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Delta Air Lines (DAL) and Aeromexico to Extend Partnership

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The long-standing partnership between the Atlanta, GA-based Delta Air Lines, Inc. (DAL - Free Report) and Mexico’s largest airline Grupo Aeromexico is set for extension. A major hurdle to that end was removed with both companies accepting the conditions laid down by the U.S. Department of Transportation. The order grants antitrust immunity to the carriers, thereby setting the stage for the formation of the largest trans-border association involving Mexico and the U.S.

According to a Wall Street Journal report, the order requires the carriers to relinquish some slots at key airports to free up space for other carriers. For antitrust immunity, the conditions imposed by the U.S. Department of Transportation required the carriers to give up four slot pairs (authorizations for landing or taking off) at New York’s John F. Kennedy airport. In addition, it mentioned that they were asked to relinquish 24 pairs at the Mexico City airport. The freeing up of slots at Mexico’s highly busy airport might result in carriers (on both sides of the border) like ControladoraVuelaCompañía de Aviación, S.A.B. de C.V. (VLRS - Free Report) and JetBlue Airways (JBLU - Free Report) vying for the relinquished spots.

The acceptance of the condition by the carriers is a major step toward the expansion of the partnership, which would be beneficial to the companies and passengers alike. The new alliance, once operational, would not only attract huge traffic and facilitate their top line, but also be welcomed by passengers as it offers them greater choice. The carriers aim to improve the travel experience of passengers by making suitable infrastructural investments. Moreover, they intend to promote sales and marketing activities through the joint venture.

Delta’s Motto: International Expansion

The move to grant antitrust immunity represents an important step for the launch of a cash tender offer aimed at fulfilling Delta’s aim of increasing its stake in the Mexican company to up to 49% from the current 4.2%. We note that Delta is making constant endeavors to widen its international presence and the decision to expand its stake in Aeromexico is in line with the strategy.

Given this favorable backdrop, the expansion of its alliance with Aeromexico is a huge positive as Mexico is currently inviting huge traffic, courtesy the depreciation of the Mexican peso. Consequently, the timing of the antitrust clearance is also favorable.

We note that shares of Delta have been performing well lately, outperforming the Zacks categorized Transportation-Airline industry over the last three months. While Delta shares have gained 31.3%, the industry has advanced only 23.05% in the period. The extended deal, on operation, may lead to further price appreciation at Delta as it will boost the top line by inviting huge traffic.

We expect investor focus to remain on updates pertaining to this issue.

Zacks Rank

Delta currently carries a Zacks Rank # 3 (Hold). A better-ranked stock in the airline space is Hawaiian Holdings (HA - Free Report) that sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate has increased 10 cents to $1.28 per share for the current quarter at Hawaiian Holdings over the last month. You can see the complete list of today’s Zacks #1 Rank stocks here.

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