The past week, Delta Air Lines’ (NYSE:DAL) expanded further into Latin America with its latest agreement with GOL Linhas Aereas Inteligentes (NYSE:GOL), Latin America’s largest low-cost airline based in Brazil. Delta is entering into a long-term exclusive commercial alliance with GOL to leverage its vast network in Brazil, an increasingly popular travel destination from the U.S and touted to be the leading engine for economic growth in Latin America (See Delta and GOL Create Enhanced Commercial Alliance, Delta Press release, Dec 7). International flight currently contributes to about 17% of stock value for Delta while accounting for a similar 22% for peer United Continental (NYSE:UAL).
Earlier in the week, Delta reported its November traffic results which show that Latin America saw a 5.6% growth in passenger traffic while the overall system traffic was down by about 2%. The carrier reported system-wise capacity cuts of 4% and improved occupancy rates this November (See Delta Air Lines Reports November Traffic, Delta Press Release, Dec 5). This coupled with the promising Brazil expansion supported modest increases in Delta’s stock during the week while the broader market was largely flat.
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The partnership will allow Delta and GOL to place their industry booking codes on each other’s flights, allowing them to take reservations for passengers flying on either airline. Travelers also will be able to accrue and redeem frequent-flier points on both carriers. (See Delta to Buy $100 Million Gol Stake to Boost Brazil Flying, Bloomberg, Dec 8)
Brazil is an attractive market for Delta as the strong economic ties between the U.S. and Brazil continue to support healthy traffic growth between the two countries. The demand for flights between U.S. and Brazil is expected to grow by 11 percent over the next four years. Adding to the promising economics of the Brazilian skies, the business travel segment is the largest component of Brazilian air transportation demand and the most profitable in the market. GOL’s 10K filing says that business travel represented more than 65% of the total demand for domestic air travel in 2010, which is significantly higher than the business travel portion of domestic air travel in the global aviation sector. Therefore, the partnership can potentially boost yield performance at Delta, besides deepening its international presence.
We currently have a Trefis price estimate of $9 for Delta Air Lines’s stock, about 10% ahead of the market price.