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Delta to Boost Aeromexico Stake for Latin American Expansion

In a bid to bolster its presence in Latin America, Delta Air Lines,Inc.DAL announced its intention to increase its stake in Mexico's largest airline, Grupo Aeromexico S.A.B. de C.V. Delta aims to more than double its current holding in the Mexican carrier by owning upto an additional 32% of the company.

Currently, the Atlanta, GA-based carrier holds a 4.1% stake in Grupo Aeromexico with an option of possessing a further 8.1%. Furthermore, the Delta pension trust has options of purchasing an additional 4.6% stake.

Consequently, in the event of the proposed stake enhancement materializing, Delta Air Lines, along with the Delta pension trust, will own/have options to buy upto 49% of the Mexican company. Delta aims to purchase the additional shares through a cash tender offer at 43.59 Mexican pesos ($2.60) a share. The offer price represents a significant premium to Grupo Aeromexico's closing price as on Nov 18.

We believe that Delta's decision to bolster its stake in Grupo Aeromexico is a smart one since the average annual growth in passenger traffic (through 2035) between the U.S. and Mexico is projected to be the highest (4.7%) among Latin American countries, as per data released by the U.S. Federal Aviation Administration.

We remind investors that in March this year, Delta, along with Grupo Aeromexico, had sought antitrust immunity for their $1.5 billion joint venture for U.S. to Mexico flights, through an application filed with the U.S. Department of Transportation.

Delta's Motto: International Expansion

We note that Delta is making constant endeavors to widen its international presence and the decision to expand its stake in Grupo Aeromexico is in line with the strategy. In July this year, Delta had announced its decision to shell out $450 million to own 3.55% of China Eastern Airlines CEA . Also, in the same month, Delta had announced its plan to bolster its ties with Latin-American carrier GOL Linhas GOL through increased investment.

Delta's constant efforts to expand internationally can be attributed to its sound financial health, thanks to low oil prices . Weak oil prices are allowing Delta, like most other carriers, to generate huge savings. This is because fuel costs account for a major chunk of an airline's operating expenses.

In another customer friendly move, Delta recently announced its decision to launch five daily flights to Denver from Los Angeles. The new flights will be operational from Jun 1, 2016.

Zacks Rank

Delta currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the airline space is Southwest Airlines Co. LUV which sports a Zacks Rank #1 (Strong Buy).

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SOUTHWEST AIR (LUV): Free Stock Analysis Report

GOL LINHAS-ADR (GOL): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

CHINA EASTN-ADR (CEA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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