Is Bastian creating the fourth global alliance?

With the stroke of his pen, Delta Air Lines CEO Ed Bastian cemented his company’s reputation as both industry transformer and a ruthless pursuer to be the world’s biggest and most influential airline.

In signing a deal to take a 20% stake in LATAM Airlines, Bastian undercut American Airlines, a direct competitor and dominant player in the North-South American market and sliced a strategically important Latin American carrier out of rival global alliance oneworld.

Not a bad day’s work, even though it’s costing Delta $2.25 billion.

The deal is also Delta’s most audacious in a series of stake buying in other airlines: 49% in Virgin Atlantic and Aeromexico; 8.8% in Air France-KLM; 9.2% in Korean Air, with the intent of making that 10%; and 3.5% in China Eastern Airlines. Delta also owns 9% of Brazil’s GOL, but will now sell that to get regulatory approval for the LATAM deal.

Delta did not create the airline equity blueprint. Former Etihad Airways president and CEO James Hogan made airline equity partnerships a cornerstone strategy—one that went disastrously wrong when airberlin failed and Alitalia re-entered bankruptcy after both airlines hemorrhaged Etihad’s money. Qatar Airways, under Group CEO Akbar Al Baker, has stakes in British Airways’ parent International Airlines Group, Air Italy, Cathay Pacific, China Southern Airlines and—most interesting given the Delta move—LATAM. Given the acrimony between Delta and Qatar, and Delta’s ongoing campaign against Air Italy’s services to the US—LATAM board meetings could become lively affairs.

Other airlines are also partnering via equity stakes. But Delta is the first major US carrier to make it a core strategy and to span multiple continents, with stakes in airlines in Europe, Asia and South America. And while some other equity partnerships were born of desperation—typically, the need for cash—Delta is a rich company investing in sound brand names.

The LATAM announcement came not long after Bastian caused something of a stir when he told Bloomberg in September that the global alliances had not been successful. Delta—and its equity partners Air France, KLM, Aeromexico, China Eastern and Korean—are SkyTeam members. But Bastian said he did not think SkyTeam had brought a lot of value to its member airlines or to their customers.

Tellingly, he described Delta’s airline investment strategy as one that creates a “network of influence that we’re having within those companies … And over time, while we can’t own them in terms of whole-owned consolidation, we can have meaningful enough investment that we create an international network of carriers that will be uniquely tied where you have Delta as the centerpiece.”

Starting with Star, the global alliances were created at least partly to get around the airline industry’s unique ownership rules. While the European Commission has bravely moved to relax those rules, most countries—and most notably, the US—cling to highly restrictive airline ownership and cabotage laws and are urged to do so by local labor group representatives.

That is what Bastian acknowledged when he said Delta “can’t own” those foreign carriers in which it has invested—but he clearly sees an expanding investment model making the global alliance model less necessary. More important, as he says, Delta’s investment strategy makes it the “centerpiece” of the international carrier network it is creating. Instead of being just one of 20 alliance members, albeit an important one, Delta sits at the head of this new “alliance” in which it has handpicked the players.

Delta isn’t likely to leave SkyTeam any time soon. But this is a company with a shrewd business eye for how to influence the industry so that it heads in a direction that best suits Delta. The way it played the LATAM card was pure Delta. Oneworld apparently had no idea until the day before the announcement. And you have to wonder at the language in the American Airlines C-suite, even though the airline issued a polite statement essentially blaming LATAM’s decision on the Chilean supreme court’s ruling to exclude Chile routes from its antitrust immunized joint venture. “We understand LATAM’s decision to partner with a US carrier that isn’t burdened by the ruling,” was all American could come up with, at least publicly.

Meanwhile, as Delta builds its “international network of carriers”—which sounds awfully similar to a global alliance—watch for the reactions of other major airlines, especially American and United Airlines. If more airlines buy meaningful stakes in strategically important foreign carriers, and if they also steal those airlines from their global alliances, then the global alliance model could ultimately fracture and be reinvented as new networks of equity-linked carriers led by the biggest buyer.

The Delta airline investment shoe that still has to drop is Alitalia—also a SkyTeam airline. But the speed and size of the LATAM deal appears to make it only more apparent that the 10% stake Delta has floated for Alitalia would be a defensive move to keep others out rather than a genuine desire to throw money into an eternally loss-making company. And, with Al Baker as a fellow shareholder at LATAM, Delta executives have a potentially new Italian prospect. Air Italy.

Karen Walker, [email protected]