Delta Cancels A350 Purchase From LATAM, Continues Joint-Venture Despite LATAM’s Chapter 11 Bankruptcy Filing

Delta Air Lines
DAL
and LATAM have modified their partnership agreement as Latin America’s largest airline group files for Chapter 11 bankruptcy restructuring.

Delta will pay LATAM $62 million for cancelling their agreement for Delta to purchase four of LATAM’s already delivered Airbus A350 aircraft, LATAM said in a court filing.

The four A350s were part of Delta and LATAM’s 2019 partnership agreement that also saw Delta takeover 10 of LATAM’s future A350 deliveries. The change involving the 10 A350s was reflected in Airbus’ March orderbook.

As part of the new agreement, LATAM gained protection Delta would not use LATAM’s Chapter 11 bankruptcy filing to cancel the joint-venture they signed earlier this month.

“Delta further agreed to not to exercise termination rights…in the event that LATAM were to file for Chapter 11,” LATAM said.

Their revised agreement is dated May 25. LATAM filed for Chapter 11 in the early morning of May 26.

Delta’s commitment to LATAM to continue their partnership, including JV, is on the provision that LATAM obtains court approval within an unspecified timeframe.

Two of LATAM’s anchor shareholders, the Cueto Group and Qatar Airways, have committed to $900m debtor-in-possession financing for LATAM. Delta, the third shareholder, did not partake.

“To the extent permitted by law, the group would welcome other shareholders interested in participating in this process to provide additional financing,” LATAM said. It has $1.3 billion of cash on hand.

LATAM did not specify why it cancelled the four A350 deal with Delta, but Chapter 11 restructuring enables LATAM to renegotiate on aircraft it does not want.

Even before COVID-19, LATAM was sub-leasing aircraft to cope with over-supply during a market downturn.

LATAM said in its bankruptcy filing that its member airlines are “likely to have a surplus of aircraft in their fleet, and will seek to enter into negotiations with aircraft sellers, lenders and lessors to remedy that surplus.” LATAM said it could also restructure or reject some leases.

Delta may find it more favorable to accept the $62m penalty and not have excess aircraft, let alone aircraft arriving in a different configuration to its own existing A350s. Prior to Delta agreeing last year to take some of LATAM’s A350s, Delta had reduced its own A350 commitments.

The $62m charge works out to $15.5 million per aircraft, but this should not be seen as a valuation for the A350. Even a used A350 is worth multiples more than $15.5 million. The low charge should be seen in the context of Delta’s much larger $1.9b share purchase.