. With American having taken a stake in that airline, I assume its days as a Delta partner are likely numbered. But with China Eastern in the mix, that’s not really all that important.
Will This Work?
While I like these strategic joint ventures, I’ve generally not been a fan of equity stakes. Historically, they’ve been disastrous. Anyone remember the Qualiflyer Group? That was Swissair’s grand ambition to buy stakes in every failing airline in Europe. It ended up failing itself. The more recent Etihad Airways Partners has been a dumpster fire in its own right. But this thing with Delta is mostly different.
To start, Delta isn’t investing in failing airlines here, at least not without reasons. Sure Gol was struggling but that was a systemic issue. And Virgin Atlantic was floundering as well, but the assets were incredibly valuable, especially when Delta could align them with its own network. There is real strategic value in each of these airlines, something you can’t say for Etihad’s moves.
If Delta was simply hoping for magic after buying a stake in each airline, that would be a bad move. But look at the work it has done to morph Virgin Atlantic and Aeromexico into extensions of Delta itself. This kind of strategy seems to work well, but not in every case. Delta didn’t need to take a stake in WestJet to find a motivated, like-minded partner. Equity stake or no, in the unlikely event that cross-border mergers end up being allowed, Delta has its route map all planned out.
NW/KL DC-10 photo by Paul Spijkers [GFDL or GFDL], via Wikimedia Commons
Delta is a horrible airline in comparison to Northwest Airlines
I’d argue that in general the quality of Delta’s customer-facing employees was improved by the addition of Northwest’s staff, but the effect has diminished in the years since then. My own experience with Northwest was consistently excellent, and they saved me a ton of money in the late 80s and early 90s when my parents were in the process of passing on, and I had to do a lot of emergency roundtrips from ABQ to CLE. By using prepaid coupons on America West to PHX and using NW’s lower fares to CLE from there I was able to save between $400 and $600 on each non-advance-purchase roundtrip . The fringe benefit was that I always felt Northwest’s employees acted like they appreciated me as a customer. These days my expectations are different – more reality-based, I guess. I usually use American in spite of their surly employees (especially at DFW) since they’ve done fewer bare-facedly hostile things to me than their competition.
Robert K, I think you need to validate that comment with some reference. In the “golden age” of flying both NW and DL were highly regarded. Pre-deregulation they both did a good job, in their own markets.
More recently, from a pure flying customer perspective the years leading up to the end of NW were not great. Cabin experience in Y was abysmal and the employees weren’t all that cheerful, rightfully so, as their employment future was in question. There was also a much publicized mechanics strike where they busted the union bussing in replacement workers. At that time AA was my go-to airline because NW was a utter mess.
What I’ve heard is that the NW management team that went to DL post merger was a big driver in the DL we have today, which is IMO better than AA and UA post merger.
Prior to all this merger mania my vote for best airline would’ve gone to CO but that management team hasn’t fixed UA so maybe there is truth to NW being a good airline, it just didn’t seem like it circa 2008.
Delta Airlines is not a Midwestern base airline ,with no midwestern values they have a corporate attitude and believing in outsourcing the repair of the jets and maintenance to outside companies outside of the US , which brings up a red flag with me ,also like many airlines the cabin space is ridiculously small and the amenities are offered with a high price!Delta does not put the customer first, I fly frequently, I put Delta on the bottom of the list ,For service ,for comfort ,for pricing and most of all how they treat their own employees.
Will probably start something here (we all have different experiences)….latest airline ratings of the 100 best airlines from Skytrax shows Delta at #32, Southwest #54 United #78 and American #74…all subjective for sure
32 is not enough living in MIDWEST we strive to be the best.Especially in the state of Minnesota we consider ourselves a quality of life state . Very good schools,quality hospitals with extremely good doctors and surgeons and very good nurses . Delta airlines would rather do business In the south and that’s fine and dandy but all of us in the Midwest think we are the best
Good for Minnesota! Just saying Delta is doing better than all the rest of the airlines in the U.S
Sent from my AT&T iPhone
It is worth noting that neither Ed Bastian or Glen Hauenstein ever worked at Northwest. Hauenstein has lead Delta’s network are for well over a decade and is responsible for growing its network and alliances while Bastian is currently leading Delta into a more stable position of leadership. Hauenstein worked at Continental Alitalia while Bastian has been at other consumer companies but no other airline.
As far as Latin America coverage goes, you don’t think they simply expect to cover anything between Mexico and Brazil out of the Atlanta hub?
Tory – They can cover the big cities from Atlanta (or Mexico City), but that doesn’t get the kind of penetration you’d like to have into smaller cities. It also doesn’t help with frequency.
Delta has 4 gateways to Brazil, the same as United.
Until UA started EWR-EZE, DL and UA each served Argentina from one gateway. ATL is arguably better positioned for all of eastern S. American than IAH.
I like what Delta is doing. I also wonder if the $450M in new debt will just be for new airplanes or also a WestJet investment.
However, I still find Delta/Skyteam to be weak compared to other alliances. When work takes me to australia, asia, india, or europe, the Delta options are fewer than others and more expensive. Delta also needs to streamline the mileage earning on partners – it is too confusing with different tiers of partners and different fare classes all earning different miles, MQM, and MQD – simplification will be customer positive!
What kind of work do you do, Noah?
While I agree with your main points, CF, I do have to question the ultimate desirability of cross-border mergers, far fetched and hypothetical as the possibility may be. If anything, it seems like the current system of joint ventures is ideal. A JV offers all the network synergy and point of sale access one (Delta, in this case) needs while precluding the need to deal with French labor baggage, chaebol drama, and other associated headaches that might come with actual merging with some of the partner carriers on the map.
After all, it’s not like the EU3 mergers were without seams when they happened.
Let’s call Northwest/KLM what it was:
In 1993, when that “alliance” was forged, Northwest was on the verge of shutdown (as were several others at the time like TWA and USAir).
KLM was the one that saw the opportunity to break into at least some of the US market and infused something like a 20% ownership stake into NW, the most legally allowed at the time. It was a cash infusion that absolutely saved NW.
So it wasn’t “quite” the forward thinking you thought it was; there’s a reason the imaging there was clearly KLM dominated, what with their logo being “on top” and all.
Matt – There were plenty of attempts to do things like that, just look at SAS and Continental, for example. But those were traditional equity purchases and not the deeply connected and coordinated joint venture that NW/KL put together. It absolutely was forward-thinking. (I don’t care if you want to give more credit to KL vs NW or vice versa, but in the end, it was a game-changer.)
The plan is to have an airline called skyteam…it’s a franchise…with 50 or so outlets(airlines) some are regionals some are foreign some are mainline…kind of like 7-11’s
I was thinking about this, but AFAIK the biggest problem is it discards/minimizes the national brands, plus there would need to be a coordination of product internationally, which might be more difficult.
Although I could see this being done in a transitionary manner, with the names Delta-Skyteam, KLM-Skyteam, Air France-Skyteam, etc for a while. (My inspiriation for this is Macy’s national branding, they spent a year or two where they rebranded all the local stores as Lazarus-Macy’s and Bon-Macy’s etc, etc, then branded to Macy’s)
and yet DL is the 2nd largest US international airline. Only the Middle East airlines are larger than US airlines. Kinda hard to argue that ANY of the US airlines outsource their flying when they are among the largest international airlines in the world.
Except that many of the airlines Delta has acquired equity stakes in are not SkyTeam members: Virgin Atlantic, Virgin Australia, GOL, WestJet. I’m feel like over the past few years, the importance of the global alliances has declined as airlines instead look towards individual partnerships and investments that meet their individual needs.
And this isn’t unique to Delta/SkyTeam. When Lufthansa went looking for a US partner to provide feed for their transatlantic flights on the east coast, they didn’t build up in PHL and CLT to take advantage of Star Alliance partner US Airways’ hubs and stron pg east coast network. Instead they created a partnership with JetBlue.
I think alliances were important in their time. On the internal side – it was harder to partner from an IT perspective, so creating a “global” standard was important. From a customer perspective, it was a signal about experience and product consistency. I do think there was a time when people thought there might be mega carriers with local franchises, but that has faded as the reality of local differences, and strengthening of balance sheets has reduced the need.
Given this, I think it is important to now compete for best customer outcome – price, connection opportunities, routes, etc. That has meant looking outside of the alliance. Given the costs of joining an alliance, it may not make sense for say, Virgin Atlantic, to join if they can get all of the benefits without the costs.
The reason why DL or any company buys equity stakes is because it reduces the possibility of a marketing decision leading to a realignment of relationships between carriers; DL is not going to commit to investing time and energy in a foreign company only to have another carrier potentially buy equity in that carrier. If no one were able to buy equity in a foreign carrier, then DL wouldn’t need to do so but as long as that option exists for other international carriers, DL has to develop its own group of relationships.
The strength of Delta’s equity/joint venture strategy can be seen in the size of Delta operations in the countries where its partners operate. In Europe, Delta’s joint venture hubs are in 3 of the top 5 positions in terms of seats offered to the US in 2017; AA at LHR is the largest US carrier station in Europe followed by DL at AMS, UA at LHR, then DL at CDG and DL at LHR, making DL the largest airline across the Atlantic.
In Latin America, Brazil and Mexico are the two largest markets in Latin America for US airlines so DL does pretty well considering it doesn’t have a Texas or S. Florida hub, missing out on the biggest local markets. DL was also a distant #3 to Canada so the JV with WestJet will help close that gap. Further, AA and DL were both codesharing with WestJet and the AA codeshare will be dropped.
As for Asia, NW knew its NRT-based operation wasn’t going to work and DL has spent and will continue to devote a huge amount of energy to building its own network and yet DL has maintained its position as the 2nd largest carrier across the Pacific and they will certainly grow given that the JV will focus on all of Asia except for China (which can’t have a JV with anyone)
It is very likely true that the greatest opportunities for further DL growth are in India (where a former DL exec is now in charge) and in Argentina. DL’s equity/joint venture network will help grow its position as the 2nd largest US international carrier.
Love the article. Can we see a similar article about my company, American?
Andrew – Not really much with AA yet. I mean you have The AA/BA/IB/Finnair deal over the Atlantic and JAL over the Pacific. That’s it for joint ventures. (The feds killed the Qantas one and the LATAM is still in progress.) Then you have the minor stake in China Southern. That’s it for equity stakes.
Really Do Not think that WestJet offered much to AA in the long run. Other Oneworld Carriers such as BA and Cathay felt the same way. Delta is smaller than AA and it’s Hubs are not exactly Global Mecca’s (DTW, SLC,MSP) and need as much feed as they can get. Canada is not a large population per say and AC will always Reign the Skies and thus Star Alliance will always be Preferred. AA can more than serve the Canadian Market on their own with a Huge Fleet, Robust schedule, pricing and a laser focus in picking Key Destinations where a demand exists. (delta is chasing penguins that Do Not Fly, Lol)
It seems like what DL is doing is pretty strategic instead of supporting failing carriers just to be a white knight. If it works, it’s a competitive advantage for DL and their partners.
anyone see the pic of the NW-KL DC-10 and think, “business in the front, party in the back?”
i kid, i kid.