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Why Shares of LATAM Airlines Soared 33% in September

By Lou Whiteman - Oct 3, 2019 at 9:17PM

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South America's largest airline has an important new partner.

What happened

Shares of LATAM Airlines Group (NYSE: LTM) gained 33% in September, according to data provided by S&P Global Market Intelligence, after the South American aviation company announced a joint venture and alliance with Delta Air Lines (DAL 1.45%). Delta stole LATAM out of the arms of U.S. rival American Airlines Group after Chilean officials expressed concerns about LATAM and American cooperating on routes.

So what

LATAM, South America's largest airline group, is a longtime partner of American but in May was blocked from forming a joint venture with the U.S. carrier. That looked like a setback for LATAM in its efforts to lock in a U.S. partner and split revenue on premium routes connecting U.S. business travelers to the Southern Hemisphere.

A plane takes off in front of a setting sun.

Image source: Getty Images.

Delta stepped into that void in September, announcing plans to buy a 20% stake in LATAM for $1.9 billion ahead of forming a joint venture with the carrier. Delta has far less exposure to South America than American and is seen likely to win antitrust immunity with LATAM to allow the two companies to coordinate schedules and pricing.

LATAM also won commitments from Delta to buy four Airbus A350s from LATAM and take over 10 other A350 orders, allowing the South American carrier to better rationalize its fleet and reduce future spending.

Delta agreed to buy the shares for $16 apiece, nearly double the sub-$9-per-share price LATAM traded at prior to the announcement. LATAM shares had been down more than 20% year to date coming into September, but following the agreement the shares are now up for the year.

Now what

Even after the jump, LATAM trades at a discount to the price Delta paid for the shares. That could be an indication of the lengths Delta was willing to go to secure a deal, or it could be interpreted as Delta being more confident than current shareholders that there is long-term value in LATAM.

The deal appears more favorable for Delta than LATAM, giving the U.S. airline strong exposure to one of the few regions where it was lacking while creating at least some risk to LATAM, as it now must break its links with American and forge ties with a new partner. But the joint venture should benefit both parties and help LATAM to present itself as South America's premium airline operator catering to business travelers.

It's tough to say where LATAM shares will go in the near term, especially given the global economic slowdown and particular weakness in many large South American economies, but over the long haul, LATAM has secured a valuable new ally to help it weather whatever turbulence might lie ahead.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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