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.
