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


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36 replies to this topic

#1
traderjake

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http://seekingalpha....t_article_title
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#2
WorldTraveler

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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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#3
700UW

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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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#4
WorldTraveler

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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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#5
Glenn Quagmire

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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.

You post the above statement then fail to provide a link to any of those articles.
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#6
WorldTraveler

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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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#7
WorldTraveler

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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.strategic...ex-its.html?m=1
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#8
QA4Jet-A

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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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#9
WorldTraveler

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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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#10
QA4Jet-A

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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.

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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#11
WorldTraveler

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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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#12
Glenn Quagmire

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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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