Delta Air Strikes Alliance With Brazil’s Gol

9 Dec

Delta’s investment essentially keeps Gol from joining a rival group, 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 partner] 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, the region’s largest discounter, brings a seat on the Brazilian carrier’s board and a long-term exclusive alliance.

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 new airlines in recent years. On Wednesday, Mr. Oliveira said growth has slowed recently 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 516.5 million reais ($287 million) due largely to the strong appreciation of the U.S. dollar, which drives up the cost of its dollar-denominated debt. A year earlier, the company had a profit of 110 million reais.

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 that 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 reais for each Gol preferred share, a hefty 47% premium from Tuesday’s closing price of 14.96 reais.

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 280 million reais for Gol, which will offer subscription rights to all of its shareholders.


One Response to “Delta Air Strikes Alliance With Brazil’s Gol”

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