Delta’s Partnership via Equity Strategy Takes an $81 Million Hit in Brazil

Global airlines from Delta to Etihad are eschewing acquisitions these days in favor of making equity investments in global partners, and Delta’s strategy has encountered a couple of speed bumps in Brazil and China.

In its first quarter Securities and Exchange Commission filing, Delta revealed that the political and economic crisis in Brazil, as well as GOL’s lackluster financial performance, saw Delta’s equity investment in GOL’s parent decrease in value by $25 million and the Atlanta-based carrier took an $81 million loss in accumulated other comprehensive income/loss from it in the quarter.

In Delta’s first-quarter earnings call, incoming CEO Ed Bastian said increasing the airline’s globalization through taking equity stakes in partner airlines will continue to be a key priority. In 2013, Delta took a 49 percent non-controlling stake in Virgin Atlantic, and has a strategic joint-venture partnership with Air France-KLM and Alitalia.

Etihad arguably has an even more aggressive partner strategy with equity stakes in Airberlin (29 percent), Alitalia (49 percent), Jet Airways (24 percent), Virgin Australia (25 percent), Air Seychelles (40 percent) and AirSerbia (49 percent).

Despite Delta’s declining value of its investments in GOL, and China Eastern, too, Bastian expressed the airline’s commitment to maintaining this partner strategy globally.

“You will see us continue on the path towards globalization, whether through initiatives like headquartering our transatlantic operations in Amsterdam, or through our equity stakes in Virgin Atlantic, China Eastern, Aeromexico and GOL. We see the international marketplace at the source of long-term profitable growth opportunities.”

Delta has a 9.5 percent ownership stake in GOL and has guaranteed a five-year $300 million GOL loan.

Delta views its investment in GOL as only temporarily at risk and intends to wait things out at least until its strategic partner recovers.

“We determined the investment was not impaired as GOL’s management is executing measures to maximize operational and network efficiency and control costs, which we anticipate will improve GOL’s financial performance and the fair value of our investment,” Delta stated. “In addition, we have the intent and ability to maintain our investment in GOL to allow for the recovery of its market value as GOL, which operates as an extension of our global network, is a strategic investment for Delta.”

China Problems

Delta has a 3.5 percent stake in China Eastern and the two airlines are working on better-connecting their networks but China Eastern’s shares have declined in value and the Chinese economy has been beset by problems.

One of the issues for Delta regarding its China Eastern investment is that Delta is restricted for three years from selling or transferring its shares.

But Delta determined that its China Eastern investment — which Delta couldn’t value because of the shares’ illiquidity — is not impaired because the price-drop of the shares is more tied to the woes of the broader Chinese economy and than specific to China Eastern’s performance.

As with GOL in Brazil, Delta intends to maintain its China Eastern investment — presumably beyond the three-year restriction — because Delta considers China Eastern and access to its network strategic in nature.

On the partnership front, Delta also has a 4.1 percent equity stake in Aeromexico, and a pending tender offer would take up that stake in Grupo Aeromexico to 49 percent if it closes in 2016, as expected.

In contrast to Delta’s stakes in GOL and China Eastern, Delta achieved a $21 million gain because of its investment in Grupo Aeromexico in the first quarter.