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Is One Of Delta's Biggest Investments About To Go Bust?

Summary

GOL, one of Delta's airline equity stakes based in Brazil, is experiencing severe difficulties as a result of the Brazilian economic crisis.

GOL woes are already costing Delta millions and could see Delta's investment wiped out completely, if it decides to pursue bankruptcy.

Despite the issues, this is a time where Delta can show leadership in its equity partners while also adding substantially to its stake for very little cost.

Img 1: Delta Equity Stakes Worldwide

Delta Air Lines (NYSE:DAL) has changed the nature of the airline industry by becoming much more of an aviation conglomerate, as opposed to a single airline. As I previously wrote about in my article, here, Delta owns an oil refinery, an aircraft maintenance business, and owns large stakes in multiple large international airlines. Investors seem to have welcomed this diversification as a way for Delta to vertically integrate the business when it comes to the oil refinery or to gain a foothold in markets it was previously weaker in via strategic stakes. Unfortunately, the first real negative side effect of this move may be coming to light, as one of Delta's largest equity stakes could be on the verge of bankruptcy.

GOL Brazil

Img 2: Brazil domestic market share by airline

GOL (NYSE:GOL) is Brazil's second largest airline, slightly smaller than TAM, the largest. Delta took a 3% stake in the airline back in 2011 for $100 million to gain a much needed foothold in the Brazilian market and catch up to American Airlines (NASDAQ:AAL) and others. The partnership has been successful and Delta has increased its stake to 9.5% over time. The stake allows Delta passengers seamless access to many smaller markets in Brazil that Delta could not economically fly to itself. Meanwhile, GOL benefits from the same in the United States where it gets access to many more U.S cities.

Img 3: GOL Stock Over Time

Unfortunately, with the economic downturn in Brazil, GOL has seen its finances hit hard. The airline lost $1.1 billion in 2015 despite lower oil prices and now has $2.6 billion in debt. One of the biggest things hurting the company is its expenses and exposure to U.S dollars while 86% of revenue is in a weakening Brazilian currency. As the Brazilian real has taken a tumble, the costs of...


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