There’s been a debate in the airline industry for a long, long time about whether it’s a good or bad idea to invest in partner airlines or whether to keep the relationship strictly on commercial terms. On one end, we have Delta, which has long championed the idea that having a financial stake matters greatly. American and United sit somewhere toward the other end, where they invest only when they have to do it.
This pandemic has been brutal for those airlines like Delta which invested heavily in their partners. Many of those investments became worthless as airlines around the globe plunged into bankruptcy and stakes were wiped out. You’d think this might have pushed Delta to rethink its plans, but you’d be wrong. Delta is now saying it is all-in as it has decided to re-up its stakes in a trio of bankrupt partners. The airline thinks that’s needed for it to pull the strings.
Delta has developed quite the stable of equity partners. Up until the pandemic, this was where things stood:
- Aeromexico – 49 percent
- Air France/KLM – 9 percent
- China Eastern – 3 percent
- Korean Air (Hanjin) – 15 percent
- LATAM – 20 percent
- Virgin Atlantic – 49 percent
On this list, half have gone bankrupt, and those are the ones — Aeromexico, LATAM, and Virgin Atlantic — that presented real questions for Delta’s future as an equity partner.
In each case, Delta has already built strong ties. With Aeromexico, it has a joint venture and it would appear a very strong hand in determining how to route airplanes, at least when it involves the US. Delta had owned just about half the airline, but in its new plan, Delta will hold only 20 percent.
LATAM is the most recent partnership, and you’ll remember Delta sunk billions in to pry LATAM away from its former partners American and oneworld. It originally agreed to take A350s off LATAM’s hands, and it had applied for a joint venture (which is still pending). Delta had a 20 percent stake, and now that will drop to 10 percent. This I believe will make it an equal partner with Qatar… unless Qatar puts more money in to double its stake as has been rumored.
Lastly we have problem child Virgin Atlantic. Delta picked up 49 percent of Virgin Atlantic several years ago from Singapore Airlines. The goal was very clearly to have better Heathrow access, and the network has shifted to match Delta’s goals. Since that time, Virgin Atlantic has joined the Delta/Air France/KLM joint venture, but it hasn’t been particularly healthy financially. The pandemic made everything worse, and Virgin Atlantic has come up with all sorts of plans, including a failed attempt to sell shares publicly, just to get cash. Delta will now reinvest to keep its 49 percent stake in the airline.
All-in, Delta says it will invest an additional $1.2 billion into these three airlines to maintain stakes when they emerge from bankruptcy protection… but why?
Certainly the optics of this are very bad. Delta just took billions of dollars from the government, let thousands of employees retire/take leave without replacement, and now it is putting $1.2 billion into a variety of foreign airlines. As if that’s not enough, Delta was the only one who didn’t send its CEO to testify in from of Congress yesterday, sending the Chief of Operations instead. I’m sure Congress is thrilled.
But even beyond the optics, does it really make sense? These airlines will all sort out their reorganizations with or without Delta’s money. Ok, maybe that’s not completely true for Virgin Atlantic, but the others will. And if they had no money from Delta, they would still be very likely to continue to partner with Delta. It’s not like other airlines are likely to be throwing money at LATAM or Aeromexico to pry them away in this environment. At least, I don’t imagine they are.
Despite this reality that Delta will likely keep pulling the strings anyway, it has decided it’s worth it to sink more money in. According to Delta, it’s all about influence. The airline told me:
The equity strategy is important for us as it provides a unique level of strategic influence, over and above the terms of a commercial JV, access to governance at the Board level, and a voice in the room around the most important strategic, financial and other decisions that our partners are making. We invest in partners who align strongly with our priorities, values, and long-term goals.
Small investments don’t bother me all that much — sometimes you need to do that to put skin in the game — but this is over $1 billion to just maintain equal or smaller stakes in the airlines that already took plenty of Delta money before. If I were a US carrier right now, I don’t think I’d be looking to part with $1 billion for anything other than running my airline, but Delta has never been shy about its strategic ambitions. It thinks this is a necessary move.
Et Tu, Tim Dunn?
“Certainly the optics of this are very bad. Delta just took billions of dollars from the government, let thousands of employees retire/take leave without replacement, and now it is putting $1.2 billion into a variety of foreign airlines. As if that’s not enough, Delta was the only one who didn’t send its CEO to testify in from of Congress yesterday, sending the Chief of Operations instead. I’m sure Congress is thrilled.”
This. All of it. Essentially Delta is making up for a clearly deficient route network (weak in Asia, weak in Latin America, third tier player at LHR) and pumps funds into foreign airlines with no clear chain of custody as to whether these are taxpayer provided funds or cash reserves built out over time. Are the funds commingled? Segregated with a proper audit trail? Who knows. Sure, the Delta defenders will trot out their usual proclamations that Delta’s profits clearly show metrics it outperforms its peers in specific markets. Maybe it does, but while the DoJ takes a microscope at the AA/B6 “arrangement”, it would do well to heavily scrutinize Delta as well and its practice of influence peddling to keep what it perceives to be vital airlines in its sphere of influence. It remains to been what benefit, if any, DL derives from lining the coffers at LATAM, Aeromexico, and Virgin.
While I don’t think it’s particularly wise for Delta to invest billions the way they do in other airlines, I agree with you that they have to due to a deficient network (no hub able to carry Mexico traffic easily like IAH/DFW, No great presence in Latin America, irrelevant player in LHR absent VS).
I don’t have a problem with them spending money on other airlines, but I do think it’s worth bringing up that Delta mandated its largely non-union workforce to take 25% salary cuts (via mandated fewer hours, not lower hourly wages) even though the federal government provided payroll support specifically to avoid pay cuts for airline workforces. Delta found a loophole in the PSP Legislation and exploited it on the backs of their frontline. They’re the only major carrier to force that paycut on their non-union frontline workers during the pandemic.
To me, that’s the slimy part. Saving money from the federal payroll support act on the backs of your frontline workers and then using that money (sure; there’s some shifting money around and can’t be directly tied to PSP) to invest in foreign carriers to save their workers and their jobs.
You beat me to it…
The C-Suite called everyone “heroes,” and rewarded those that stayed on through the pandemic with a 25% pay cut. I’m sure it met a legal threshold, but it absolutely undercut the intent of the act.
On top of all this I wonder how much Delta has been flexing their political might both here & abroad in all decisions we see here & elsewhere.
It’s definitely looks bad and will be scrutinized, but Delta obviously has accountants and lawyers to make sure that all these investments are legal and kept track of. Any company of its size would have the same.
I’m going to write the same thing again. When did it become a crime for airlines to have different business models?
It’s not; but I think the crime (or least the concern around it) is that Delta begged for government funds, misused those government funds (cut employee pay when the funds were explicitly for employee pay) and then turns around and invests in foreign carriers.
I said it a year ago and I’ll say it again – the money should have gone DIRECTLY to the employees, not through the employers. Shareholders should have lost out with the pandemic, not taxpayers. We are seeing the outcome of what was a very short sighted decision.
“It’s not; but I think the crime (or least the concern around it) is that Delta begged for government funds, misused those government funds (cut employee pay when the funds were explicitly for employee pay) and then turns around and invests in foreign carriers.”
Delta is thumbing it’s nose at congress by the actions on how they funneled & misused the PSP funds.
What Delta does with their money is their business – until it’s my business as a US taxpayer when they take bailout funds from the treasury. I’ve never been a fan of corporate welfare, even if the goal is ostensibly to save jobs. Water under the bridge now, but were I the ringmaster, no airlines, or other businesses for that matter, would’ve gotten a dime of pandemic bailout funds. Relief should’ve gone direct to individuals only, like the UI bonuses. Would some airlines fail? Absolutely. Would new ones take their place in a recovery? Absolutely. How many times does Congress make CEO’s testify about stuff like this after everyone is pissed off after the fact? Pretty often. And still the bureaucrats haven’t learned to put teeth into the giveaways, so it’s time we just end the practice. Delta knows they won’t even get a slap on the wrist and they clearly think this is the best use of their funds. I just wish it wasn’t my tax dollars going towards it. I fly DL and am just fine supporting them with my fares instead.
Delta’s investment in foreign airlines came AFTER federal aid to the US airline industry ended. Regulators and stockholders, not airline fans, will determine what was and is appropriate use of taxpayer money. Legislators yesterday were far more interested in the operational failures at American, Southwest and other carriers this summer. United still manages to post worse on-time than American or Delta and far worse complaint ratios than nearly all of the rest of the industry. The subject of Delta’s investments in foreign airlines simply was not an issue yesterday.
Delta is the only one of the big 3 that was consistently profitable in every global region pre-pandemic and was also profitable this summer in every global region. US airlines all exist to generate profits for their owners- the shareholders – and not to fly “sexy” networks that lose money. The reason why Delta is consistently more profitable than American and United is because Delta understands why it exists.
If there were bad optics it would be AA and UA’s investment in unproven aircraft technologies DURING the period when airlines received tens of billions in financial aid. United’s contract for ten billion dollars in new aircraft involved more than 5X more money than DAL’s equity investments. As hard as it is for some to accept, there is no more “crime” for Delta to invest in foreign airlines than it was for UA to place a massive order during government support or AA or UA to invest in new unproven technology, regardless of the price.
For about $400 million per investment (the cost of about 4 new widebody aircraft), Delta ensures its partnerships with three major partners. Delta will never have on its own enough slots at LHR. Its JV w/ Aeromexico and its coming JV w/ Latam that simply cannot be duplicated – and will provide competitive advantages that neither AA or UA can overcome.
DL is aggressively adding widebody aircraft to its fleet while AA and UA wait and wait and wait for 787s from Boeing. The fuel efficiency of Delta’s fuel efficiency will be far better than AA and UA for years as AA and UA are burdened by its 777 fleet – both models of which are 25% or more costly per seat to operate than Delta’s A330s and A350s.
Delta’s international expansion – including in Miami – is coming and developing and maintaining strong partnerships makes all the sense in the world.
“Delta’s investment in foreign airlines came AFTER federal aid to the US airline industry ended.” This is laughable.
How much of that taxpayer funded federal aid is ending up with Virgin, LATAM, and Aeromexico? Regulators can’t determine that after the fact. That’s simply not right.
Delta isn’t aggressively adding wide bodies to its fleet. That’s simply not true. If anything, it is adding wide bodies incrementally, and slowly.
Is Delta’s fleet more efficient? Partly, yes, due to A350/A330 but Delta has plenty of 767s in the fleet, as does United, and they both contribute to both airlines being able to serve new and emerging markets better than AA.
Delta “understands” why it exists? Oh please. Delta has screwed its employees every bit as much as the other two have.
Your arguments are plain hubris. C’mon.
As for wide body aircraft you should check Delta’a financial statements. At least 13 new widebodies plus whatever of the 9 or so used 350s they get in service by next summer
There simply was and is not any restrictions on investing in one’s business whether it be aircraft, new unproven technologies or equity investments in foreign airlines.
Have fun creating your own rules and then dishing out your own ‘justice’
Both versions of the 777 are 25% less efficient according to DOT data submitted by airlines. The767s have similar cost of operation as the 787-8 including ownership costs
> As hard as it is for some to accept, there is no more “crime” for Delta to invest in foreign airlines than it was for UA to place a massive order during government support or AA or UA to invest in new unproven technology, regardless of the price.
A key difference is that United’s investments with US taxpayer funds are going to American companies supporting American jobs and technology innovation, including and especially Boeing. Delta’s investments in foreign carriers are shipping US taxpayer money abroad, which looks far, far worse.
You do realize that the rules of federal airline funding prohibited airlines investing in other US airlines – but says nothing about investing in foreign companies?
Feel free to make up rules which Congress didn’t make but perhaps your angst should be directed at Congress.
And given that deliveries of the MAX7 and 787 are backing up and can’t be delivered, maybe you should express your frustration that the FAA won’t give a green light to those programs – or the return of the PW 777 fleet for that matter.
I mean, honestly, why should Delta be able to buy new and used Airbus aircraft by the dozens and AA, WN and UA can’t get their Boeing aircraft?
and then why has Airbus won – or expected to win – hundreds of orders from QF and AF/KL?
Noted that Delta has no 737-MAX aircraft on order. Also noted that the Administrator of The FAA is a former Delta Pilot. Coincidence?
It’s actually a conspiracy that should be investigated along with the continued grounding of the PW 777 fleet. A true conspiracy. /sarcasm/
Thanks for the chuckle, but in all seriousness, the FAA Administrator could move the MAX-7 certification process to its conclusion, if he desired. It’s nothing but a MAX-8 (THE most scrutinized airliner since the Comet) with a shorter fuselage. Same systems. Even the same 4 emergency exit doors. Of course, it could be said that it’s out of his hands, but that would imply that he has lost control of the process to politicians. That he (and really the FAA) have been emasculated by Capitol Hill. I mean even China has stopped politicizing the 737-MAX program and recertified the airplane. Isn’t it about time we do the same?
Perhaps he’s influenced by his DL background and by the fact that DL doesn’t have MAXs on order.
Or perhaps he’s just doing his job and is approaching Boeing with a healthy skepticism given their (relatively) poor safety culture of late.
I’m not a Delta fanboy by any stretch (if anything, I’m a bit of a JetBlue fan but can recognize their many mistakes), but DL did the smart thing avoiding the MAX.
As if Delta didn’t have spectacular operational failures as well, lol. Way to go Tim, keep carrying that water! Hopefully their next massive layoff includes you
On the surface this reminds me of Swissairs ill-fated “hunter strategy” of the 1990s and how the sunk-cost fallacy sank the mother ship. But Delta is not a peripheral player trying to keep up with the big dogs. Virgin Atlantic is not a basket case like SABENA, AM is not LTU and LATAM isn’t South African.
Yes…all 3 face intense competitive pressure from LCC/ULCCs but their network and fleet “bones” are strong and have the potential to deliver a value proposition product beyond the competitions abilities.
My only concern is where does DL draw the line before changing their strategy or cutting the cash cord all together.
How do you make millions in the airline business? By investing billions. Delta seems to be following that logic, along with Qatar and Etihad.