DL looking at buying an oil refinery?
- Thread starter Kev3188
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WorldTraveler
Corn Field
- Dec 5, 2003
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Jim,
I wasn't necessarily directing the comment about where the refined product goes to you.... there have been a number of comments or questions on the subject and most people are missing the whole concept that jet fuel is a commodity.
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I understand the input costs and also understand the reasoning behind why those refineries have been closed.
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But I also find it a little hard to believe that a company with $30B in revenues doesn't have advisers who identified these obstacles long before anything was leaked to the press that got a bunch of aviation discussion fans going.
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I have no idea whether this makes sense or not... and I don't know how DL would overcome the obstacles that you and others have identified.
DL is running a very fiscally sound airline right now... just for point of reference, UA has still not reported its March traffic stats but airlineroute is reporting some pretty hefty capacity cuts including elimination of entire routes. Just for comparison, a year ago DL identified weakness and started pulling out a lot of capacity six months ago esp. over the Atlantic. UA clearly didn't read the same tea leaves DL did or they had bigger issues - perhaps labor integration - that prevented them from recognizing the market was tanking but their RASM is now showing that they should have cut alot of capacity along time ago....
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DL has been very aggressive in identifying and heading off problems that could threaten DL's finances... thus it seems even more of a stretch to believe they would go diving into a totally new venture without fully understanding what is at stake....
but then that is a logical way of looking at the situation.
I wasn't necessarily directing the comment about where the refined product goes to you.... there have been a number of comments or questions on the subject and most people are missing the whole concept that jet fuel is a commodity.
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I understand the input costs and also understand the reasoning behind why those refineries have been closed.
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But I also find it a little hard to believe that a company with $30B in revenues doesn't have advisers who identified these obstacles long before anything was leaked to the press that got a bunch of aviation discussion fans going.
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I have no idea whether this makes sense or not... and I don't know how DL would overcome the obstacles that you and others have identified.
DL is running a very fiscally sound airline right now... just for point of reference, UA has still not reported its March traffic stats but airlineroute is reporting some pretty hefty capacity cuts including elimination of entire routes. Just for comparison, a year ago DL identified weakness and started pulling out a lot of capacity six months ago esp. over the Atlantic. UA clearly didn't read the same tea leaves DL did or they had bigger issues - perhaps labor integration - that prevented them from recognizing the market was tanking but their RASM is now showing that they should have cut alot of capacity along time ago....
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DL has been very aggressive in identifying and heading off problems that could threaten DL's finances... thus it seems even more of a stretch to believe they would go diving into a totally new venture without fully understanding what is at stake....
but then that is a logical way of looking at the situation.
tech2101
Veteran
Are you referring to CP or Delta?
I think CP has quite a few advisers who are rather adept at analyzing petrochemical issues. They also have $245B in revenues,
But hey, what do they know...
xUT
Veteran
As a competing airline, I hope DAL Corp will buy as many refineries as can be 'leveraged'.
Better for me to secure what little health and flight benefits that I can.
B) xUT
Better for me to secure what little health and flight benefits that I can.
B) xUT
BoeingBoy
Veteran
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But, as xUT points out, a $245B company doesn't know what it's selling for such a cheap price...
Makes it seem all the better to stick to what it knows and stay away from what it doesn't...
DL can talk to/hire all the experts it wants, but who knows the refining business better - the people engaged in that business every day or those who sell their opinion to whoever will pay for it? If ConocoPhillips doesn't see any value in refurbing Trainer, isn't that an expert opinion that should be considered carefully?
Jim
WorldTraveler
Corn Field
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DL and every other business has competing businesses that it must negotiate with in ANY business transaction..... being able to show a profit means you are able to price your product at some level of costs above your product with suppliers who are equally as intent on making money as you are.
I'm not understanding why DL should all of a sudden should be unable to make a correct financial decision using consultants from outside the petroleum industry (many of whom were formerly in it) who now can make more money advising AGAINST their former employers.
Your default assumption is that because DL is venturing into an area outside of its core business, it will lose against larger companies in the same field.
My assumption is wait and see... but for me to take that position means I have to admit I don't know the outcome.... and at the core that I don't know more than the company that will make the nine figure investment.
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You do realize that many of the counterparties to airline fuel hedges are the oil companies themselves... which means that DL is already beating OIL COMPANIES in order to save money on its fuel hedges?
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BTW, UA finally reported its traffic, RASM, and fuel. UA's RASM grew about 1/3 of the rate DL reported, due in part to the fact that UA added capacity faster than it could be profitably absorbed, esp. on international. So much for the backbone idea of UA and AA that int'l is strong enough that you can continue to add int'l flights - where fuel costs are an even higher percentage of the cost of the flight.
Interestingly, UA's Paciific load factor fell on significant capacity adds - in contrast DL added just 1% more capacity and its LF jumped about 8%. On the Atlantic, DL cut about twice as much capacity as UA and got about twice the increase in LF.
So, DL is indeed doing what it does well....
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And DL still had an eight cent better jet fuel price at the pump than UA. And UA is alot better hedged than alot of other airlines.
I'm not understanding why DL should all of a sudden should be unable to make a correct financial decision using consultants from outside the petroleum industry (many of whom were formerly in it) who now can make more money advising AGAINST their former employers.
Your default assumption is that because DL is venturing into an area outside of its core business, it will lose against larger companies in the same field.
My assumption is wait and see... but for me to take that position means I have to admit I don't know the outcome.... and at the core that I don't know more than the company that will make the nine figure investment.
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You do realize that many of the counterparties to airline fuel hedges are the oil companies themselves... which means that DL is already beating OIL COMPANIES in order to save money on its fuel hedges?
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BTW, UA finally reported its traffic, RASM, and fuel. UA's RASM grew about 1/3 of the rate DL reported, due in part to the fact that UA added capacity faster than it could be profitably absorbed, esp. on international. So much for the backbone idea of UA and AA that int'l is strong enough that you can continue to add int'l flights - where fuel costs are an even higher percentage of the cost of the flight.
Interestingly, UA's Paciific load factor fell on significant capacity adds - in contrast DL added just 1% more capacity and its LF jumped about 8%. On the Atlantic, DL cut about twice as much capacity as UA and got about twice the increase in LF.
So, DL is indeed doing what it does well....
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And DL still had an eight cent better jet fuel price at the pump than UA. And UA is alot better hedged than alot of other airlines.
I didn't know that. I knew that many of the counterparties were investment banks and hedge funds - I didn't realize that oil companies were on the other side of hedges. Lehman Brothers bankruptcy was cited as a problem for airlines as Lehman was a counterparty to many hedges:
http://www.nytimes.com/2008/11/13/business/worldbusiness/13iht-air.4.17803639.html
http://www.orientaviation.com/storage/PDF/OA%20May09/OAMag_V16N04_p12_Main%20Story.pdf
Not surprisingly, AA has turned to Citi and Morgan Stanley for its hedging:
http://www.businessweek.com/news/2011-12-27/amr-citigroup-seek-bankruptcy-law-relief-for-fuel-hedging-deal.html
I hate to be a skeptic, but would you have a link or two that shows that DL's hedges have ever involved oil companies as counterparties?
On a related note, even assuming that DL " is already beating OIL COMPANIES in order to save money on its fuel hedges," there's a world of difference between successful hedging and operating an oil refinery more efficiently and successfully than its previous oil company owner.
You don't need to be petroleum engineer or a finance wizard to be very skeptical that DL (or any other airline, for that matter) possesses any skills at operating an oil refinery or distributing refined products. That's simply not Delta's area of expertise, any more than an oil company would know thing one about operating a successful airline. When you stop dancing with the one that brung ya, investors get nervous, for good reason.
WorldTraveler
Corn Field
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I'm afraid I cannot remember where I saw a list of countrerparties and I cannot find them... which means you can accept my recollection or not...
but in the process of looking, I found this little article that remind us not only of how difficult it is to hedge but how low oil prices were just a couple years ago.
http://vandymkting.typepad.com/files/2009-1-31-fuel-hedges-can-fail-airlines-find---wsj.com.pdf
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This serves as a stark reminder of how volatile the hedging business has been and that it hasn't delivered the results airlines have needed many times.
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And it still requires someone to be willing to lose in order for the airline to win.... most people are going to work really hard, really fast to minimize someone else's gains at their expense.
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My point on this subject has more to do with the notion that DL is going to dive headlong into a decision and be taken to the cleaners just because they are venturing into a business outside of their core area, even though they spend $10B a year in fuel. Is it not possible for a company to be very familiar with how a supplier's business works when they constitute such a large poriton or your costs?
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And even more so that we on forums are going to tell ANY multibillion dollar company something they don't already know.
but in the process of looking, I found this little article that remind us not only of how difficult it is to hedge but how low oil prices were just a couple years ago.
http://vandymkting.typepad.com/files/2009-1-31-fuel-hedges-can-fail-airlines-find---wsj.com.pdf
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This serves as a stark reminder of how volatile the hedging business has been and that it hasn't delivered the results airlines have needed many times.
.
And it still requires someone to be willing to lose in order for the airline to win.... most people are going to work really hard, really fast to minimize someone else's gains at their expense.
.
My point on this subject has more to do with the notion that DL is going to dive headlong into a decision and be taken to the cleaners just because they are venturing into a business outside of their core area, even though they spend $10B a year in fuel. Is it not possible for a company to be very familiar with how a supplier's business works when they constitute such a large poriton or your costs?
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And even more so that we on forums are going to tell ANY multibillion dollar company something they don't already know.
BoeingBoy
Veteran
- Nov 9, 2003
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It shouldn't come as a surprise that companies aren't experts on their supplier's businesses. Can any airline design an engine or airframe from scratch better than Pratt or Boeing? Every business has it's strengths and weaknesses when it comes to not just knowledge but expertise, and smart businesses use other's strengths to their advantage. Otherwise, every business would do everything needed for their business themselves. But Walmart doesn't build it's own trucks, airlines don't build their own airplanes, Coca-Cola doesn't produce it's own cans and bottles, etc. DL, or any airline, has no need to have expertise in refining any more than a grocery chain needs to be expert farmers or hog growers.
Jim
WorldTraveler
Corn Field
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There are indeed companies that know the business of their suppliers very well... you can bet that Coca-Cola knows the plastics business very well even though they don't personally produce the bottles for their product.
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But I still have never asserted that DL needs to know the refinery business as well as ConocoPhillips... just that they will engage advisers if they don't have that expertise on staff already... and I still find it incredulous that you can't believe that a company that buys $10B worth of jet fuel per year wouldn't have some very well-trained people on staff in the petroleum area.
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But the BIGGER issue is the assumption that people on THIS FORUM are going to identify some issue which DL doesn't know about and hasn't considered as part of its decision regarding what to do with a refinery once they own one.
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I don't know what the outcome is and I'm sure not applying for the job... but I also can say with 100% certainty that no one on this forum will be asked to provide DL or C-P with an opinion regarding the transaction or with what to do with the refinery if DL does acquire it.
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But I still have never asserted that DL needs to know the refinery business as well as ConocoPhillips... just that they will engage advisers if they don't have that expertise on staff already... and I still find it incredulous that you can't believe that a company that buys $10B worth of jet fuel per year wouldn't have some very well-trained people on staff in the petroleum area.
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But the BIGGER issue is the assumption that people on THIS FORUM are going to identify some issue which DL doesn't know about and hasn't considered as part of its decision regarding what to do with a refinery once they own one.
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I don't know what the outcome is and I'm sure not applying for the job... but I also can say with 100% certainty that no one on this forum will be asked to provide DL or C-P with an opinion regarding the transaction or with what to do with the refinery if DL does acquire it.
tech2101
Veteran
I am sure they do as all airlines have "buyers" who all well versed in the Jet-A purchasing market.
However, I seriously doubt that any of those same people could hold an intellegent conversation on the subject of owning a plant that refines Jet-A, any more than a Zales salesman could tell you how to operate a diamond mine.
BoeingBoy
Veteran
- Nov 9, 2003
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Exactly. "Well trained" in the petroleum area doesn't mean having the expertise to run a refinery or even know if running a refinery makes sense. DL, like most airlines, has people in charge of hedging, planning whether to ferry fuel or not, probably even biofuel progress - they are "well trained" is aspects of the petroleum area. Heck, I'm "well trained" in certain airplanes but I wouldn't know where to start if I were asked to design one...
I do love how you repeatedly give all the positives but then close with not having an opinion either way. Makes it easy to claim being right no matter what happens. Be a man, take a stand and if wrong...well, that's life. No one is right 100% of the time unless they never take a position...in which case they give up the right to claim they were correct...
Jim
Well..W T, the fact that DL is "considering" a refinery Intrigues me, but not for the reason(s) you might think.
You may recall that I opined a month or two back(as Jet-A $$ was beginning to soar towards the Ionosphere) that DL, more than any other US carrier, would get Hit the Hardest due to thier #1 Size, AND the uneconomical Fact that they're flying just about every kind of Jet in existance today.
So I'm NOT surprised Anderson is looking to get into the Oil (etc.) business !
Being BIGGEST is Not always a good thing .
You may recall that I opined a month or two back(as Jet-A $$ was beginning to soar towards the Ionosphere) that DL, more than any other US carrier, would get Hit the Hardest due to thier #1 Size, AND the uneconomical Fact that they're flying just about every kind of Jet in existance today.
So I'm NOT surprised Anderson is looking to get into the Oil (etc.) business !
Being BIGGEST is Not always a good thing .
WorldTraveler
Corn Field
- Dec 5, 2003
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Jim,
just as with the whole seat thread, I am simply providing the reasons why DL MIGHT have considered it... I didn't embrace that idea or this one and I certainly don't pretend that I have the knowledge to make that decision.
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Your assumption that a consumer can't understand the business that its suppliers do just because they don't choose to do that business is flawed, plain and simple.
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What I find beyond belief is the assumption by a half dozen people on the internet that they can make the assumption that a company with $30B plus in revenues can't and won't find the right resources to make an informed decision regarding an investment that still amounts to only a couple of percent of what they spend on the product per year and in which none of their competitors have been able to find effective long term cost controls. Not surprisingly, you and the cheering section that think the investment is a bad idea haven't offered any real insight as to alternative solutions - other than DL doing what they do anyway..
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This topic has nothing to do with refineries or Delta or even the airline industry... it has to do with admitting that there are people in the world who know more than the rest of us and they bear the responsibility for those decisions; what alot of people here have a hard time admitting is that there are companies and individuals that have pretty strong records based on what they have done.
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I am certain the topic will be discussed on DL's earnings call if a contract has not been signed or sources leak that DL is no longer interested.
just as with the whole seat thread, I am simply providing the reasons why DL MIGHT have considered it... I didn't embrace that idea or this one and I certainly don't pretend that I have the knowledge to make that decision.
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Your assumption that a consumer can't understand the business that its suppliers do just because they don't choose to do that business is flawed, plain and simple.
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What I find beyond belief is the assumption by a half dozen people on the internet that they can make the assumption that a company with $30B plus in revenues can't and won't find the right resources to make an informed decision regarding an investment that still amounts to only a couple of percent of what they spend on the product per year and in which none of their competitors have been able to find effective long term cost controls. Not surprisingly, you and the cheering section that think the investment is a bad idea haven't offered any real insight as to alternative solutions - other than DL doing what they do anyway..
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This topic has nothing to do with refineries or Delta or even the airline industry... it has to do with admitting that there are people in the world who know more than the rest of us and they bear the responsibility for those decisions; what alot of people here have a hard time admitting is that there are companies and individuals that have pretty strong records based on what they have done.
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I am certain the topic will be discussed on DL's earnings call if a contract has not been signed or sources leak that DL is no longer interested.
