September 27, 2019– Airlines: Major Rearrangement of Partnerships in Latin America
Delta announced it will tender for a 20% stake in LATAM, paying $16 per share (a +70% premium vs. LTM’s closing price), while the US airline will divest its Gol interest. The news is a clear positive for LTM; it suggests some strategic uncertainty for Gol but any P&L impact should be small.

What happened? Delta/LATAM announced a partnership consisting of the following elements: 1) Delta will invest US$1.9bn for a 20% stake in LTM through a public tender offer at US$16 per share (78% premium to the stock’s last closing price and implying a 7.7x 2020 adj. EV/EBITDA); 2) Delta will make gradual down payments totaling US$350mn to support the partnership and LATAM’s transition costs; 3) Delta will acquire 4 Airbus A350 aircraft from LATAM and assume 10 additional A350 aircraft commitments that LATAM was due to receive in 2020-25; and 4) Delta will have a seat on LATAM’s board of directors. The companies intend to implement a joint-business agreement (JBA) in U.S.-Latin America routes, which would imply capacity and route planning. The tender offer and the strategic alliance will be subject to regulatory and anti-trust approvals. Delta has announced that it will sell its 9.4% stake in Gol, which we believe could be done in an organized transaction (such as a block trade).

Strategic alliances. In line with what would be expected, LATAM has announced its intention of ending the partnership with American Airlines and exiting the Oneworld Alliance. The South American airline does not intend to enter into the SkyTeam Alliance; it intends to maintain its partnership with IAG in Europe (a Oneworld Alliance member). So, at least for now, it will have two bilateral agreements and no alliance.

What are the next steps? LATAM and Delta should initiate shortly the process of obtaining regulatory (including anti-trust) approvals in a number of countries for a JBA, a process that could take ~2 years, we understand. In the interim, the companies will announce code share agreements, which we believe could be implemented in the next 3-6 months.

Below we address the implications for both LATAM/GOL and US carriers.

Clearly positive implications for LATAM. The news is a clear positive for LATAM airlines, in our view, for a number of reasons. To begin with, Delta is valuing LATAM at a very large premium to where it has been trading, though the deal brings no new equity (different from the transaction announced with Qatar Airways in 2016 which involved the issuance of new shares – details here). We are also encouraged by the mentioned sales/transfers of the A350 fleet/fleet commitments to Delta. This represents a big additional step forward in rationalizing the company’s fleet and should have favorable (though not easily quantifiable) implications for cash flow and long-term leverage (without sacrificing the ability of the company to grow).

In our view, another positive point is that LATAM and Delta’s route networks have far less overlap than those of LATAM and American Airlines. This means that we are unlikely to see antitrust obstacles to the two airlines doing a JBA (whereas a Chilean judge blocked a LATAM/America JBA effort last May). More important, the lack of overlap may create more opportunities for LATAM to expand and to gain inbound Delta traffic to the region in the coming years. Another basis for a positive view is the mentioned US$350 million Delta will invest in the strategic partnership (which we understand will flow through LATAM’s P&L). Most of this will go to offset real additional costs LATAM will face (such as those associated with terminating its partnership with American) but this US$350mn amount could give a boost to LATAM’s results in the next several years.

A small negative point is that this transaction could further reduce LATAM’s already low liquidity (US$4mn L12M ADTV). We highlight LATAM’s current ownership structure in Exhibit 2. The Cueto Group has signaled that it intends to tender a portion of its shares but plans to remain above 20% (versus the current ~28%). It remains to be seen what Qatar will do.

Implications for Gol: creates stock overhang but any operating impact should be modest. Gol’s stock will likely see some pressure in the near-term on uncertainty related to how/when Delta will divest its position. We believe any P&L impact from Delta leaving their partnership will be small. Customers that Delta feed to Gol represent less than 1% of the Brazilian airline’s revenues. Given the low number of daily flights that Delta operates to Brazil, we believe that American and United are more relevant for Gol (in terms of feeder traffic) than Delta. Today’s news does leave some strategic uncertainty for Gol; one possibility for it is a partnership with American (which might or might not involve the US carrier making a strategic investment in the Brazilian carrier). With LATAM exiting their partnership, American is now the only large US carrier serving the US/Brazil market without a local partner. It’s also worth commenting here that this transaction raises some uncertainty for Smiles because its main foreign airline partners are Delta and Delta’s partners (such as Airfrance, KLM, Aeromexico). As such, we would not be surprised to see SMLS3 coming under pressure in the near term.

What are the implications for Delta Air Lines? Another draw on cash via international investments… The ~$2B equity stake and ~$350M partnership investment are a notable draw on Delta’s balance sheet and cash flow over the next few years. However, management has pointed to available debt capacity to fund the transaction, which our forecast supports (

And from a strategic standpoint, though it came as a surprise, the partnership with LATAM (and subsequent GOL stake exit at ~$200M) does enhance the Central and South American footprint while creating opportunities to apply the airline’s best practices (500bps+ relative margin spread). The benefits may even be seen over the coming months as a codeshare and ultimately a JV are formed. Finally, we estimate the EPS accretion to be limited over the coming years ($50M+ 2020 net income per MSe at 20%) and believe shares may be pressured modestly given the large premium and outlay announced above.

…And a modest negative for those with LatAm exposure in the US. For the industry overall, we believe the announcement is a modest negative with carriers most exposed including AAL, UAL, and SAVE per 7-10% capacity exposure as shown in the exhibit below. This is because DAL is a formidable competitor and has historically shown an ability to enhance operations and networks for its airline investments (e.g. Virgin Atlantic). And on AAL in particular, the airline has noted a limited impact from LATAM’s departure from the Oneworld alliance and from ending its relationship with the airline, especially considering their inability to obtain approval from regulators on a JV.

  • Provides enhanced media capacity for Latin America

Luxembourg | June 9, 2016– Intelsat S.A. (NYSE: I), operator of the world’s first Globalized Network, powered by its leading satellite backbone, announced the successful launch of the Intelsat 31 satellite, which is hosting the DLA-2 payload for DIRECTV Latin America. Intelsat 31 was launched from the Baikonur Cosmodrome, Kazakhstan aboard an ILS Proton launch vehicle. Liftoff occurred at 7:10 GMT. The Intelsat 31 satellite separated from the rocket’s upper stage at 22:41 GMT, and signal acquisition has been confirmed.

Built for Intelsat by Space Systems/Loral (SSL), Intelsat 31 is a 20-kilowatt class Ku- and C-band satellite. The Ku-band payload, known as DLA-2, is designed to provide redundancy and reliability for DIRECTV Latin America’s distribution services in South America and the Caribbean, reflecting the company’s commitment to providing their subscribers with the highest reliability in the region.

The C-band portion enhances Intelsat’s existing C-band service infrastructure serving Latin America. The satellite will be co-located with the previously launched Intelsat 30, which hosts the DLA-1 payload, at 95° West and is expected to have a service life of more than 15 years.

“Intelsat 31 will deliver additional resilience to the DIRECTV service platform, further enhancing their leadership in the region. DIRECTV Latin America is committed to providing its customers with the highest quality programming at all times,” said Intelsat CEO Stephen Spengler. “Intelsat 31 will also provide valuable C-band services for our customers and further fortifies our video neighborhoods serving Latin America.”

  • Latin American commercial fleet will more than double over next 20 years

San Juan, Puerto Rico | November 16, 2015– Boeing (NYSE: BA) projects the Latin American commercial aviation market will grow at one of the highest rates in the world over the next 20 years. As a result, Boeing forecasts the region’s airlines will need 3,020 new airplanes valued at $350 billion.

“The economies of Latin America and the Caribbean will grow faster than the rest of the world over the long term,” said Van Rex Gallard, vice president, Sales, Latin America, Africa and Caribbean, Boeing Commercial Airplanes. “This economic growth, coupled with rising incomes and new airline business models that give more people access to travel, is causing passenger traffic in the region to grow by 6 percent per year – well above the global rate.

“To accommodate that growth, we forecast that the region’s fleet will more than double,” he said.

Of the 3,020 new airplanes needed, 83 percent will be single-aisle airplanes, spurred by intense regional traffic growth. The widebody fleet will require 340 new airplanes as regional carriers continue to compete more strongly on routes traditionally dominated by foreign operators.

Average airplane age in the region’s fleet has been reduced from more than 15 years to less than 10 years since 2005, giving Latin America and the Caribbean a younger fleet than the world average. The region has been in a steady replacement cycle since the mid-2000s and that trend will continue as nearly 60 percent of the current fleet is replaced over the next two decades.

“Commercial aviation and economic expansion go hand-in-hand in this region and around the world,” Gallard said. “Passenger traffic grows as economies grow, and economies grow as commercial aviation grows. Every dollar that commercial aviation adds directly to a country’s GDP generates four times as much activity in the larger economy.”

  • Smartphone apps set for significant growth, reports SITA survey

Cancun, Mexico | November 11, 2014– Air passengers in Mexico are increasingly using smartphones and mobile technology to enhance their travel experience, according to a new survey from air transport IT specialist, SITA. The 2014 SITA/Air Transport World Passenger Survey reports that 89% of Mexican passengers carry a smartphone with them with they travel—compared to the global average of 81%—and they are looking for ways to use mobile technology throughout their journeys.

The survey, which queried approximately 1,300 passengers across the Americas region, reports that check-in via smartphone apps is poised to nearly double in Mexico over the next two to three years. Today, 31% of passengers use this technology, but 61% say they will use it more in the future.

Use of mobile boarding passes in Mexico is also set to increase significantly with 76% of passengers saying they will use them in the future, compared to 54% today. And 58% of Mexican passengers said they would use smartphones more in the future to buy airline tickets and other travel-related services, compared to a regional average of 48%.

Speaking at the Airports Council International Latin American-Caribbean Annual Assembly in Cancun, Alex Covarrubias, Vice President, Sales, SITA Latin America, said: “SITA’s survey highlights the positive influence that mobile technology is having on Mexican passengers’ travel experiences. While passengers have already begun embracing mobile apps, we expect to see significant growth in these areas in the next two to three years as passengers become more familiar with them and airline and airport apps continue to improve.”

Smartphone apps have already improved the pre-flight experience for around one-third of passengers in Mexico, reports the survey. On average 84% of smartphone users in Mexico have used airline apps and 74% have used airport apps for travel applications such as airport information and bookings. Around 75% of Mexican passengers are using smartphone apps to access real-time flight information, and 71% say they will use them more in the future, compared to an Americas average of 63%.

Smartphone apps are particularly appealing for directions and way finding, with 79% of Mexican passengers surveyed saying they would definitely use these apps in the future. Seventy-one percent said they would also definitely use their smartphones for access to boarding gates, airline lounges and other areas.

When asked about their future “wish list,” passengers in Mexico said their top two priorities for investments are inflight wireless and better real-time flight information. Around 70% of Mexican passengers mentioned inflight wireless, compared to a regional average of 58%, and 59% cited better real-time flight information, compared to the regional average of 55%.

Passengers in Mexico generally showed a strong preference toward self-service technology. Around 70% of passengers said they access websites regularly via a personal computer to view flight information. Around 93% said they had used online check-in, compared to the global average of 48%. Self-service technology at the airport was also a popular option. Thirty-four percent of passengers in Mexico said they had used self-serve check-in kiosks, with 46% saying they would definitely use them in the future. An additional 90% of Mexican passengers said they would definitely use automated boarding gates, which would allow them to board the plane by scanning their own boarding passes. This compares to a regional average of 79%.

The 9th annual SITA-ATW Passenger Survey was conducted across 15 countries worldwide with nearly 6,300 participants. The 15 countries involved in the survey represent 76% of total global passenger traffic. In the Americas region, the survey was conducted across Brazil, Mexico and the United States with approximately 1,300 passengers, 20% of whom were based in Mexico.

  • Region’s largest market represents 35 percent of Latin America’s air traffic


November 26, 2013 —
According to the latest Airbus Global Market Forecast (GMF) the Brazilian air travel market will need 1,324 aircraft by 2032 to address the country’s rising international and domestic air travel requirements. The 896 single-aisle, 353 twin-aisle and 75 very large aircraft (VLA) are forecast to help meet the rising demand from domestic and foreign carriers in Brazil almost tripling the in-service fleet from today’s 480 to more than 1320 aircraft by 2032.

With a GDP forecast to grow at 4 percent annually, above the world average of 3.1 percent, socioeconomic trends suggest Brazil’s economy will more than double over the next 20 years. Brazil’s air traffic is expected to follow suit, growing at an annual rate of 6.8 percent by 2032, far exceeding the world average of 4.7 percent.

Driven by a growing middle class, increased consumer spending as well as a booming tourism sector, Brazil represents 35 percent of all Latin America’s air traffic, making it the region’s largest and amongst the fastest growing markets, having more than doubled since 2000. Since then, international traffic alone has increased at an impressive 87 percent. As the market has grown, carriers from Brazil have been unable to benefit at the same pace as foreign carriers such as those from Europe and North America.
More than 40 percent of South America’s long-haul traffic arrives through three Brazilian airports, including Guarulhos International Airport in Sao Paulo which is the number one international airport for long-haul traffic in Latin America. Very large aircraft such as the A380, would be ideal aircraft for these cities with their high density traffic including Rio. VLAs can carry more passengers with fewer flights, while meeting the international air traffic requirements needed to serve long-haul flights to Europe and North America.

“With nearly half of the region’s long-haul traffic going through Brazil, the A380 could alleviate traffic congestion at busy airports, such as Guarulhos , which represents 25 percent of total international traffic in Latin America,” said John Leahy, Airbus Chief Operating Officer, Customers. “The A380 would also support the huge tourism flows expected around the upcoming football World Cup and the Olympic Games.”

The country’s domestic air traffic market has grown an impressive 2.4 times since 2000, consolidating Brazil’s position as the fourth largest domestic market in the world by 2032, only surpassed by China, the United States and India.

“The A350 XWB and A320neo deliveries starting from the second half of 2014 and 2015, respectively could not come soon enough, with single and twin-aisle aircraft making up the vast majority of aviation demand in Brazil,” added John Leahy. “These ultra-efficient aircraft are ideally suited to address mounting challenges presented to airlines by high fuel costs and an ever-competitive passenger market seeking comfort and low fares.”
Airlines in Brazil are also operating some of the newest and most efficient aircraft in the world. With an average age of seven years, 34 percent lower than the world’s average, Brazil is leading a regional trend. The average age of Latin America’s in-service fleet is currently 9.5 years, down 42 percent since 2000.

In Latin America, Airbus foresees a 20-year demand for more than 2,307 new aircraft, including 1,794 single-aisle, 475 twin-aisle and 38 very large aircraft, estimated at approximately $292 billion. Globally, by 2032 some 29,230 new passenger and freighter aircraft valued at nearly US$4.4 trillion will be required to satisfy future robust market demand.

With more than 800 aircraft sold and a backlog of almost 400, over 500 Airbus aircraft are in operation throughout Latin America and the Caribbean. In the last 10 years, Airbus has tripled its in-service fleet, while delivering more than 60 percent of all aircraft operating in the region.

  • Intra-regional route development gives region huge potential for growth

November 14, 2013– According to Airbus’ latest Global Market Forecast (GMF), Latin American airlines will require 2,307 new aircraft between 2013 and 2032, including 1,794 single-aisle, 475 twin-aisle and 38 very large aircraft (VLA) worth an estimated US$292 billion. Globally, by 2032 some 29,230 new passenger and freighter aircraft valued at nearly US$4.4 trillion will be required to satisfy future robust market demand.

With GDP currently growing above the world average (3.6 percent per year over the last two years, versus 2.6 percent for the world) socio-economic indicators forecast that Latin America’s middle class will grow to represent more than half of the population by 2032. Between 2012 and 2020, Latin America’s economy is expected to outperform the world average, largely thanks to Mexico and Brazil’s consumer spending. As a result, traffic growth in Latin America in the next 20 years is expected to outperform the world average of 4.7 percent with an annual growth rate of 5.2 percent.

A growing middle class and increased consumer spending have led to air transport becoming more accessible throughout Latin America in the past 10 years, increasing 14 percent in terms of total number of cities served. Still, while almost 100 percent of the 20 largest cities in North America and Europe connect passengers with at least one flight per day, only 40 percent of Latin America’s top 20 cities do the same. As a result, in the next 20 years, intra-regional and domestic traffic is expected to grow at an impressive rate of 6.3 percent, becoming the biggest market for Latin American carriers.

This untapped intra-regional potential partly explains why Airbus forecasts that in the next 20 years two-thirds of the population in emerging markets will take a trip a year, positioning Latin American airlines to enjoy the second highest traffic growth rates worldwide, after Middle Eastern airlines.

While 10 of the 92 worldwide aviation mega-cities with over 10,000 international passengers a day will be in Latin America by 2032, additional opportunities exist for Latin American airlines to capitalize on. Currently, Latin America’s six largest carriers have 19 percent market share of the region’s long-haul traffic, while regions like North America and Europe enjoy nearly 40 percent.

“Very large aircraft, such as the A380, not only help alleviate traffic congestion at busy airports, but they can assist Latin American airlines to compete with their foreign competitors,” said Rafael Alonso, Executive Vice President of Airbus for Latin America and the Caribbean. “At the same time the A380 addresses international air traffic requirements needed to serve long-haul flights to Europe.”

Another prevalent trend in Latin America is the rise of low cost carriers (LCC), which accounts for nearly 40 percent of the market share of total air traffic in the region, up from just 12 percent in 2003, with Mexico and Brazil representing nearly the entire market. A highly competitive LCC market has led airlines to constantly seek the most efficient aircraft available, largely driving the average age of Latin America’s in-service fleet to 9.5 years, down 42 percent since 2000, as compared to the world average age of 10.7 years.

While many Latin American airlines have gone through great efforts to maintain a young and highly-efficient fleet, the average aircraft age in Latin America could decrease further when Caribbean carriers start their renewal process.

“Aircraft in the Caribbean average about 17 years of age – – that’s more than seven years older than the Latin America and world average,” said Alonso. “We’ve already started seeing some airlines in the Caribbean take advantage of current market opportunities and achieve greater operational benefits associated to newer generation aircraft. As more follow, the average aircraft age in the region will continue to drop.”

With more than 800 aircraft sold and a backlog of almost 400, over 500 Airbus aircraft are in operation throughout Latin America and the Caribbean. In the last 10 years, Airbus has tripled its in-service fleet, while delivering more than 60 percent of all aircraft operating in the region.