Delta expands in Mexico

The US airline's stake in Aeromexico creates a leading airline alliance in the Mexico-US market.

By Zacks.com Jun 6, 2012 1:49PM

Image: Airline (© Christie & Cole/Corbis)By Zacks Equity Research
    

Delta (DAL), the second largest U.S. airline, has acquired a 4.17% stake in the largest Mexican airline, Grupo Aeromexico, for $65 million.


Under the terms of the deal, Delta received 30.18 million shares of Aeromexico at $31 Mexican pesos per share and became a member of its board. The deal was first announced last year and was just cleared by regulators.


The transaction will expand the networks of both companies between U.S. and Mexico amidst an uncertain economy, threats of a recession looming large over Europe and high fuel prices. Thus, the purchase would create a leading airline alliance in the Mexico-U.S. market.


Together, the companies will offer 93 destinations with 733 daily flights in eight countries through code sharing. In addition, Aeromexico's fleet, which includes Boeing (BA) 777s, 767s and 737s, and Embraer (ERJ) 145s and 190s, will further benefit Delta's network as the company is replacing smaller-gauge inefficient aircraft with more fuel-efficient jets.


Further, Delta and Aeromexico intend 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 continuing its effort to strengthen its position in New York City through deeper focus on corporate customers, better airport facilities, and increased services into and out of the region. Additionally, the company has a strong foothold in Latin America, in particular Brazil and Mexico.


We believe the company's global network, hub structure and alliances with other airlines will enable it to offer an improved global reach compared with its peers such as United Continental Holdings Inc. (UAL), JetBlue Airways Corporation (JBLU) and Southwest Airlines Co. (LUV).


We are currently maintaining our long-term "neutral" recommendation on Delta Air Lines. For the short term (one to three months), the stock retains a Zacks No. 2 "buy" rank.


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