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.
