Two years ago, American Airlines' (NASDAQ:AAL) plan to form a joint venture with South American airline giant LATAM Airlines fell apart after Chile's Supreme Court ruled that the deal would be anticompetitive. Within months, the U.S. airline giant found a new partner in South America: Gol Linhas Aereas (NYSE:GOL).
Last week, American Airlines announced that it plans to invest $200 million in Gol's preferred shares to take a 5.2% economic interest in the Brazilian airline. The two airlines also plan to deepen their cooperation. Let's take a look at why this move is so important for American's long-term health.
The growing importance of partnerships for Brazil
Thanks to its hub in Miami, American Airlines has had a significantly larger presence in South America -- especially in Brazil -- than any other U.S. airline for many years. Around the time that it merged with US Airways in late 2013, American Airlines flew to nine destinations in Brazil and planned to keep growing there.
However, Brazil's economic growth had already begun to slow by then. Conditions worsened in 2015, as Brazil fell into a deep recession that lasted for two years. The economy began to recover in 2017, but at a slow pace -- and GDP plunged 4.1% in 2020 due to the impact of the COVID-19 pandemic.
Making matters worse, Brazil's currency (the real) has depreciated rapidly over the past 10 years. A decade ago, one real was worth nearly $0.60. Today, one real is worth less than $0.20. This has eroded Brazilians' purchasing power abroad, crushing outbound tourist demand from Brazil to the U.S.
As a result, it has become harder and harder for U.S. airlines to fly to Brazil profitably. American Airlines has steadily cut back service to Brazil since 2015. Since the pandemic hit last year, the carrier has ended its last two secondary market routes to Brazil. Now, it only flies to the country's two largest cities: Sao Paulo and Rio de Janeiro.
The difficulty of operating profitably in Brazil has made partnerships critical to U.S. airlines' success there. Teaming up with Brazilian airlines allows them to sell connecting flights from Sao Paulo and Rio de Janeiro to secondary cities in order to provide broad market coverage and fill more seats.
American Airlines and Gol expand their ties
Last February, American and Gol announced a reciprocal codeshare agreement. At the time, American Airlines said the partnership would give its customers access to 20 new destinations in South America (mainly in Brazil, where Gol is the largest domestic airline).
The new agreement was finalized last week, and it makes American Airlines and Gol exclusive codeshare partners in their respective markets for at least three years. The two airlines will implement a joint loyalty program that gives customers more options for earning and redeeming miles. Additionally, they will offer reciprocal benefits like priority boarding, lounge access, and preferred seats for elite loyalty members.
American and Gol are also discussing options for further cooperation. Finally, American Airlines will get a seat on Gol's board to solidify the partnership.
A critical partnership for American Airlines
Considering its weak financial results and massive debt load, American Airlines might prefer not to invest $200 million in a foreign airline. However, it has little choice.
First, American Airlines has struggled to build a defensible business in Asia, whereas it is the top U.S. airline in Latin America. As a result, it generated about 45% of its international revenue in Latin America in 2019; roughly twice as much as its main U.S. rivals. That makes success in the region crucial for American's long-term health -- and Brazil is the largest market in Latin America.
Second, after American's plan to form a joint venture with LATAM fell through, Delta Air Lines swooped in to take its place. Assuming regulators approve the Delta-LATAM joint venture (which seems likely), American Airlines will face significantly tougher competition between the U.S. and South America going forward.
Thus, American Airlines must maintain its leadership position in Brazil -- and South America more broadly -- at all costs. Expanded cooperation with Gol maximizes its chances of success.