The second largest U.S. airline Delta Air Lines Inc. (DAL) formed a long-term alliance with the largest Mexican airline, Grupo Aeromexico.
Under the terms of the deal, Delta will invest $65 million in Aeromexico. In exchange, Delta will receive some shares of Aeromexico and will become a member of its board. The transaction is waiting approval from Mexican regulators.
The transaction will solidify network expansion of both companies between U.S. and Mexico amidst weak demand, uncertain economy and high fuel prices. In addition, Aeromexico’s Boeing Inc. (BA) 777, 767 and 737, and Embraer SA (ERJ) 145 and 190 fleet will further benefit Delta’s network.
Delta and Aeromexico also announced its intention to open a new maintenance and overhaul facility in Mexico in the third quarter of 2013.
The deal affirms Delta Air Lines’ continued effort to expand domestic and international flights. Within the country, the company is also improving its presence in New York through deeper focus on corporate customers, better airport facilities, and increased services into and out of New York City.
Internationally, Delta’s deal with a Chinese international airline China Eastern in early June should prove profitable. The agreement will expand Delta’s service offerings to 49 China Eastern operated flights between Shanghai and both Los Angeles and New York, as well as between Shanghai and more than 20 other Chinese cities.
We believe the company’s global network, hub structure and alliances with other airlines will enable it to offer customers an improved global reach compared with its peers such as United Continental Holdings Inc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV).
However, rising fuel prices, unionized labor, debt-heavy balance sheet and competitive threats keep us cautious on the stock.
We are currently maintaining our long-term Neutral rating on Delta. The stock retains a Zacks #3 Rank (Hold) for the short term (1–3 months).
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