LATAM To Exit Oneworld After Delta Takes A Stake

LATAM and Delta announced today that they would form a partnership where the American carrier will take a 20% stake and assume some liabilities.

This would result LATAM leaving the Oneworld Alliance in perhaps 12 months time after the deal goes through. It is unclear if the airline plans to join SkyTeam or stay outside of the alliances altogether. Delta will divest its 10% stake in Brazilian airline GOL.

Here’s press release from Delta:

Delta (NYSE: DAL) and LATAM Airlines Group S.A. (NYSE: LTM; IPSA: LTM) (“LATAM”) today announced that they have entered into a strategic partnership that for the first time combines the strengths of the leading airlines in North and Latin America.

“This transformative partnership with LATAM will bring together our leading global brands, enabling us to provide the very best service and reliability for travelers to, from and throughout the Americas,” said Ed Bastian, Delta’s chief executive officer. “Our people, customers, owners and communities will all benefit from this exciting platform for future growth.”

“This alliance with Delta strengthens our company and enhances our leadership in Latin America by providing the best connectivity through our highly complementary route networks,” said Enrique Cueto Plaza, chief executive officer of LATAM. “We look forward to working alongside one of the world’s best airlines to enhance the travel experience for our passengers.”

The strategic partnership will unlock new growth opportunities, building upon Delta’s and LATAM’s global footprint and joint ventures worldwide, including Delta’s existing partnership with Aeroméxico. With their complementary networks, Delta, LATAM and their partners will be able to offer access to a greatly expanded array of worldwide destinations. Together, the partnership will provide greater customer convenience, a more seamless travel experience and better connect customers with the rest of the world.

Additional details of the partnership include:

• Delta will invest $1.9 billion for a 20 percent stake in LATAM through a public tender offer at $16 per share, to be funded principally with newly issued debt and available cash.
• Delta will also invest $350 million to support the establishment of the strategic partnership.
• Delta will acquire four A350 aircraft from LATAM and has agreed to assume LATAM’s commitment to purchase 10 additional A350 aircraft to be delivered beginning in 2020 through 2025, supporting Delta’s ongoing fleet transformation.
• Delta will be represented on LATAM’s Board of Directors, further strengthening the relationship.
• The tender offer and the strategic partnership are subject to customary closing conditions and all required governmental and regulatory approvals, including anti-trust immunity.

Delta expects that the transaction will be accretive to EPS over the next two years. In addition, the transaction will not impact the company’s existing financial commitments to shareholders, including free cash flow and shareholder returns. Delta also expects to remain within targeted leverage ratios.

For LATAM, the transaction will improve free cash flow generation, reduce forecasted debt by over $2 billion by 2025 and improve LATAM’s capital structure, enhancing its ability to execute its long-term strategy.

Here’s statement from the Oneworld:

LATAM advised oneworld earlier today of their decision to partner with an airline outside of the oneworld alliance. LATAM further advised oneworld that they intend to leave the alliance in due course and in accordance with formal contractual requirements. We are disappointed, but we respect their decision. They have been a valued long-term member of the alliance, and we wish them well.

Our priority at this time is to our customers and while LATAM remains a member of oneworld, the full customer benefits will continue to be delivered. As the transition continues, we will work to ensure a seamless experience for our customers.

oneworld remains a strong coalition of high-quality airlines. There has been significant progress in member airlines deepening their bilateral relationships, as evidenced by the recent regulatory approval of the American Airlines and Qantas joint business.

Conclusion

This is a huge blow to Oneworld that would essentially lose their only alliance partner in South America that has airlines around the continental in Chile, Brazil, Argentina, Colombia, Peru and Ecuador.

LATAM was formed when LAN in Chile (part of Oneworld) and TAM in Brazil (Star Alliance member) merged earlier in this decade. The combined airline decided that Oneworld was better fit for them.

I guess that LATAM’s leadership has concluded that Delta’s investment into the airline and assumption of certain liabilities such as the 10 A350’s is more beneficial than the benefits they get from being in Oneworld. It is unclear at this this whether the airline is planning to join SkyTeam. Not sure what will happen to Qatar’s 10% stake in the airline?

Star Alliance still has Avianca that has the Western and Northern South America covered by its presence in number of markets including Peru and Colombia. Avianca Brazil collapsed earlier this year and the main Avianca is having some financial issues too at the moment. Copa, also Star Alliance member,  is useful for flying between number of destinations within the Americas. So far, depending what happens with LATAM, SkyTeam’s coverage within the continent has been very limited by Aerolineas Argentinas (location of Buenos Aires limits options). .

I have extensively flown for years with LATAM in South America and about to complete Oneworld around-the-world ticket that had four segments with them (IPC-SCL, SCL-GRU, GRU-LIM and LIM-HAV). I also tend to use the airline for my flights within Brazil because Oneworld Emerald members are eligible for complimentary checked bag even on non-baggage inclusive fares.

This LATAM Oneworld exit really makes my travels within the continent and between Asia-Pacific (they have flights from Melbourne and Sydney to Santiago) and South America more complicated.