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The spectre of Delta: the world may not be enough

In the week that saw Delta increasing its shareholding in Aeromexico, Chris Kjelgaard examines what this could mean for the Atlanta-based carrier as it looks to establish itself as a pan-global airline.

In the week that saw Delta increasing its shareholding in Aeromexico, Chris Kjelgaard examines what this could mean for the Atlanta-based carrier as it looks to establish itself as a pan-global airline.

In the wake of the opening of ‘Spectre’, yet another James Bond film on the broad theme of an organisation attempting world domination, Delta Air Lines is making a new move in its continuing effort to dominate the world’s air transport industry.

Having already purchased equity stakes in Virgin Atlantic Airways, China Eastern Airlines, GOL Linhas Aéreas Inteligentes – a stake which it recently increased from three per cent to nine per cent – and Grupo Aeromexico, Delta announced on Wednesday (November 18) that it intended to increase its investment in Mexico’s largest airline group to as much as a 49 per cent holding.

If Grupo Aeromexico’s board of directors and audit committee approves Delta’s tender offer for the 32 per cent additional holding in the company Delta is seeking, Delta and the Delta pension plan would own shares and share options representing 49 per cent of the Mexican airline group.

Such a stake would be the same as that Delta now holds in Virgin Atlantic Airways. At first glance there seems no reason why Grupo Aeromexico’s board would say ‘No’ to Delta’s new offer of MXP$43.59 ($2.60) per share, because it represented a 52 per cent premium on the price at which the company’s shares were trading before the offer was announced.

Delta’s planned greatly increased investment in Aeromexico follows an application by the two carriers in March under the US-Mexico Open Skies agreement to create an antitrust-immunised joint venture which would coordinate the two carriers’ schedules and fares on routes between the two countries.

The application is reportedly an attempt by Delta to target American Airlines’ and United Airlines’ domination of routes from most major US cities to Mexico and to cities in Central America. Aeromexico has a strong presence in various Mexico-Central America markets.

Should Delta succeed in acquiring a strategically important 49 per cent stake in Grupo Aeromexico, coordination of such a joint venture should be a relatively easy process. And even if the US and Mexican governments were to disapprove the joint-venture application, Delta would be in a position to benefit strongly from Aeromexico’s own route and fare decisions.

But, beyond the burgeoning US-Mexico market, Delta’s determination to acquire and grow stakes in other airlines indicates its developing strategy to secure strong hub and feed arrangements in major geographic markets throughout the world.

Delta has made no secret of its ambition to create a hub operation at Shanghai’s Pudong International Airport, where China Eastern Airlines is based. Its relationship with China Eastern will provide Delta with greater feed to and from the Chinese domestic market, which ultimately will become the world’s largest.

Meanwhile, not only does Delta’s 49 per cent stake in Virgin Atlantic assure it of a strong position at London Heathrow, still Europe’s largest gateway in terms of numbers of international passengers handled, but Delta also has a strategic, non-equity partnership with Virgin Australia on US-Australia routes.

Based at Hartsfield-Jackson Atlanta International Airport, currently the world’s busiest airport for passengers and also its largest hub, Delta has acted shrewdly in another region of the world as well, by cementing a strong relationship with Brazil’s GOL Linhas Aéreas Inteligentes.

The oneworld alliance now has a dominant position in both the Brazilian and South American markets because all the airlines in the LATAM group are members. LATAM is South America’s largest airline group and is a highly important component of oneworld.

Star Alliance lost TAM, Brazil’s largest carrier, as a member when TAM merged with the LAN Airlines Group to form LATAM. So Star is left trying to court Azul Linhas Aéreas as a potential new Brazilian member. But although Azul is close to United, Azul’s boss David Neeleman has indicated the low-cost carrier isn’t greatly interested in joining any global alliance.

Formally, the nearest presence the SkyTeam alliance – of which Delta is a founding member – has to the massive Brazilian domestic and international market is Buenos Aires, where SkyTeam member Aerolineas Argentinas is based.

However, Delta’s increasingly strong ties to São Paulo-based GOL ensure the US major will be in a very strong position to benefit from any future developments in the US-Brazil market. This will be particularly true at São Paulo’s Guarulhos International Airport, South America’s busiest international gateway.

Such developments are likely soon. The investment news website MarketRealist.com reported on October 23: “Delta Air Lines expects the US to conclude an open-skies agreement with Brazil in 2016, after which Delta would increase its ties with GOL. Delta plans to file for antitrust immunity soon after the agreement is concluded.” Possibly, GOL could become a member of SkyTeam one day.

Having made various airline investments and identified strategic growth potential in several major markets outside the USA, where Delta is already the largest international carrier, Delta will require a lot of resources and management focus to build out its hoped-for foreign hubs.

It is clear Delta harbours ambitions to be a pan-global carrier in its own right. But it will be important for Delta to ensure its relationship with SkyTeam remains strong and that other SkyTeam carriers remain in tune with the big US carriers.

That now seems assured. On Thursday (19 November) SkyTeam announced that former Delta executive Perry Cantarutti would become the new CEO of SkyTeam. At Delta, immediately before his SkyTeam appointment, Cantarutti had been senior vice president Europe, Middle East and Africa.

“During his five years in this role, Cantarutti was instrumental in maximising the profitability of the airline's trans-Atlantic operations and identifying growth opportunities for its joint venture with Air France, KLM and Alitalia – the industry's largest trans-Atlantic alliance,” SkyTeam said in a news release.

So not only is Delta aiming to conquer the world in its own right, through a network of equity investments in other airlines, but it is also intends to stay close to all of SkyTeam’s other members. For Delta, it seems, the world may not be enough.

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