Instead of growing internally, and increasing our flying, Delta buy's GOL Airline
By Susan Carey and Matthew Cowley Of THE WALL STREET JOURNAL Delta Air Lines Inc. (DAL), moving to build its market heft in fast-growing Latin America, on Wednesday said it agreed to pay $100 million to take a nonvoting 3% stake in Gol Linhas Aereas Inteligentes (GOL, GOLL4.BR) as part of a broader alliance with the Brazilian carrier.
The deal cements Delta's relationships with leading carriers in Latin American's two largest air markets after it agreed in August to take a 3.5% stake in Grupo AeroMexico SAB. Delta also has a relationship with Aerolineas Argentinas, the major Argentine carrier which is slated next year to join the SkyTeam global marketing group in which the U.S. carrier is a leading member.
The Gol pact comes at a crucial time for the three global alliances jockeying for position in Latin America, the world's fastest-growing aviation market. The International Air Transport Association expects traffic in the region to rise 10.6% this year and 8.5% in 2012, more than twice the global average.
Gol is not a member of a global alliance, and said the Delta deal doesn't envision Gol joining SkyTeam club, which also includes Air France-KLM SA, AeroMexico, China Southern Airlines and Korean Air.
Constantino de Oliveira Jr., Gol's chief executive, said on a conference call Wednesday that he intends for the airline to stay independent of alliances, but build strong bilateral relationships. He said the one with Delta will allow Gol to code-share, or put its flight code on Delta's flights between Brazil and the U.S., which will allow it to sell those Delta flights as if they were operated by Gol. Conversely, Delta will be able to sell to its customers connections to Gol's internal Brazilian flights.
But Delta's investment essentially locks in Gol and keeps it from joining a rival grouping, said John Thomas, global head of the aviation and travel practice at L.E.K Consulting. "Gol may not join SkyTeam but they could align with (Delta partners) Aerolineas and look for opportunities in Mexico."
Delta, which remains the No. 3 U.S. airline to Latin America after AMR Corp.'s American Airlines and United Continental Holdings Inc., has expanded its capacity in the region by 43% since 2005. Its investment in Gol, a 10-year-old carrier and the region's largest discounter, brings Delta a seat on the Brazilian carrier's board and a long-term exclusive commercial alliance. This includes frequent-flier and airport lounge reciprocity and coordinated sales efforts, Delta and Gol said.
American, which already has a code-sharing relationship with Gol, stressed Wednesday that Delta's news will have no impact on its own deal with Gol, which is based in Sao Paulo. But Gol said The American arrangement is slated to expire in mid-2012. Delta insists that it will be the exclusive U.S. partner of Gol, which serves 51 Brazilian destinations, flies to 11 cities in South American and the Caribbean, owns a large frequent flier program and recently acquired a smaller Brazilian discount carrier, WebJet.
With low unemployment, rising income and plentiful credit, Brazil has spawned a new generation of air travelers. The local airline industry has seen double-digit annual growth for much of the past decade. Passenger traffic was up 17% in the first 10 months of this year, compared with the prior-year period, according to Brazil's civil aviation authority, ANAC. Some major global events, including the 2014 World Cut and the 2016 Olympic Games, only add to the attractiveness of the market.
But the growth has increasingly come at the expense of profits, particularly since the launch of a slew of new airlines in recent years. On Wednesday, Gol Mr. Oliveira said growth has slowed in recent months as a price war eased, which is "extremely healthy" and will allow airlines to rebuild their finances. Gol swung to a third quarter loss of BRL516.5 million, due largely to the strong appreciation to the U.S. dollar, which drives up the cost of its dollar-denominated debt. A year earlier, the company had a profit of BRL110 million.
A far larger and more complex deal is making its way through Brazil's lengthy antitrust process. Last year, Chilean airline LAN SA and Gol's biggest rival in the local market, TAM SA, agreed to merge into Latam Airlines Group.
If the deal is completed as expected early next year, it will lead to the creation of the largest airline in Latin America. TAM commands 41% of the domestic Brazilian market and also serves long-haul destinations such as the U.S. and Europe. LAN is the leading Chilean domestic and longhaul carrier, and has regional affiliates in Peru, Ecuador, Argentina and Colombia.
Chilean regulators already have required that a combined LAN and TAM can only be a member of one global alliance.
Currently, Tam is a member of the Star Alliance, whose members include United Continental, Deutsche Lufthansa AG, Air Canada and All Nippon Airways. LAN is a longtime member of the Oneworld grouping, which includes American, British Airways and Japan Airlines.
Keeping Latam Airlines Group in Oneworld is important to American, which filed for bankruptcy-court protection last week under the weight of years of losses, high labor costs and waning market share. Latin America is the only geographic region where American has made money over the past couple of years. If Latam Airlines Group jumps to the Star group, "it puts American into a very, very difficult situation," said Mr. Thomas, the consultant.
While American remains the leading U.S. carrier to the region by capacity offered, a new U.S.-Brazil air treaty to take effect in two years is going to open up those routes to new competition. Moreover, American's Mexican partner in Oneworld, Cia. Mexicana de Aviacion, went into bankruptcy in 2010 and shut down, robbing American of a partner in that important market.
Delta's recent investments, while small, "dramatically change its position in Latin America," Mr. Thomas said. "It poses a real challenge to American."
American said Latin American remains an important and growing market for it, and its frequent-flier program, with 66 million members worldwide, will continue to remain competitive in the region. The company also said it is pure speculation that Lan would leave Oneworld, and said it and its Chilean partner are increasing their commercial cooperation.
Delta will pay 22 Brazilian reais ($12.50) per Gol preferred share, a hefty 47% premium from Tuesday's closing price of BRL14.96. A Delta spokesman said the Atlanta-based airline felt the shares were undervalued, but the purpose of the investment isn't to profit on the shares but to lay the foundation for the relationship. The transaction is part of a capital increase of up to BRL280 million for Gol, which will offer subscription rights to all of its shareholders.
Delta shares closed up 1.1% at $8.56.
-Rogerio Jelmayer contributed to this article.