Much has been written about Delta’s surprise deal to buy 20 percent of LATAM, inject money into the company, and take 14 excess A350s off the airline’s hands. It’s a big win for Delta in its weakest region, and it lets LATAM ditch airplanes it doesn’t want while raising needed cash. This is Delta doing what it does well, and that makes it less interesting to analyze then the other side of this deal. This is a big development in the airline industry on the whole, but most notably, it has the potential to be a watershed moment for LATAM’s spurned lover, American… if the airline can rise to the challenge. That’s a very big “if.”
Losing LATAM Isn’t the Problem
Though you may assume otherwise, losing LATAM isn’t really the issue here. American remains the biggest airline between the US and Latin America. It has long-standing ties with consumers and travel agents throughout Latin America. And of course, it has THE hub in that region’s unofficial capital: Miami. LATAM brought some connectivity to American, but American needed it less than any other US airline. The pending joint venture between the two would have been helpful, but then again, Chile already had to be carved out thanks to competition concerns. It was an imperfect union. American could benefit from its partnership with LATAM, but it doesn’t need LATAM.
American’s bumbling response seems to be trying to make that point, but it fails miserably. The airline’s statement was milquetoast. “LATAM and the Cueto family have been terrific partners….” Then American goes into familiar territory and blames others, in this case, the decision by the Chilean Supreme Court to not allow the joint venture. Finally, the airline tries to play down the situation by saying the deal was only worth $20 million a year anyway, so it didn’t matter. If it didn’t matter, then why did American invest so much time and effort into creating the joint venture in the first place? This is a weak statement, but more importantly, it paints the picture of an airline that doesn’t know what it’s doing.
Furthering that narrative, the airline on Friday tried to make a swift, bold move by shutting down the codeshare with LATAM immediately, but that was poorly thought through, if it was thought through at all. The ending of that codeshare so abruptly just hurts American’s customers and partners who need to buy new tickets, change existing tickets, or deal with schedule changes. It was a move meant to show strength, but it instead just showed, at best, a decision that failed to consider the customer impact. This response is actually quite symbolic of what’s been going on at the airline at large.
Strategic Aggressiveness is Needed
While losing LATAM in a vacuum isn’t an issue, losing LATAM to Delta, an also-ran into Latin America that is now all-of-a-sudden a formidable competitor, is hugely problematic for American, especially if Delta builds up Miami as expected. (Someone has to feed all those LATAM flights in Miami.)
This is Delta throwing down the gauntlet, making smart strategic moves, and threatening American in its strongest international region. This kind of strong move to achieve strategic goals is exactly what American needs to be doing. It should start by actually having a cohesive strategy. Apparently the old Latin strategy was to create a joint venture with a partner it now says contributed very little. That’s a head-scratcher.
Publicly, American can start with a bold statement. What people want to hear both inside and out at the company is “We are not going to take this lightly. We are going to fight for Latin America and we are going to win. We are American Airlines, and nobody is going to push us around. Get ready for war.” Then they need to slather on war paint and sharpen their swords. Or, you know, something like that.
Then, American needs to evaluate Latin America and fill in the gaps. Delta is selling its stake in Gol, so American can start by buying that to feed its already massive Brazilian network along with providing additional secondary destinations for customers. Then it can move on to harder things, for example, like convincing Copa to join forces instead of being in third position with United behind Azul and Avianca.
But this isn’t just about Latin America. Delta has fundamentally re-drawn the map around the globe. If long-entrenched partners who were about to implement a joint venture can be broken up, then anything can be up for grabs. Traditional alliances aren’t the anchors they once were; LATAM even says that once it leaves oneworld, it will stay independent. The fight is on, and American needs to enter the ring.
The Perfect Storm for Management
It’s rather strange to think that this gut-punch of a LATAM departure may actually be a blessing in disguise for American. It needs to be the catalyst that is going to force the airline to make huge changes and face its demons. Will American continue to stagnate, or will it step up? The answer must be the latter. The question is… who will make it happen?
American’s management team has already been on the ropes for a variety of reasons, but Wall Street has recently been particularly concerned with the airline’s high debt load. Whether it’s an actual issue or not doesn’t matter. What matters is that Delta just came out saying it’ll raise more than $2 billion of debt to fundamentally re-shape Latin American aviation. American, saddled with higher debt, doesn’t have that same kind of flexibility. This should get Wall Street howling, and maybe this time the board will be listening.
Today, American is like the woolly mammoth in the tar pits. Those pits are full of labor issues, operational problems, organizational messes, and just general malaise. So far, American hasn’t been able to extricate itself nor has it seemed from the outside to really be trying all that hard. Senior management has given plenty of excuses and has tried to get people to patiently wait for better times ahead. Patience, however, has been running thin. This should be the event that causes patience to run out entirely.
I would be very surprised if we don’t see management changes at or near the top soon thanks to this turn of events. In fact, I’d say some kind of shake-up is necessary here. The board can’t be happy, and Wall Street is going to keep ramping up pressure. We already know employees aren’t happy. The only way to get things moving in the right direction is to make big changes, and they need to happen very soon.