The newly announced partnership between Delta and Latam will upend the competitive landscape in the U.S.-South America aviation market while threatening the dominance of American Airlines in the region.
Delta and Latam caught industry insiders by surprise on Sept. 26 when they announced that Delta would invest $1.9 billion at $16 per share to acquire 20% of the South American carrier. Delta CEO Ed Bastian said the financial commitment is the largest the carrier has made in another airline since its 2008 merger with Northwest.
As part of the alliance, the carriers plan to pursue an antitrust-immune joint venture, although they expect regulatory approval to take up to two years. Codesharing between Delta and Latam, however, could begin as soon as later this year, both carriers said.
Latam, the largest airline in Latin America, has subsidiaries in Argentina, Brazil, Colombia, Ecuador, Paraguay and Peru.
If Delta and Latam are the winners in the agreement, then American and Brazil's Gol are the losers. American, which until now has been a Oneworld partner of Latam, had sought a joint venture with the carrier, as well, but the proposal was blocked in May by the Chilean Supreme Court.
Latam will now leave Oneworld. The existing codeshare agreement between Latam and American remains in place for the moment, but it will wind down over the next few months. American continues to honor existing codeshare bookings with Latam but has suspended new codeshare bookings, the carrier said.
The Delta-Latam deal also spells the end of the partnership between Delta and Gol. Delta, which owns 9.5% of Gol, had used the partnership to enhance its South American reach, placing its code on 100 to 125 Gol flights daily.
American remains the largest player in the U.S.-South American market. In September, the carrier, which maintains strategically located hubs in Miami and Dallas/Fort Worth, had a 26.3% market share, according to the airline industry data analytics company OAG.
Latam had the second-largest share, at 20.6%. Third was Avianca, at 12.4%, followed by Avianca's partner, United, at 11.8%. Delta was fifth in the market, with an 8% share.
A Delta-Latam combination, however, would have had 28.6% of the market last month, exceeding American's share.
In a statement it released shortly after the deal was announced, American sought to downplay the financial impact of losing Latam as a partner.
"This change in partnership is not expected to have a significant financial impact to American, as the current relationship provided less than $20 million of incremental revenue to American, and the proposed joint business without Chile would have provided limited upside," the carrier said.
A few days later, in what looked like another response to the Delta-Latam tie-up, American announced that it would increase frequencies to Sao Paulo, Brazil; Lima, Peru; and Santiago, Chile, from Miami in the coming months.
"We'll continue to grow, compete and thrive in a region of the world where we have a long history and a bright future," the carrier said.
Bastian, meanwhile, said Delta views South America as the region in which it has the greatest growth potential. The U.S.-South America market is worth $8 billion annually and makes up 10% of the U.S. international market, he said.
Along with its stake in Gol, Delta already holds stakes in Air France-KLM, China Eastern, Korean Air, Virgin Atlantic and Aeromexico. The Latam deal, in particular, will help Delta leverage that Aeromexico partnership, which already includes antitrust immunity on routes between the U.S. and Mexico.
Executives at Delta and Latam said they did not expect to run into the same challenges with regulators that Latam and American did in their attempt to form a joint venture. The reason, they said, is that while the American and Latam networks have substantial overlap through Miami and elsewhere, Delta and Latam currently compete on just one route: Sao Paulo to New York. That route will be left out of the proposed joint venture, said Latam CEO Enrique Cueto Plaza.