The new strategic partnership between American Airlines and Gol checks some important boxes for the two carriers. American gets much deeper access to South America’s largest domestic market — Brazil — something that Chief Financial Officer Derek Kerr has said is a priority for the company, while Gol gets a capital infusion that analysts say it needs to weather the balance of the Covid-19 crisis.
Under the deal unveiled on Wednesday, American and Gol will enter into a three-year exclusive codeshare — in other words American cannot partner with another Brazilian carrier, nor Gol with another U.S. one — and cooperate where allowed under antitrust rules. In addition, they will expand reciprocal loyalty benefits with details to come in 2022. And, importantly for Gol, American will invest $200 million in the Brazilian carrier in exchange for a 5.2 percent stake in the airline.
The new pact should surprise few in the industry. American is taking a page — really, a second page — out of Delta Air Lines’ playbook after the Atlanta-based airline wooed away long-time American partner Latam Airlines Group with a sizable equity investment in 2019. In response, American and Gol launched a basic codeshare covering Brazilian domestic routes in early 2020. And then in July, American took that first page from Delta with an equity investment in and partnership with Chilean discounter JetSmart that aims to give its millions of South American loyalty members domestic and regional flight options within the continent.
“The one thing we don’t do in South America is offer short haul and domestic connectivity in a lot of markets,” Kerr said at a Cowen & Co. investor conference earlier in September. “We’re looking to create partnerships that do that and enable us doing further the reach of our loyalty program there.”
In August, American Chief Revenue Officer Vasu Raja said that 65 percent of seats on the airline’s flights South American flights were sold locally rather than in the U.S. He added that many of those flyers are members of the AAdvantage loyalty program and, by adding partnerships like the one with JetSmart, American can create a “massive amount of customer value.”
The American-Gol pact also sets up a fierce competitive showdown among the three large U.S carriers in South America once travelers return. American will have local equity partners in Argentina, Brazil, Chile, and Peru with Gol and JetSmart; Delta in Brazil, Chile, Colombia, Ecuador, Paraguay, and Peru with Latam; and United in Brazil, Colombia, and Ecuador with Avianca and Azul. United also partners with Copa Airlines, which has an extensive into-South America network via its Panama City hub.
Based on 2019 numbers — and excluding shuttered Avianca Peru and Latam Airlines Argentina — American’s partners Gol and JetSmart had an almost 22 percent share of intra-South America capacity; Latam, a roughly 36 percent share; and Avianca and Azul, a 20 percent share, according to Cirium schedule data. However, these numbers have changed as a result of the crisis and Avianca and Latam’s Chapter 11 bankruptcy reorganization’s in the U.S. that have seen both carrier’s shed dozens of aircraft.
American has long been the largest carrier between the U.S. and South America. The airline carried 28 percent of the 15.1 million travelers who flew between the regions — and 28 percent of all U.S.-Brazil flyers — in 2019, Bureau of Transportation Statistics data via Cirium show. United carried nearly 12 percent and Delta just over 8 percent.
For Gol, the partnership is about more than just expanded network access. American’s investment is forecast to boost its liquidity to roughly 5.2 billion reais ($988 million) by year-end, wrote Bradesco BBI Transportation Analyst Victor Mizusaki in a report Wednesday. He forecasts that the additional liquidity, which will come from the issue of 22.2 million new shares, is “enough to overcome the Covid-19 pandemic.”
This is good news for Gol that some analysts have warned could struggle in coming years under its debt load and capital commitments.
The Latin American airline industry is in the midst of a pandemic-induced shake up. In addition to American’s deals and the bankruptcies, reports indicate that Volaris shareholder Caoba Capital has purchased a 40 percent stake in Chile’s Sky Airline opening the door to a tie up between the successful Mexican discounter and struggling Chilean carrier. And in Brazil, Azul is actively pursuing an acquisition of Latam’s local subsidiary, Latam Airlines Brasil, through the group’s bankruptcy restructuring. In addition, Gol agreed to buy Brazilian regional carrier Map Transportes Aéreos for 28 million reais in June.
“I do believe this is a kind of trend created by the pandemic,” Gol CEO Paulo Kakinoff said at an investor event in June. “[Gol] is about to reinforce, re-emphasize its role in promoting regional consolidation.”