Delta Pays LATAM $62 Million To Undo A350 Deal

Filed Under: Delta, LATAM

Earlier I wrote about how LATAM is filing for Chapter 11 bankruptcy in the US. In LATAM’s First Day Declaration, an interesting revelation was made regarding an A350 deal that Latin America’s biggest airline had worked out with Delta.

Delta was supposed to acquire 14 A350s from LATAM

In the fall of 2019 it was revealed that Delta would be taking a roughly 20% stake in LATAM. This came as a complete surprise to the industry, since prior to that LATAM was in oneworld and was pursuing a joint venture with American Airlines. In many ways this deal completely changed the dynamic of the industry.

In addition to Delta investing $1.9 billion to acquire a 20% stake in LATAM, Delta also agreed to take over 14 A350s from LATAM:

  • Delta would acquire four A350s from LATAM, which the airline was already operating
  • Delta would assume LATAM’s commitment to purchase 10 additional A350s, to be delivered between 2020 and 2025

This left Delta with a large A350 order, when you consider the airline had also ordered some directly from Airbus. This also largely explained why Delta recently announced plans to retire all 777s, given how many A350s the airline would take delivery of.

Delta A350-900

Delta & LATAM strike A350 deal

Per an agreement dated May 25, 2020, Delta and LATAM have terminated the aircraft sale and purchase agreement that was initially dated November 6, 2019.

This is specifically the agreement by which Delta committed to purchasing four used A350s from LATAM. In exchange for termination of this agreement, Delta has agreed to pay LATAM $62 million.

In other words, Delta has paid $15.5 million for each A350 they won’t be taking over from LATAM. While that’s a fraction of how much an A350 would cost, that’s still a lot of money to simply throw away to undo a previous deal.

Delta will still be taking over the commitment for 10 A350s, which will be delivered directly from Airbus.

Business class on Delta A350-900

Delta & LATAM still pursuing joint venture

This doesn’t come as any sort of a surprise, but Delta and LATAM will continue to pursue a joint venture.

The reason I bring it up is because under the framework agreement of the joint venture, it’s stated that Delta could call off the partnership if LATAM entered Chapter 11 bankruptcy.

Obviously Delta has no desire to call off this joint venture, since the ability to partner with LATAM on flights to Latin America was one of Delta’s primary motives for investing in the airline.

Business class on LATAM A350-900

Bottom line

Delta is paying $62 million in order to avoid acquiring four used LATAM A350s. That’s a lot of money to spend simply on avoiding a deal. Clearly Delta is trying to stay as small as possible going forward, and avoiding additional A350s is part of that.

The airline will still be acquiring 10 new A350s from Airbus that were initially intended to go to LATAM. I wouldn’t be surprised to see Delta work out some sort of deferral deal on those planes, though.

Are you surprised to see Delta spend so much to avoid taking over A350s from LATAM?

Comments
  1. As you state Lucky, with Latam entering Chapter 11 this is a cheap way for Delta to fund their partner whilst also keeping assets at Latam which can subsequently be sold in the open market, or sold and leased back to provide further funds to the company which may help with cash flow.

  2. I guess that Delta will also a lot of money through the 20% investment in LATAM as equity holders are treated below secured and unsecured creditors in a bankruptcy. Best case, the investment will be diluted; worst case, it could be worthless

  3. Probably would have spent that amount putting new interiors and repainting the four planes. Without knowing all of the details I suspect Delta is trying to limit capital expenditures in the short run.

  4. That seems like a good deal on A350s….especially since avoiding delivery requires a $62 million check at a time when cash is scarce. Why not just take delivery and park them in the desert for a couple years until demand recovers?

  5. I bet LATAM wishes they never parted ways with OneWorld and AA. What a @#$% show DL is if your their partner. They have basically turned their backs on Virgin (both of them); Alitalia; now LATAM (you could also say Korean Air to some extent too). This opens a huge door for GOL which seems to be the only Latin American airline with a plan. QATAR is also helping to finance LATAM so this could be a huge win for One World (they have a fox in the hen house so to speak).

    DL/LATAM will take years to fix the mess they created; AA and GOL (with OneWorld) will strengthen the network and continue to become the lead dog (AA already is) in Latin America. Airlines will think twice before working with DL once this is all over.

  6. Delta doesn’t want these 4 specific early build A350’s due to its sudden need for higher gross weight 350’s in leu of the 777 removal decision.

  7. Delta hasn’t really had a choice but to walk away from its foreign equity investments. The terms of its US govt bailout meant it couldn’t put any money in these foreign airlines even if it wanted to.

    LATAM has really lost out in all of this. It was forced to look for another partner when Chile said no to the AA JV–it needed money and it needed a US partner. It could have accepted a less than ideal US partnership and probably got investment from Qatar. Instead LATAM agreed to Delta because they were offering money and agreed to build out Miami (LATAM’s key hub) as a focus city.

    Unlikely Delta will now want to put money into fighting AA in Miami for a while. LATAM is now left with a pretty pointless US partner, unless it shifts flights to Atlanta, but the O&D business there won’t be good. It probably would have been better with the less than ideal AA partnership than what it will get now.

    As LATAM was leaving oneworld for Delta, its European JV plans with IAG were abandoned. Its partnership with Iberia weakened leaving it lost in Spain, its 2nd strategic market. Iberia announced the acquisition of SkyTeam’s Air Europa meaning that option to connect traffic into Spain and Europe was gone.

  8. @Matt

    Would you say Chile denying the JV between LATAM and AA just about snowballed the bankruptcy of LATAM? Obviously with the catalyst of the COVID19. Would LATAM had been better off JV’ing with AA to weather through that timeline you brought up?

  9. As I recall reading, the whole thing came because LATAM and AA and IAG could not do a JV without proof there would be competition on Chile-Spain between OneWorld and “not OneWorld.”

    Assuming a successful IAG buyout of Air Europa, OneWorld would have a true monopoly on the route. Thus, the JV wasn’t going to be approved, and that was likely to hurt LATAM going forward.

  10. @sunviking82 If you seriously think that OW is going to dominate Latin America because of GOL, you’re delusional. There’s a reason why DL left GOL in favor of LATAM. Also, the only reason why AA had such a large upper hand in Latin America was due to its partnership with LATAM. Now that that’s gone, it has lost its upper hand. Additionally, with what money do you think DL would be able to bail out LATAM, VS or VA? It’s in an economic crisis of its own. The same exact thing would have happened if LATAM or any other airline in a similar position had partnered with AA.

  11. I say LATAM has itself to blame for the mess it is in. Why would anyone team up with an airline like DL that has an established track record of ditching partners. Not to mention a long list of loss-making partners, all of whom are now basically lining up for bankruptcy. As we can see, not only does DL not participate in the restructuring, they even go ahead and cancel the A350 orders. I guess we are only beginning to witness the collapse of ‘DL partners’.

    Giving up membership in oneworld and blowing off AA and IAG was clearly the dumbest strategic decision that any airline would have taken in decades. Such a sad state of affairs for LATAM. A JV with DL will do absolutely nothing to help them navigate through this time. They are simply going to struggle with their US operations for the forseeable future. Hoping at least LATAM v2 makes some decisions going forward…

  12. As an American, I want to know where Delta is getting the $62 million it’s paying LATAM to cancel the A350 purchase? Aren’t we taxpayers giving Delta a financial bailout due to the Covid pandemic? If they have $62 million to blow, perhaps they don’t need the American taxpayer’s money. At the very least the government should withhold that amount from their bailout.

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