Financial analysts see a possibility that Delta Airlines might be on the brink of founding a non U.S. subsidiary in order to escape their tax burden in the United States.
This could improve Delta’s overall financial situation even more, though interestingly it happens in times where Delta management is bashing Middle East carriers for state subsidies.
Delta has had very good earnings during the past years. This was partly due to wise business decisions and in more recent times as a result of low fuel prices.
Yesterday Air Transport World (ATW) had an article (access here) that speculates about the Atlanta based carrier founding a non U.S. subsidiary to handle their foreign operations and joint ventures.
In a report issued Nov. 6 by New York-based Wolfe Research, the firm says Delta senior management has several times hinted in analyst calls that it was working on a tax strategy and Wolfe believes it will announce that plan in December.
Delta declined to comment on the report, but did confirm to ATW that it is scheduled to hold its investor day event Dec. 17, when it will outline its plans for 2016.
US airlines pay about 38% in taxes, some of the highest in industry, and it has long been a fighting ground with Congress as airlines point out that they are treated, in government tax and fee terms, like the alcohol or tobacco industries even though airlines are a major driver of GDP.
I’m a bit surprised that such a highly protected industry is levied with such a high tax rate but maybe that’s sort of a trade off. On the other hand that doesn’t mean anyone really pays such a rate after all deductions they are eligible for. And if you factor in the liabilities they wiped off under Chapter 11… well let’s not go there.
Although Wolfe says in its report it has no specifics on Delta’s tax strategy plan, it cites a possibility in which the Atlanta-based carrier sets up a non-US subsidiary to house its international equity interests and JVs, and maybe some other business such as its MRO operation.
This would lead to the creation of “Delta Amsterdam, a foreign subsidiary based in the Netherlands where the corporate tax rate is 25%,” Wolfe states.
Wolfe says the Netherlands makes sense because Delta already has an overnight maintenance facility in Amsterdam and a big commercial office for JV pricing and yield management.
In this scenario, Delta would move two transatlantic JVs—one with Air France-KLM and Alitalia and one with Virgin Atlantic—into Delta Amsterdam. Then it would move its transpacific JV with Virgin Australia Airlines. Finally, Delta would move its 49% stake in Virgin Atlantic, its 9.5% stake in Brazil’s GOL, and its 3.5% stake in China Eastern into Delta Amsterdam.
Those are interesting reflections based on the stakes Delta has in companies around the globe. We shall see what Delta Management will present to their investors in terms of strategy.
Conclusion
Keeping in mind that NONE of this is official, I don’t blame Delta or any company for trying to optimize their tax benefits through all legal means available to them. I also appreciate CEO Anderson’s unconventional style of running the airline because it has done them good both in terms of company performance and customer satisfaction.
Where I disagree is when a company uses patriotism, service to their country and community at every given opportunity and then takes operations overseas to stick it to the government while running record earnings. Even more ironic that one of Richard Anderson’s favorite battles is lambasting against the ME3 carriers accusing them of running under s state subsidy scheme. Even if that was true, at least the government funds them voluntarily while moving operations out of the country pretty much pulls the rug underneath Washington’s feet.
Another Sebastian article….
I guess DL has run out of carry forward loss provisions that saved it hundreds of millions in US taxes when it made money, or the hundreds of millions it (and other US airlines) received to cushion the blow of the 9.11 groundings. Okay, yes, US corporate taxes are a disaster but with so many special interests Congress (let alone the President) will not soon get around to addressing long needed change. This follows on the heels of speculation that the largest US pharmaceutical company may acquire a foreign competitor and move its HQ overseas to similarly avoid the US corporate tax regime.
Of course, there are foreign ownership restrictions on US airlines so this would be a major corporate restructuring that would still see DL’s airline operations subject to US taxation as a US corporation. It cannot transfer operating and route certificates to an off-shore entity without losing them due to their bilateral national nature. DL would not longer be a US airline.