They say the more risk you take, the higher the potential reward. That is true, but it can also naturally go in the other direction. After years of building up equity investments abroad, US carriers are quickly coming to terms with seeing their investments disappear. There is no airline harder hit than Delta which has focused on this equity partner strategy and is now paying the price.
Over the last few years, Delta has aggressively pursued equity interests in a variety of airlines. The list as of March 31, including total ownership percentage, is:
- Aeromexico – 51 percent
- Air France/KLM – 9 percent
- China Eastern – 3 percent
- Korean Air (Hanjin) – 15 percent
- LATAM – 20 percent
- Virgin Atlantic – 49 percent
Delta’s idea was simple. It couldn’t outright buy airlines or start its own operations in most other countries due to foreign ownership rules. It also didn’t think it could have enough influence with traditional partnerships or even joint ventures. Instead, it felt the need to take a stake and get a seat at the table.
This is the opposite of what we’ve seen at American, which has relied on stronger joint ventures with non-equity partners like IAG and Qantas. In fact, its only equity purchase was a 2.2% stake in China Southern that it hoped would help further access in China. That was more of a one-off special situation than a strategy.
Delta’s measly 3 percent stake in China Eastern may have also been a one-off, but the rest of its holdings are heftier and show a real pattern.
In 2012, Delta saw an opportunity to buy into Aeromexico and gain a seat on the board. Aeromexico was the only full service airline left in Mexico after Mexicana’s failure. Both American and United had stronger service to Mexico from their Texas hubs. Delta apparently liked what it saw and continued to buy shares until it had 49 percent of voting stock. (It has 51 percent total, but not all of those are voting shares due to Mexican ownership laws.)
That same year, Delta also purchased nearly half of Virgin Atlantic from Singapore. This was similar to Aeromexico in one sense. Both United and American had a much stronger presence in London, and Delta needed to close the gap. It wasn’t going to be able to make that happen on its own, so it bought that chunk of Virgin Atlantic as a slot vehicle.
By 2017, Delta was running separate joint ventures with Virgin Atlantic and Air France/KLM, so it opted to combine them. But just combining them wasn’t enough; Delta turned it into a “blood brothers” situation. Delta bought a stake in AF/KL while AF/KL bought a stake in Virgin Atlantic. They were all bound by money.
In 2019, with the Korean relationship heading into a joint venture and Delta’s legacy Tokyo hub crumbling, Delta decided to pick up some equity there as well so it could have more say in its Asian operation.
Most recently, at the end of last year, Delta made its boldest move yet by acquiring 20 percent of LATAM and taking the airline away from American as a partner. This was an expensive deal costing $1.9 billion. That was in addition to the 14 A350s it would take off LATAM’s hands.
Back in 2017, I said this about the strategy:
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.
What I failed to realize at the time was that just because an airline isn’t failing at the time of the acquisition, every airline becomes a failing airline in 2020. And no matter how much equity Delta pours into an airline, it still doesn’t have true control. Sure, it can influence commercial decisions, but it is left without the financial flexibility to protect itself when things get ugly abroad.
And things have gotten ugly.
The two ugliest situations as of right now are at Virgin Atlantic and LATAM. LATAM filed for bankruptcy last week, and Delta isn’t participating in the debtor-in-possession (DIP) financing raise. Why? Because it really can’t just take a bunch of money and throw it down into Latin America per, as I understand it, CARES Act rules… not that it has that kind of money lying around anyway. The best it could do was offer $62 million to get out of a deal to take the four LATAM A350s that were scheduled to make the move. In exchange, Delta got reassurance that LATAM would still move ahead with the joint venture even if Delta’s equity is wiped out.
But there’s a problem here. Qatar has made no secret of the fact that it wanted to raise its legacy 10 percent stake to match Delta’s at 20 percent. Qatar is providing DIP financing, and it is a proud part-owner of IAG. It is also strengthening ties with American. While I don’t doubt that Delta will be able to see the joint venture through, it is likely looking at a weaker connection with its others partners thanks to Qatar’s investment. And Delta’s massive equity purchase? There’s a good chance that’s wiped out. Poof.
Meanwhile at Virgin Atlantic, there’s more trouble. Delta has said it expected Virgin Atlantic to go into administration in the UK. It owns as much as it’s allowed to own by law, and that means it is hamstrung in its ability to help Virgin Atlantic. The same goes for Aeromexico, if that airline finds itself needing outside help.
To be clear, Delta is not alone here. United has found that its equity stakes down in Latin America have been problematic as well. It owns very little of Avianca, but it has lent the airline millions and millions of dollars. It’ll now hope to get cents back on the dollar, presumably, as that airline goes through the bankruptcy process. But other than this and an 8 percent stake in Azul, United is in the clear. It’s Delta that has the most exposure by far.
With so much at stake yet so little control over the situation, Delta must be feeling uncomfortable right now. And it’s probably asking itself… did it really need equity in order to build these partnership? In some cases, like with LATAM, yes. But in others, well, it might feel otherwise.
33 comments on “Delta and The Perils of Investing in Partners It Can’t Control”
1.9 billion not million
Both United and *American*…
+1
Whoops, fixed.
Minor edit –
Both United and Delta had a much stronger presence in London, and Delta needed to close the gap.
I believe you meant –
Both United and *American* had a much stronger presence in London, and Delta needed to close the gap.
Where is TIm Dunn coming here to defend Delta’s honor and assure everyone all is well…
I’m not defending anything. I am providing the balance which the discussion needs.
I would fully expect you and others to post a balanced analysis of who lost the most or least when this whole chapter of the airline industry is written.
Delta certainly invested in the stock of foreign airlines and managed to build partnerships because of its investments. American, United, and Southwest all invested much higher percentages of their free cash flow (left over after operating costs plus new aircraft) in buying back their own stock. Regardless of what happens with DAL’s equity investments, those joint ventures are not currently at risk of failing and will remain while the stock of some US airlines could be completely wiped out if they are forced to declare bankruptcy.
United wrote off its investment (loan) in Avianca. Delta hasn’t yet written down its investments in other airlines; it will have to in time if the value of those investments does not return but it retaining the investments means they can grow again, along with one’s own stock. Delta’s investments in other companies that to be revalued while the stock market does that for the stock of each airline. American’s market capitalization (the value of all AAL stock) is worth far less than any comparably sized global airline and investors themselves lost that money.
Delta and Latam affirmed the development of the joint venture which could still amount to a greater shift in revenue from American, over time, than the value of the Delta-Latam investment.
Etihad and Qatar have lost far more money in airlines that have actually failed than Delta.
Other Latin America airlines are expected to be forced also to file bankruptcy which could further impact United.
Qatar also is an equity holder in Latam at nearly identical levels to Delta. Latam could create a plan or reorganization to wipe out all of its common stockholders – but US bankruptcy law (where Latam filed) does not allow wiping out one investor in the same class of stock. Qatar’s investment in Latam will fall or not be impacted just the same as Delta’s regardless of whether Qatar provided debtor-in-possession financing (which was actually split between the managing families of Latam). American’s stockholders (AMR) were not all wiped out in chapter 11; the same could occur with Latam.
American invested in China Southern in your assessment as a one-off but said even before the worst of the virus crisis and the fall in airline equities that it would be ending LAX to China service; no other airline has invested in a foreign airline and ended two-thirds of service to the investee’s home country in what can only be called a strategic failure.
Richard Branson was given the opportunity to sell part of his stake in Virgin Atlantic to Air France/KLM but nixed the deal; he has now sold his stake in Virgin Galactic so he can save his airlines of which Virgin Atlantic will get the most amount of money. If VS goes into administration, his stake will be reduced along w/ Delta’s.
American, not Delta, has said it is relying on the US government to provide it with loans in order to maintain its operations and keep it out of operations. United might need to do the same but they aren’t saying they “expect” money from the Treasury which will make the decision about American’s future. The US government will likely hold the loyalty programs of American and potentially United as collateral if it makes loans; they already hold part of the AAdvantage program for collateral in the loan portion of the first phase of CARES Act which is worth almost as much as Delta invested in Latam. In a future article, I hope you discuss the track record of large airlines that have not had control (spun off) their loyalty programs. As long as American has an outstanding loan with the government, they do not and will not fully control their crown jewel. Few would doubt that not being able to control your most valuable asset is far more costly than equity investments in foreign airlines.
AA’s terrible financial performance pre-COVID and likely BK filing has nothing to do with this.
You can defend DL’s investment strategies without bringing AA/UA into this.
Just say they spend money that they would’ve otherwise spent on stock buybacks on equity stakes and that’s fine.
oh, there is a good chance VS go into administration and lose its slot holdings at LHR. We will see what DL’s UK strategy look like after that.
Open question… if there wasn’t a pandemic, how much of the current crisis in the airline industry would even exist? I ask as that is the measuring stick Cranky puts forth in his post on Delta’s investment strategy. Put another way, would Delta’s strategy look brilliant if Covid didn’t disrupt global economics.
Thoughts…
Sure, and airlines would have been great in 2002 if it weren’t for 9/11. But a major event that severely disrupts aviation is indeed part of the risk of any investment in the aviation industry, including investments by airlines. Such events, with multi-year impacts, happen every decade or two; the fact that no one has a crystal ball telling them what specifically the major event will be in advance doesn’t change that. And the truth is that equity investments make Delta more exposed to the downside than they otherwise would have been. That doesn’t mean (and Cranky didn’t really say) that these investments were a bad risk to take, but there was always a risk.
Tim,
A few things:
1) American never announced that they were dropping LAX-China service. That rumor has been floating around the internet, yes, but no announcement was made, either before or after COVID. Both LAX-PVG and LAX-PEK are scheduled to restart in October, at the beginning of the IATA winter season. Whether or not that happens is certainly debatable, but please don’t call things a “strategic failure” based on misinformation.
2) While American may have said that it is relying on the government (I can’t find a quote that says that, btw, so if you’d like to provide a link it would be appreciated), UA and DL are both doing the exact same thing. DL took the CARES act money too and would likely take any other money offered. As you wrote yesterday about WN, it’s more important to look at what the airlines are doing than what they’re saying. DL may not be saying much about aid, but they’re taking it.
3) While much of what you wrote is interesting, it’s mostly all immaterial to what Cranky actually wrote. Very little of it actually addresses his points about how DL may be regretting some of its investments (note I said “may be” not “is”). Most of what you’ve written is a red herring, bringing up other airlines instead of addressing the issues at hand. Deflecting and pointing out other airlines’ flaws (which I’m not denying they have) does nothing to diminish the fact that DL’s strategy may come back to hurt them.
Dfw88 and FC,
The topic, in its full context, is how much cash each airline generated and what each airline invested in during the best times the industry has seen – which would have to include the past 5 years. Delta generated the most free cash of any airline in the world and invested in dividends, stock buybacks, equity in other airlines, new aircraft (in some cases paying in cash which now makes them available as collateral), and the richest employee profit sharing in the US (and perhaps the world). Other airlines generated far less cash but still invested in some of the same things, even if not in the same proportion, as Delta. American and United both also made investments in foreign airlines. American was free cash flow negative which means its investments all resulted in an increase in debt.
Delta invested in foreign airlines with which it largely has or is developing joint ventures. United’s investment in Avianca was done with the same intent and has already been written off. American invested in China Southern and has cut its service to China; whether it ultimately cuts Los Angeles to China, it cut Chicago to China even before the virus crisis. No other US airline has cut as much of its own service in a country in which it made an investment. There are no known plans or expectations for Delta or any other US airline to lose any of their joint ventures regardless of the outcome of any equity investments.
It is not finding fault with others but in providing full context regarding investments to include how airlines invested and not just picking out foreign equity investments. Even if Delta loses all of its equity investments, which is an extraordinarily low risk given that other governments and investors are supporting Delta’s partner airlines, it likely will still have its joint ventures. Specific to Latam, Delta and Latam have affirmed they will continue to pursue their joint venture which still has the potential to significantly shift revenue in the US to Latin America market to Delta and Latam.
American most certainly has said that they expect to be granted a loan by the US government and it has included its expected cash in their financial projections; you should consult their investor updates and financial statements if you don’t believe me. The US Treasury holds the future of American Airlines itself and they may require any number of things including taking AAL’s most valuable assets as collateral. There is no greater loss of control than to lose control of one’s own future.
Regarding VS, feel free to provide legal documentation that VS could lose its slots as a result of administration which may well not even happen because Branson is willing to invest hundreds of millions of pounds into his airlines. Even if VS goes into administration, the expectation is that it would be a pre-packaged reorganization of investors, not a shutdown or alteration of the business.
Yes, it is absolutely critical to wait for the full picture to be clear for all airlines in all aspects. It is no more “fair” to pick out equity investments without knowing how they might work out than it is to prognosticate about what hubs may fall or not based on selective schedule filings which other carriers have made but others have not.
To Sean’s point, ALL of the investments that airlines made are now being pushed through the crucible. The final question of how much return on investment any airline gets is far from clear.
Thanks to you both for the conversation.
You keep talking about DL/LA JV and how it is going to be the best thing – the approval of the JV is not a guarantee anymore. Pretty much all the other airlines in Latin America are getting wiped out one by one, with LATAM the only carrier even worth mentioning in most countries – will they be allowed to form a JV with a US airline? I think the whole situation has changed so much as a result of covid. Most Latin American countries have to do something serious about competition, and approving a JV is definitely not the way to go. If anything, any progress on this JV would be delayed significantly until there is a clearer picture of how the Latin American aviation landscape looks like…
At least LA meets one of the important conditions to be a DL partner: that they have to be a loss-maker. LATAM will keep on accumulating more and more losses with no feed in MIA and MAD. What a big blunder LATAM made – and this crisis will undoubtedly expose it!
Even if Delta legally could compete in the domestic markets of the countries where Latam operates and Latam could operate in the United States, the joint venture is for connecting traffic FROM countries in S. America on Latam flights connecting TO the United States on flights operated by both Delta and Latam to flights in the United States operated by Delta. That is the same principle as is used for every other US carrier joint venture – other than that third country connections might be included as well.
The collapse of other airlines in S. America does not necessarily impede the ability of remaining Latin America carriers to form joint ventures with foreign airlines.
And, remember, in most cases, American is still the largest competitor with Latam on flights between the US and Latin America.
If American fails, then a Delta-Latam joint venture is off because there is not enough competition to keep it in check. A joint venture decision will be based on airlines that operate to/from the United States.
DL got cocky after Richard Anderson left the helm. AA will strengthen and GOL will grow into the second largest air line in South American (not just Brasil) since there will be slots available. AA was never happy with the LAN / TAM merger as it was like working with 7 separate airlines. One reason AA won’t invest in them and they looked for cash from DL. Also, thought Virgin was a bad call from the beginning. Sir Richard is a wild card and stopped caring about VA long ago. Now he needs to pony up and doesn’t want to. I see VA as a niche player with 40 aircraft and being crushed by IAG and BA in the next few years. Same goes for Australia. Looking at the big 3 alliances, Star and Skyteam look to be falling behind OneWorld for the first time as the strength of OneWorld carriers is greater. I can almost see QATAR and IAG investing in AA once this crisis is over.
Note to clarify since it has the potential to be confusing in this context. The IATA codes for Virgin Atlantic and Virgin Australia are VS and VA, respectively. Your comment uses VA a couple of times, but from context I’m pretty sure you mean VA to refer to Virgin Atlantic.
Richard Anderson engineered the link up with Virgin Atlantic (VS). At the time (which is all there was to go on), it was a brilliant decision. Prior to the investment in VS, DL only had 28 LHR slots, and was the weakest US carrier at the busiest airport in Europe. For the sum of $360m (the price of one A350), Delta gained immediate access to Virgin’s 304 slots. Singapore Airlines had previously paid $995m for the same stake. In 2016, Oman Air paid Air France $75m for 1 slot pair at Heathrow.
https://qz.com/35543/why-delta-air-line … -heathrow/
Post-Richard A, while Delta was investing in other airlines, it most certainly was investing in itself. Witness the substantial terminal improvements at ATL, LAX, LGA, JFK, and SLC. It has also bought new aircraft, refurbished others, as well as purchased additional LHR slots. Plus Delta has spent millions to upgrade its ancient payroll system to SAP, refreshed the GO renovated the Delta Museum (turning it into a money-making event space), and of course paid out record profit sharing to employees.
So while some are saying it’s airline investments were a waste after Covid, the JVs remain and still have potential in the future. VS hasn’t lost those valuable slots yet.
Cranky – Does this also need to be discussed in the context of equity stakes vs Skyteam alliance? Was Delta’s dissatisfaction with SkyTeam the real push to start taking equity stakes in certain airlines? I am off on my dates in terms of when Mr. Bastain started making statements about Skyteam, but could this angle also be included in the discussion?
BSOD – I don’t think it’s necessarily dissatisfaction with SkyTeam. The reality is that when you have a big group like SkyTeam that spans the globe, you acn’t serve all masters perfectly. Where Delta needed to go outside to fill a need, it did. They are complementary strategies, even if that means SkyTeam becomes less important.
World Traveller…was wondering where you ended up after getting banned from Airlineforums.
You writing puffery on Seeking Alpha as well?
I’m old enough to remember Howard Cosell. For those of you who are too young to remember Howard, he was a sports analyst and commentator. He was one of the first announcers to broadcast Monday Night Football on ABC television. The reason I bring him up is because of a phrase he coined. I’m not 100% sure Howard coined the phrase, but he was the first person I heard use it.
That phrase is: “Hindsight is always 20/20.”
A novel could be written about the most recent episode of “The Waning Widget.” Rather than invest in its people and its infrastructure, Delta felt its best Return On Invested Capital (ROIC) was to eschew the people that invited Management to the prom and take several different dates, even paying for the privilege. The worst thing about this is the loyal employees who are now sitting at home, trying to pay their mortagages, keep food on the table, and raise their children.
Today, I left the office and went over to the Delta Museum. It is a testament to many of Delta’s previous blunders. In light of Delta’s mismanagement of previous dance partners, the present embarrassment is taken in context.
Let’s take a historical look. In 1953, Delta acquired Chicago & Southern Airlines. Their biggest hub was Chicago. But Delta was a southern airline. It didn’t need Chicago.
Today, we have virtually nothing in Chicago compared to other Big 4 carriers. But hey, we have Atlanta!
The next major mistake was giving Boston away when we bought Northeast Airlines in 1972. Northeast was the largest carrier in Boston. But Delta was a southern airline. And hey, we have Atlanta!
Arguably the biggest mistake we ever made was the disposition of the Western Airlines acquired assets in 1987. They were the biggest airline at LAX, had a nice operation in Denver and a secondary hub in SLC. Guess which one we kept??? So we gave up dominance in LA and a nice stake in Denver for SLC. Probably the biggest of all our major errors. Bigger, even, to our Network, than the LATAM and Virgin Atlantic fiascos. But hey, we had Atlanta!
Which brings us to the Northwest Airlines merger in 2010. We dumped MEM for the second time (it was HQ of Chicago & Southern), fiddled with CVG, and kept MSP and DTW. Due to the loss of LAX in the fore-mentioned Western debacle, we’re now battling to grow and establish SEA.
So, just to recap, we gave away dominance in BOS and LAX, and basically abandoned Chicago and Denver. But hey, we have Atlanta!!! With strategic planning like that, is it really that big of a stretch to see how we’ve invested in foreign airlines like a drunken sailor in the red light district???
But hey, at least we have Atlanta!!!
Re: your episode of “The Waning Widget” script;
Your assertion that Delta didn’t invest in its people and infrastructure is belied by the record. There have been multiple pay raises and sizable profit sharing over the last 8+ years for the employees that you seem to not be aware of, as well as (on the infrastructure front) all the new/rebuilt terminals that are under construction (LAX T2/3, SLC, LGA, SEA International renovation) or finished (JFK T4). Delta has also taken delivery of hundreds of new planes the last few years. This statement seems off base to me.
Did Delta make strategic mistakes in the past? Sure. What exactly is there to do about 30, 40, or even 60 year old mistakes/decisions made in drastically different circumstances and environments that you would like them to try?
You brought up “leaving” Chicago. Delta, nee Chicago and Southern in Chicago as you noted, never to my knowledge had more than 100 flights from O’hare and usually rather less, never being higher than 4th I think at O’hare. It may have been C&S’ biggest hub, but United, TWA, Northwest, and later American and also Southwest at Midway were bigger. As such, Delta didn’t want to get in a 4 way war with, at various times, United, American, TWA, and Southwest. Seems reasonable even today. And with the Northwest merger the overall Midwestern weakness was more than fixed and today the Midwest is a strength. Would you have them invade O’hare and build a hub now?
Let’s also recap Denver. Same issue as O’hare, three way fight between United, Continental/Frontier 1, and Western. Western had less scale and was clearly 3rd in a delay-prone Stapleton. Cutting your losses and moving to a fortress SLC with no real loss of connectivity where you print money and have the second best hub in the region all to yourself still seems a very rational strategy today.
MEM and CVG, there are better hubs nearby that do connecting more efficiently and cheaper. Not sure why these are strategic mistakes at all, no one has tried to do anything at MEM since Delta dehubbed, and CVG (pre-COVID) had a solid Delta presence that was sized for the local O/D. We’ll see post-COVID.
Giving up LAX and BOS, sure those were short-sighted. Guess what though? Pre-COVID, Delta was trying to rectify those mistakes and rebuild hubs there! So, again, what exactly would you have them do differently now?
Every airline has mistakes or misses in the past. American and the Pan Am Pacific route purchase, or more recently their NYC troubles, United not building on the Pan Am Miami routes, Southwest not taking advantage of wide-open JFK and to a lesser extent Boston in the 1990s and 2000s. I’m not sure why you seem to feel that Delta has a monopoly on mistakes.
I’m also not sure why you haven’t noticed the attempts by Delta to fix some other issues retroactively. Virgin Atlantic and LATAM definitely fall under this column, as unfortunately there wasn’t a third US airline to buy LHR access from in the late 1980s or later. While Delta was digesting the Pan Am Europe purchase (which gave Delta a large amount of financial heartburn), American built Miami (and knocked out United), well done to American for that, but Delta was unable to enter that fight. LATAM comes around, and it appeared to solve a lot of relevancy issues that had plagued Delta since the late 1990s in South America specifically.
Delta has been trying to fix their issues but when those appear to not be working as intended they are labeled as catastrophic errors. They aren’t, and as someone commented upthread, hindsight is 20/20.
well said, Charles.
If this person honestly thinks they love Delta and live day in and day out with such intense hatred for Delta’s decisions, perhaps they should take one of the generous packages that Delta is offering.
The simple fact is that Delta was the most profitable, highest revenue, highest market cap airline in the world at the end of 2019. let’s see how it all turns out in a year or two and when enough revenue comes in. The notion that someone that claims to work at Delta’s headquarters but doesn’t understand that Delta is not interested in financial success first and foremost is quite shocking.
Just a few FACTUAL perspectives:
Delta gets more revenue from the local market in Detroit, Chicago and Minneapolis combined than either American, United or Southwest does in Chicago.
Delta gets far more revenue in the Midwest as a whole than any other airline.
Delta had more international flights from the Midwest than any other airline. Delta operates more year-round longhaul international service from either Boston and Seattle than American does from Chicago (precisely one flight).
Delta has higher average fares by a long shot from every one of its hubs than the comparable hubs at American and United – Chicago vs. Minneapolis and Detroit, Salt Lake City vs. Denver, Atlanta vs. Charlotte etc.
Delta is the 2nd largest revenue on the west coast behind United.
Regarding alliances and international service, Delta’s joint venture with Air France/KLM carries more revenue across the Atlantic than any other alliance. Adding Virgin Atlantic gives Delta JV hubs in 3 of the top 4 transatlantic airports (lacking only FRA).
Delta’s joint venture with Korean makes it the largest two carrier joint venture across the Pacific.
The notion that Delta has made any strategic mistakes that have left it in a disadvantaged position is simply correct.
And even if Delta loses its entire equity foreign airline investments, it will have lost less than what American and United lost in market cap compared to those two airlines that had much larger stock buyback programs.
And Delta still stands a very good chance of being the first US carrier in decades to challenge American’s monopoly of the Miami to Latin America market.
And let’s simply wait til this virus recovery has passed; it will be clear that Delta’s much greater financial strength than AA and UA going into this crisis will make a difference coming out of the crisis – and that includes the international market and the joint ventures which are the basis of Delta’s equity investments.
correction: American operates precisely one year-round international long haul market from Chicago which is still less than Delta does from either Boston or Seattle, its two NEWEST hubs.
To echo what has already been said, MSP and DTW is a combined much bigger prize than Chicago. Both are fortress hubs in metros with a lot of high value business travel. Similar could be said of SLC and DEN. Why fight it out in DEN with Southwest, Frontier and others when you can effectively own the SLC market. Sure, it’s smaller but what matters is profits.
Of Delta’s 4 main non-coastal hubs they all have effectively little competition. Looking around the country what other major airline can say that? DFW and IAH both have secondary airports in their markets with intense competition from WN. ORD has two large airlines fighting it out with MDW just across town sucking away pax. I’d wager CLT is the only real non-coastal fortress hub not DL controlled but with less O&D traffic than ATL. Sure there is SFO, EWR, MIA, PHL and IAD but all are coastal and less strategically located to move people about the country. Great international hubs but not domestic.
All in all I’d say DL’s domestic network is best setup to recover post Covid, sans maybe WN, but I’m still skeptical WN wins a ton of business pax until they assign seats.
These deals were needed as Delta would otherwise have been a junior player at LHR and today, still lags far behind AA and UA in Latin America. I’d also add that DL’s TPAC network, which is the second largest of the US3, was also looking fairly week until the KE deal. Think the problem here is the $ spent vs. the traditional JV through alliances, which Delta was trying to break out of.
just to add context, DL reported $3 billion in revenues in Latin America in 2019 for 7.1% of system revenues, UA reported $3.8 billion for 8.7%, and AA was at $5 billion for a 11.9% of system revenues.
DL reported to the DOT a $381 million profit flying to Latin America, United reported a $235 million profit and AA reported a $1 billion profit in Latin America. However, American reported that it lost money on its transatlantic and transpacific system, United reported it lost money on its transpacific system while Delta reported it was profitable that it was profitable in all 3 global regions.
Thank you, Charles. Of the responses to my post, yours is the closest to where I was going. Yours is the only reply that unequivocally states we have made strategic mistakes in the past. Yours was the only one showing any humility or self-consciousness.
The single biggest reason we have MSP and DTW is Richard Anderson. Bringing him over from NW saved the day in the Midwest. The myopic DL guys wanted to keep throwing money into CVG, even after punishing Comair by shutting it down after the wretched Comair pilot strike. Richard ensured we actually kept something from Northwest other than the Pacific routes. We desperately needed new blood after The Telephone Man, an airline guy from OUTSIDE Delta. Thank God we brought in RA. Hollis used to tell us privately that we were too inbred. And he was right.
I clearly remember receiving the news that we had FINALLY out-boarded Eastern in Atlanta. There was a quiet celebration in the office that day. We were so focused on beating Eastern in Atlanta that everything else was secondary. Everything in our system was designed to beat Eastern. We were fixated on that. And we did it (or, rather, Eastern beat themselves). Regardless, once we took over Atlanta, we became arrogant.
The Western buy occurred a few years later. We did not listen to the Western people about the value of LAX. Our next purchase was the Pan Am European routes and the Pan Am Shuttle. We did not listen to the Pan Am people about European Culture as it relates to customer service, and Charles, as you noted, our economic pain was greater than necessary because of that. We at Delta, in general, are not good listeners.
Richard MADE us listen. He FORCED us to accept (if not embrace) the Northwest folks. And, in doing so, he built the house that paid the last 8 years of Profit Sharing. We seem to think that unless you’re “Real Delta”, your ideas are without merit. This mentality alienated the Western people, the Pan Am people (the ones we actually took), and, to a certain extent, the Northwest people too. So what I meant by “Delta not investing in its people” is that Delta has a VERY poor record of listening to its acquired employees. They all built great airlines, but we have treated them almost as afterthoughts. Having Richard at the top FORCED us to look at the world outside Atlanta. And, as you noted, we have benefited enormously from it.
The main point of my original post on this thread is that Delta has continually placed too much emphasis on Atlanta. Yes, Atlanta is our gold mine, our mint. It has financed ALL our forays. Look at what Atlanta has bought us: Europe, Asia, SLC, DTW, MSP, LAX, BOS, and all the JVs all over the world and our Alliance Partners. Basically, Atlanta has bought us the entire PLANET. But look too at what we’ve done with it. I’m sorry, but we have NOT managed our empire to its fullest potential. We should be MILES ahead of our biggest competition, both domestic and foreign (except the ME-3, which are imploding on their own). We would be if we had truly valued ALL our people and actually listened to them.
For all the history that you clearly sat on the sidelines for, how did you miss getting elevated to the CEO spot?
Just to think that in ALL of those years you worked at Delta, you never once figured out their formula for success.
https://www.nakedcapitalism.com/2020/06/hubert-horan-what-will-it-take-to-save-the-airlines
Very thorough essay posted on naked capitalist by respected financial writer
The author is fundamentally wrong about the ability of the free enterprise system to play its part in correcting the current industry problems. Given that Delta and Southwest have each accessed over $10 billion in private capital since the beginning of the year while United and American have accessed far less, the problem is not an industry problem but a carrier and company specific problem.
And the reason why Delta is financially stronger and was coming into the virus crisis is not because Delta-NW merged first but because Delta took a very different tack to running its business – much more in line with Southwest while United and American have echoed traditional legacy airline business models. American had the opportunity to cut spending and reduce capital spending even in the six years since the US Airways merger but did not. United is somewhere in the middle. American has said it is counting on government loans, something no one else has said.
Getting all of those basic facts wrong leads to the wrong conclusion that the free market system and not the government can return the airline industry to sustainability.
Delta’s whole approach to the equity stakes in partner airlines was to gain access to markets that they couldn’t access in a meaningful way (LHR with VS) or regions in which they were behind competitors and lacked the near term ability to grow in a significant way (Asia with KE and South America with LATAM). At the time of investment none of the partner airlines was on the verge of bankruptcy. Some were experiencing challenges but not life threatening. The best way to keep this in context is to understand something unprecedented in aviation history has happened. International travel has almost come to a standstill due to governments closing their borders and a 95% reduction in demand. Even the best of airlines are struggling and almost no airline is safe in this environment.
If Delta’s partner airlines survive and the JVs continue then they will most likely be successful. Perhaps not nearly as robust of a near term ROI as hoped but Delta would be well positioned to mount a successful rebound.