Summary
-Canada remains Delta’s largest market that it does not have a joint venture or equity stake in.
-In a recent interview, Ed Bastian, the new CEO at Delta stated that aside from growth in emerging markets, Delta was looking to expand its presence in Canada and the U.K.
-Any joint venture or equity stake would be very positive for Westjet.
As Ed Bastian took over control of Delta Air Lines (NYSE:DAL) after 8 years of Richard Anderson’s transformational leadership, Bloomberg decided to interview him on the future ahead for the airline. Richard Anderson was pivotal in transforming Delta into the industry leader that it is today. Delta thought outside the box under Richard Anderson, taking unusual steps such from purchasing an oil refinery to have greater control over fuel costs to purchasing large stakes in foreign airlines in places where it needs a larger presence.
In the Bloomberg interview, Ed Bastian stated that outside of emerging markets such as Brazil, China, and India, two other places Delta needed greater presence was in Canada and the U.K. In Canada, Delta has had a codeshare partnership with Westjet for a few years that allows Delta to have access to certain additional Canadian markets that they cannot serve directly while Westjet (OTC:WJAFF) also gains access to additional U.S cities.
Ed Bastian said that the increased Canadian presence would come in the form of a “broader partnership”, stating that a partnership or joint venture were possibilities and not wanting to give any comment when asked about the possibility of an equity stake. Any additional flights into the country along with focus there would be opportunistic for Delta as American and United both reduce service to Canada due to the large plunge in the value of the Canadian dollar and corresponding drop in demand for cross-border travel as a result.
Airline Stakes
Delta in recent years has led the industry in North America by taking stakes in airlines located in regions that it sees as strategic long term. The list of equity stakes that Delta has purchased to date are listed below.
The stakes are a win-win for both parties, allowing Delta to get greater access to the markets those airlines serve. For example, Delta with its GOL partnership can sell a ticket from Chicago to a secondary city in Brazil that would not be economical for Delta to fly to directly. The airline that Delta takes a stake in benefits from the access they gain to additional markets in the United States, as well as access to the Delta management team and access to the Delta technology platforms. The stakes also in some cases give Delta board representation at the airline, allowing Delta to be confident that the partnership will be long term and will not be ended by a competitor swooping in with a better deal or bad management driving the airline into the ground.
In its most recent equity stake, Delta bought 49% of AeroMexico, the largest airline in Mexico, giving it substantial access to the country compared to what it had previously. With South of the American border covered, now Delta is looking North.
Westjet Stake
A stake in Westjet may very well be a possibility for Delta as it seeks to gain a greater foothold in the Canadian market. Delta is an airline that thinks for the long term so the recent drop in value of the Canadian dollar may be compelling it to consider taking a stake in Westjet. Westjet stock has fallen from $34.04 CDN to $19.83 CDN in under 2 years as a result of falling oil prices that disproportionately affect Westjet due to its large exposure to oil producing regions of Canada. A stake for Delta would be opportunistic, giving the company the ability to buy shares of a high quality airline at likely near the bottom for the foreseeable future. The potential rebound in the Canadian dollar in the future could also drive the value of the investment up even more for Delta.
Air Canada has a joint venture with United in the Canada-USA-Canada market that has benefited the two airlines substantially and allowed them to be leaders in cross-border business travel. A joint venture allows the participating airlines to share both revenues and costs, along with coordination of schedules and pricing.
While not having any joint ventures currently, Westjet has a codeshare partnership in place with both American Airlines (NASDAQ:AAL) and Delta. Despite this, while flying to several American Airlines hubs from its base in Calgary, Canada, Westjet does not fly to any major Delta specific hubs from Calgary.
A Delta stake does make sense and out of all the major markets that Delta serves, Canada is the largest one that Delta does not have a local equity stake or joint venture in. Either way though, any kind of increased partnership would be beneficial to Westjet. Delta has worked to become more of an upmarket airline in the United States, while also remaining one of the largest. The focus on product and service has been well received by many in the business community and has generated increases in business spending year over year for quite some time. Delta now sees a ~10% pricing premium on its flights, something that would be beneficial to Westjet if it were able to capture more of these passengers in an expanded partnership. Airlines tend to have most of their costs in U.S dollars regardless of where they are based, so for Westjet, an airline much less known in the USA, the ability to capture additional U.S sales would be beneficial as the Canadian dollar continues to slump.
Westjet tends to fly to many leisure destinations in the USA as opposed to business destinations but has been working to pivot in recent years. A Delta stake, joint venture, or increased partnership would be helpful for this pivot allowing Westjet to add more business orientated U.S destinations.
There are still a few unsolved questions though. What would happen to the American Airlines partnership if Westjet got a much more extensive partnership with Delta? Would it remain or would focus on it deteriorate? How would Delta feel about the low cost transatlantic flights Westjet has started offering that in many cases take potential Delta customers from one of its most profitable markets?
Conclusion
It appears that Delta is looking to increase its presence in Canada going forward and sees it as one of the few developed markets that it needs a greater presence in. While some of the growth may come from additional flights, Ed Bastian also mentioned a partnership and joint venture as possibilities. As Westjet is the only other major airline in Canada and Air Canada is already in an extensive partnership with United, there is no doubt it will be Westjet that Delta seeks to expand its partnership with. Outside of an increased partnership or joint venture, history would suggest that an equity stake by Delta is a very high possibility.
Regardless of the exact outcome, any increased partnership between Delta and Westjet will be very positive for Westjet. A joint venture or stake would be particularly positive and is something that Westjet investors should look out for. The increased U.S dollar sales and high value customer base that Delta could offer Westjet, an airline that is traditionally focused on lower yielding leisure passengers, would be very positive. While Westjet is a very well run airline, the access to Delta management and technology platforms as a result of an equity stake would certainly not hurt.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Delta Air Lines looking into purchasing WestJet shares?
