Delta Airlines' Oil Refinery: The Math Doesn't Work

Discussion in 'Delta Air Lines' started by traderjake, Feb 3, 2013.


  1. WorldTraveler

    WorldTraveler Corn Field

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    There have also been articles written in the last week or so showing that the refinery does in fact make sense. A balanced perspective should include them as well.

    Lots of people have been worked up about this refinery since it was announced, thinking they could catch DL in a mistake or at least proving that conventional thinking about fuel in the airline industry can't be changed. Even in the past quarter when the refinery was interrupted by Sandy - which actually affected distribution of the product as much as if not more than the actual operation of the refinery - the refinery only lost about $60M or so (don't remember the exact number but it was a small fraction of 1% of DL's costs) - and those losses were offset by hedging gains.

    DL is also saying that domestic fuel will be run thru the refinery and could change the economics favorably. Midwest crude wasn't really an option when Trainer was shuttered - and other oil companies have also switched to Bakken.

    DL is still saying they expect the refinery will deliver $300M or more in savings to DL within the first full year - as much as they said it would deliver when they announced the deal. Given that DL is paying close to $12 billion a year in fuel costs, $300M is not going to make or break the company if they fail but it does have the potential to reduce DL's fuel costs by 3% or more.

    Given that yet another refinery in the NE will close, the crack spread for jet fuel in the NE will continue to rise - exactly why the deal makes sense. The US continues to shutter refinery capacity which disproportionately reduces jet fuel supplies since jet fuel is a small percentage of the production capacity of most refineries.

    Let's also keep in mind that DL ran the most profitable airline in 2012 in the Americas - and one of the most profitable in the world. Other airlines have used Sandy and other weather issues in quarters before as to why they couldn't be profitable. DL has managed to run a profitable airline and still have money to use in risks like the refinery. Given that weather has been a part of aviation from its infancy, it would seem that other carriers' greatest need is to figure out how to operate in an environment that is the norm for the industry. All the other stuff is just fluff if the core business can't work well.
     
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  2. 700UW

    700UW Corn Field

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    How can this be?

    WT said DL is the world's best airline and has the smartest people running it?
     
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  3. WorldTraveler

    WorldTraveler Corn Field

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    no WT said that DL is running the most profitable US airline.

    I don't think there is a metric for intelligence of leaders in any business per se. Profits are the best metric of how well the company is using the resources it has and adapting to the realities of the marketplace.

    If you can think of a better metric to compare companies, let Wall Street know.
     
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  4. Glenn Quagmire

    Glenn Quagmire Veteran

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    You post the above statement then fail to provide a link to any of those articles.
     
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  5. WorldTraveler

    WorldTraveler Corn Field

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    They can be found in the same location the OP probably found the original.... yahoo airline news does a pretty good job of tracking all news about any airline.

    Remember there were a host of "analysts" who were convinced the refinery was a bad deal then and aren't about ready to admit they are wrong now.

    They now take a $60M or so quarterly loss during the startup quarter and have tried to extrapolate it out to make a statement about the viability of the refinery.

    They still don't see the core numbers on which the refinery deal was announced and likely never will... even though DL will at some point report fuel price savings attributable to the refinery.

    I'm still pretty content to wait and see the numbers even in the first full quarter of operation to provide some real sense of color - and that likely still won't reflect any switch to Bakken crude.
     
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  6. WorldTraveler

    WorldTraveler Corn Field

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    BTW, this is the article I read...not sure if I found it via yahoo or not but it is another opinion.

    http://www.strategicsourceror.com/2013/01/delta-airlines-continues-to-flex-its.html?m=1
     
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  7. QA4Jet-A

    QA4Jet-A Veteran

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    What I find interesting is the day after Sandy slammed the Northeast, Delta claimed that the refinery had suffered no damage and the refinery was operating 'business was usual'. Then, in their quarterly report, they stated a signicant loss in revenue due to Sandy. So what is the truth?
    I wish I would have saved the link cuz I know the Delta Tree Hugger will call me out on this.
     
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  8. WorldTraveler

    WorldTraveler Corn Field

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    again, they noted that the greatest hindrance to the operation of the refinery came because of an inability to distribute products because of infrastructure issues in the NE - which apparently happened after the first day.

    Don't you think someone who really knew would have stepped up and called them out at the risk of fines to DAL for false statements to investors if the refinery really was not operating normally?

    Companies really do tell the truth a whole lot more than some people want to believe.
     
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  9. QA4Jet-A

    QA4Jet-A Veteran

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    I guess you read different reports. What I saw was 'No problems', not a word about distribution issues. Spare me your idea that companies don't lie, whether to investors or employees! You and I both know better than that! What gets my attention is, the fact that they made the statement, only to fall back, when, any moron would know, after Sandy, that transportation would be interrupted. Power outages to allow pipeline flow should have been handled by back up generators, trucking companies to be able to load tanks, etc. My point was to identify a statement that was made, perhaps a bit ill-timed, vs the truth at the end of the day. I suppose my question back to you would be, how much money did they lose due to not being prepared and involving only the refinery vs Sandy?
     
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  10. WorldTraveler

    WorldTraveler Corn Field

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    If you are so certain they were telling lies, then please file a complaint with the SEC. You can have the satisfaction of knowing that you have put DL's execs in jail and subjected to the company to fines.

    Go for it!

    In case you forgot, parts of NYC were without electricity for far longer than had happened in a real long time.... but of course, DL was supposed to have known that risk.

    Let me know when your complaint is filed.
     
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  11. Glenn Quagmire

    Glenn Quagmire Veteran

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    To say or imply Delta lied or misrepresented themselves on their financial report is not based in fact.

    I also have a hard time believing that they could have done anything to predict or mitigate what took place as a result of Sandy.
     
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  12. QA4Jet-A

    QA4Jet-A Veteran

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    Then why on the day after the storm, did they make a public announcement that there was no harm done to the refinery and that 'Business was usual'? I am not implying anything other than what was posted to the public, not stating that Delta lied, just the fact that they perhaps spoke too soon. Gotta love WTs comments, if I was so certain they were telling lies.... OMG, it was in the press and no, I won't file a complaint as I don't have a dog in the hunt. I could care less if they make a buck or not, just the point that they said one thing, then back tracked from the original statement. Is this so hard to grasp?
     
  13. WorldTraveler

    WorldTraveler Corn Field

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    apparently you can't grasp that their statement was accurate..... power outages and distribution problems happen even w/o storms - but not for days on end.
    DL could not have known that the day after the storm.

    Like any company that wants to stay out of trouble w/ the regulators, DL told the truth as they knew it at the time but they couldn't have been able to predict what all might happen days later.

    Apparently not having a dog in the hunt doesn't stop you from throwing accusations of not being honest.
    Just admit you are wrong and move on.

    And it really doesn't matter what company we are talking about.
     
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  14. QA4Jet-A

    QA4Jet-A Veteran

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    I was not throwing out accusations, merely stating what was said in the press. I can grasp what I read, and understand what is said in print, not saying what I will accept and/or deny. Their first statement was inaccurate, or shall we say, too early to tell? My point is, Mother Delta decided, IMO, to state everything was rosy after the storm, without taking into consideration of what may lay ahead. To state that all is well, then months later, put partial blame on financial reports due to the storm is interesting. I would think, perhaps into day 2 or 3, after the storm, they would have been better off to report the rising problems of distribution, following the aftermath. Apparently not having a dog in the hunt doesn't stop you from throwing accusations of not being honest.
    Just admit you are wrong and move on.

    I will not admit I am wrong just because I state what I read. There is nothing to deny.
    Perhaps you should consider taking your cane pole and moving on down the creek!!
     
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  15. WorldTraveler

    WorldTraveler Corn Field

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    Except DL didn't say the entire state of the universe was rosy. You are the one that wanted to leave no room for the possibility that anything else could have gone wrong and tried to crucify them for complications way beyond their control.
    Others get it.

    Apparently, you've never heard a doctor tell you or a family member that the problems they found were worse than expected.
    Apparently, you've never accepted that government leaders are telling the truth when they say the economy did respond to the interventions that previously worked.

    Welcome to the human race - where life doesn't always go as expected - where people tell the truth as they know it and the healthy ones accept that there really are a lot of things out of there control so they figure out how to adapt and move on despite what they encounter.

    DL told the truth as they knew it at the time. It's the way the human race works. It's all most of us expect any one to do.
     
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  16. townpete

    townpete Corn Field

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    I think people are forgetting that the purpose was to reduce fuel costs, not making a profit via traditional refinery. Fuel costs are a net operating loss. With the refinery there is still an operating loss, just not as much as before.
     
  17. FWAAA

    FWAAA Veteran

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    No, that's not correct. Fuel costs are not a "net operating loss." Fuel costs are a cost of doing business, just like labor, airplanes, maintenance, terminal rent, landing fees, insurance, utilities and catering expenses. Net operating losses result when your expenses exceed your revenue.

    That said, the refinery must operate at a profit in order for it to benefit DL, as operating at a loss means that its expenses exceed the value of its output. For the fourth quarter, that loss was about $63 million. Along with the purchase price ($150 million) plus the improvements ($100 million), DL now has at least $313 million wrapped up in Trainer.

    On a somewhat related note, an interesting article appeared yesterday:

    http://www.bloomberg.com/news/2013-02-05/new-york-gasoline-weakens-on-restart-of-delta-trainer-fcc.html?cmpid=yhoo
     
  18. WorldTraveler

    WorldTraveler Corn Field

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    It isn't at all certain that profit for the refinery will mean the same thing for C-P as an oil company as it will for DL.
    First, you perhaps can comment but DL is the sole user of jet fuel from the refinery. There have been suggestions - and I am not certain if they are correct or not - that DL will avoid some fuel taxes they would have otherwise paid on purchased jet fuel by using products from its own refinery. There are abundant examples where vertical integration of production works... I don't know the oil industry well enough to know where it makes sense, but I still bristle at the notion that DL - or any other company that would have made just a purchase - didn't investigate those issues.
    In fact, the refinery only has to break even or lose less than what DL would pay in higher costs in order for the whole project to be profitable.

    Second, the primary reason why DL bought the refinery is because the supply of jet fuel in the US continues to decline because the US is using less and less gasoline. Jet fuel is a byproduct of most refineries... it is the primary intent of this refinery. If refineries in the US continue to close or if they do not produce as high of a percentage of jet fuel as Trainer on smaller total supplies, the crack fuel - which reflects the value of jet fuel as a percent of total production - will continue to rise. No other oil company has said that they intend to focus production on jet fuel - which completely skews the value

    Third, the byproducts that DL doesn't use are based on trades; the NE has had above average gasoline costs compared to the rest of the US, a significant part of which is due to the reduced supply of refining capacity in the US. Trainer has the potential to create better trades for jet fuel because of its location in the NE than would occur if it were in other parts of the US.

    Fourth, DL's refinery losses were offset by hedging gains. I still don't know if DL will quit hedging when the refinery is totally up and running but hedging gains actually reduced DL's fuel losses by 20%. In fact, part of the motivation why DL wants the refinery is to eliminate about $1B in cash that is tied up continually to buy jet fuel. The interest on that $1B is easily $50M per year and probably more.

    Fifth, DL never said that the refinery would be profitable in the first quarter of operation; they did expect it to be profitable within the first year and they have not changed that forecast despite what happened with Sandy. It is worth noting that despite having the refinery loss and having a large operation in the NE that was impacted, DL still managed to generate better financials than any other airline w/ a heavy NE presence.
    just as with DL's network, they have the financial resources to try some things and to invest in strategies that don't pay off right away. DL doesn't have to report immediate positive results for the refinery. But if they are right that the refinery ultimately results in the benefits promised, DL could end up with a 2-3% cost advantage just because of the refinery. Right now, no other airline has the financial resources to take such a risk.

    I'm still comfortable to believe that DL knows a whole lot more than the online analysts who torpedoed the idea when it began to leak out... and given that DL execs continue to affirm that it was the right financial decision, I think they know full well the repercussions if they cannot deliver.
     
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  19. WorldTraveler

    WorldTraveler Corn Field

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    one more thought....
    there were an analyst or two who recognized when the Trainer deal was announced that the airline industry may be one of the few that is lower margin than the refining industry. Oil companies want out of the refining business because it is a drag on much higher margin operations for them. But for an airline, the risk of running a refinery looks relatively tame compared to some of the risks airlines regularly face.

    And, again, even if Trainer's 4Q loss is annualized (ie if DL lost the same amount of money for the whole year), the loss still amounts to a fraction of DL's total costs. DL's losses due to Trainer still did not stop DL from reporting a pretty impressive quarter compared to its peers - and DL's fuel costs which were indeed higher than AA's - did not prevent DL from having one of the best CASM's among network carriers. Industry segment low costs - long a DL philosophy - combined with the ability to generate revenues as good as or better than their network airline peers has the potential to change the way the airline industry in the US operates. For years, DL succeeded at keeping costs down but couldn't get revenues up. Now they are succeeded at both - and the refinery presents a decent possibility they could push costs even lower while pushing revenues even higher as the concentrate their position in the NE.
    That is probably why Richard Anderson is more and more comfortable saying that the distance between DL and its competitors will only grow in the years ahead.
     
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