There has been a lot of discussion about what a great coup it has been for Delta to snatch LATAM away from American, but from LATAM’s perspective, things aren’t quite as positive. For LATAM, this is a monumental change that will not only see the airline leave American for Delta, but it will also mean a transition from being a member of oneworld to becoming an alliance-less vagrant. There is a lot of risk here for the airline, primarily from a commercial perspective.
The Network Mismatch
The root of the issue lies in the network, so let’s start there. In the US, LATAM has put nearly all of its eggs in Miami’s basket. Here’s a map of the routes currently served from the US.
In the last few years, LATAM has dropped service to San Francisco, Washington/Dulles, and Toronto so that it now only serves Boston, New York/JFK, Los Angeles, Orlando, and most importantly, Miami, in the US and Canada. Why? Well, these cities are the ones that can support the most local traffic from Latin America. It’s where LATAM can do best.
Boston has a relatively new flight to Sao Paulo which seems like an experiment. Brazilians have an unhealthy love for Disney and Orlando, so that explains the Sao Paulo flight from there. The Lima flight may seem more of an outlier, but it’s on an A320 so there is limited risk. It also gives people in the north of Brazil easier connections. Los Angeles has 12 a week to Lima and 5 to Santiago. That’s good for inbound tourists as well as visiting friends and relatives. And it fees people on to the West Coast. Then there’s JFK which surprisingly only has service to four cities on LATAM. I figured that with the huge Latin American population there, LATAM would serve more, but I was wrong.
That leaves us with Miami, and that is LATAM’s primary focus in the US. LATAM serves 10 cities from Miami, though keep in mind that some of these are only flown once or twice a week. In addition, however, LATAM operates a cargo hub at the airport further bulking up its presence. Miami is the unofficial capital of Latin America, and the amount of traffic that goes between Miami and everything south is staggering. The reason for LATAM’s reliance on Miami is clearly local, but the presence of American enhanced it.
When LATAM partnered with American, it received the benefit of having a connecting hub where it could transfer people from Miami to destinations all over the US and beyond. The flights existed because of the local demand, but filling empty seats with connections helped to strengthen those flights and allowed for more frequencies.
That now disappears.
It’s not as simple as just saying, “well, ok, we’ll move our flights to Atlanta and connect to Delta there.” While I don’t doubt that flights to Atlanta will begin, those Miami flights are there for the local market. LATAM can’t move them to Atlanta. So what’s the option?
Delta has said it’ll build up in Miami. Joe Esposito, Delta’s SVP of Network Planning, told Ned Russell at TPG “We want to make sure we can connect our customers in Miami. We will realign our network to connect there.”
The Revenue Problem
This means Delta will be growing in Miami and adding connections to the most important markets for LATAM, but that is going to require a lot of new capacity to flood the market. For its part, American won’t back down and is already ramping up in anticipation of losing LATAM. It has announced new frequencies from Miami to Lima, Santiago, and Sao Paulo. When Delta rolls out domestic operations, Miami is going to become a war zone. (I mean economically… it’s been an operational war zone that haunts the souls of all travelers for many years.)
Fare pressure, massive capacity increases, and further crowding in Miami doesn’t sound like the most brilliant plan for LATAM’s ongoing success. On top of that, American has a much more robust sales capacity in Miami compared to Delta, so LATAM is going to have to rely on its own organization even more. Why would LATAM bother getting itself into this mess? Cash, for one. But there’s more to it than that.
Cash Goes Up, Fleet Goes Down
Delta is buying 20 percent of LATAM for $1.9 billion, but it’s the two sub-plots that are more interesting. As part of this deal, Delta will invest another $350 million into LATAM’s operation. It will also take 4 of LATAM’s A350s that it flies today along with 10 future orders. This will give LATAM cash and get it out of its commitment to buy more aircraft than it needs.
Is LATAM so desperate for cash that it is willing to forgo a better commercial situation? It may not be that simple.
Remember, there’s the issue of the joint venture. LATAM and American had been working on their joint venture for a long time, but when the Chilean courts ruled that they couldn’t implement it in Chile, that hurt the prospects for the deal overall. They were still working on trying to implement it, but LATAM started looking elsewhere.
I’d say it’s quite telling that from all accounts, LATAM never even gave American a chance to counter. Then again, that could be simply because as I understand it, the relationship had soured. Things appear to have been so bad that it’s not even clear that LATAM even told American what was happening after the deal was done. I’ve heard it may have actually been communicated through a third party.
So which is it? Was it the relationship fraying and the joint venture becoming problematic? Or was it the desire for cold, hard cash?
For 2018, LATAM earned a very slim net margin of 1.8 percent. Believe it or not, that’s an increase over the two prior years. But for the first half of this year, LATAM’s operating margin slipped down to 2.5 percent. That was off from 6.4 percent in the first half of last year. It had a negative net margin which widened slightly year-over-year to -2.5 percent. The airline’s cash position has remained steady, but its fleet is growing from 310 at the end of last year to 328 at the end of this year, and aircraft are expensive.
While there aren’t warning signs suggesting LATAM is in huge immediate trouble, the cash was certainly going to come in handy. In the end, Delta dangled enough carrots to convince LATAM that it was worth making the switch.
From Delta’s perspective, this is a win. But from LATAM’s perspective it’s decidedly mixed. It’s going to be costly to get the support LATAM needs in Miami, and all parties appear positioned for a long, bloody fight.
Updated 10/1 @ 1113a PT to add Boston service