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Delta's ridiculous refinery purchase still providing laughs
Posted on 1/23/15 at 9:48 am
Posted on 1/23/15 at 9:48 am
I remember laughing about this with my oil-trading friends several years ago when they made this preposterous move. It's the gift that keeps on giving.
LINK
quote:
In 2012 Delta Air Lines DAL -0.28% did something strange. It bought an oil refinery. No other airline owns a refinery. But Delta executives, led by CEO Richard Anderson, thought it was time to do something radical about the painful cost of fuel. Back then oil prices were stubbornly high–more than $90 a barrel. Its planes were burning the equivalent of 260,000 barrels a day, representing a third of total costs.
At the time, Delta figured, $2.2 billion of the $12 billion a year it was spending on fuel went to refiners as profit. By making jet fuel in the company’s own refinery, Anderson and his team figured Delta could keep some of that profit for itself. So they plunked down $180 million for an aging Phillips 66 PSX +0.92% plant in Trainer, Pa., near Philadelphia.
Two and a half years later, “this deal is even more idiotic now than it was then,” says Ed Hirs, an energy economist and lecturer at the University of Houston. Delta has sunk $420 million of capital into the refinery, which has generated roughly $100 million of losses. Is Delta at least getting cheaper jet fuel? Yes, it expects to pay about 50 cents a gallon less this year. But that’s only because oil prices have plunged, which has nothing to do with owning a refinery. Besides, the real test is to compare Delta’s fuel costs to other big airlines. Before the acquisition Delta was sourcing fuel for 9 cents a gallon cheaper than its peers. Its edge today: still 9 cents. Meanwhile, much of its rationale for owning a refinery has disappeared: refiners’ margins have declined, while American crude no longer sells as such a wide discount to imported barrels.
LINK
Posted on 1/23/15 at 10:17 am to Big Scrub TX
I remember laughing about this too. Airlines have historically had enough trouble making money running an airline. Trying to making money running a refinery is even more ridiculous.
Posted on 1/23/15 at 10:21 am to Big Scrub TX
This is one of those things that sounds good on the surface. However, when you get into the details, this seems poorly thought out. I would guess refining companies have economies of scale that this project would not have. Plus, did they realize the capital injection needed?
Posted on 1/23/15 at 10:26 am to LSUFanHouston
It's too bad because delta is the best of the bunch in the US. It's shameful how horrible continental is here in Houston.
Posted on 1/23/15 at 10:27 am to reb13
You mean united...
Continental was great until they merged...
Continental was great until they merged...
Posted on 1/23/15 at 10:33 am to eng08
quote:
You mean united...
I can't believe how horrible they are. I wish southwest flew out of IAH.
Posted on 1/23/15 at 10:40 am to geauxbears08
This part is funny too:
On top of the horrific refinery decision, they actually put a risk reversal on...and got hammered on it too.
quote:
What’s more, Delta is set up to forgo upwards of $1.5 billion in savings this year on the rest of its fuel-hedging program. Turns out that Delta’s futures traders had bought their 2014 puts and calls in such a way that they limited the pain Delta would feel if fuel prices went higher, by giving away some of the benefit Delta would get if they went down. According to comments from CFO Paul Jacobson, Delta will participate in only about two-thirds of the oil-price plunge. Thus Delta’s 2015 fuel bill will likely be about $2 billion lower, instead of the $3.5 billion it would have saved without those hedges.
On top of the horrific refinery decision, they actually put a risk reversal on...and got hammered on it too.
Posted on 1/23/15 at 10:58 am to Big Scrub TX
THey should go vegas and double down with some more buys
Posted on 1/23/15 at 11:03 am to eng08
quote:
You mean united...
Continental was great until they merged...
I was about to say this. Long ago, Continental was pretty bad, but they really, really turned it around and become a great airline. Then, they merged into United, and it all went downhill.
Which is a shame, because you are limited in where you can fly on Southwest.
Posted on 1/23/15 at 11:14 am to Big Scrub TX
Well you know what they say...
If you want to beat the S&P, buy the index and sell the airlines.
If you want to beat the S&P, buy the index and sell the airlines.
Posted on 1/23/15 at 11:25 am to Big Scrub TX
I don't think Delta has any qualms with lowering the fuel for everyone in the industry so long as they maintained their margin compared to their competitors, which the article pointed out. Obviously they would like to expand that margin but if the refinery operates at a loss of $100M a year but increases JetA supply in target markets and drops the cost of fuel overall it saves them (and the whole industry) billions of dollars. A rising tide lifts all boats and you're seeing record profits after record profits across the board.
Airline management teams are behaving much more rational than in the past. Instead of flooding capacity to try and capture market share, they are maintaining discipline and seeking to compete on network, service and strategic innovations.
Airline management teams are behaving much more rational than in the past. Instead of flooding capacity to try and capture market share, they are maintaining discipline and seeking to compete on network, service and strategic innovations.
Posted on 1/23/15 at 11:37 am to Waffle House
quote:
I don't think Delta has any qualms with lowering the fuel for everyone in the industry so long as they maintained their margin compared to their competitors, which the article pointed out. Obviously they would like to expand that margin but if the refinery operates at a loss of $100M a year but increases JetA supply in target markets and drops the cost of fuel overall it saves them (and the whole industry) billions of dollars. A rising tide lifts all boats and you're seeing record profits after record profits across the board.
Your numbers don't agree to the numbers in the story.
Posted on 1/23/15 at 8:25 pm to LSUFanHouston
Eh whatever same shite different name.
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