I'm not an expert, but I'm skeptical when someone invests $250 million (net purchase price of $150 million plus upgrade investment of $100 million) and then claims that it will magically produce annual fuel price savings of $300 million. If the Trainer refinery was such a guaranteed money-tree, then why did its oil company owner (clearly the experts in the field) shut down the refinery and refuse to make the $100 million investment? Oil companies are greedy, right? Oil companies know all about making profits, right? So why would an oil company hand this golden goose to Delta for such a small price?
Hint: the $300 million annual fuel price "savings" may not be real.
If Delta can really turn a $250 investment into $300, it should liquidate the airline, buy some more refineries and become the jet fuel provider to every other airline. Think of the potential profits - a 120% annual return on invested capital - that such a strategy could produce. If it can get other refineries at similar prices, then an investment of $10 billion would produce annual profits of about $12 billion. If DL has a very good year in 2012, the best it can hope for is a profit of about $1.5 billion. Becoming the jet fuel supplier to the industry (if the Trainer numbers are scalable) might produce an annual profit of $12 billion. If so, then DL should leave the flying to others and make serious money refining oil into jet fuel.
perhaps the reason you are stumbling w/ the idea is because DL is participating in the petroleum industry as both a consumer and supplier - roles that modern business says don't work but which there are examples where cmopanies have done that type of vertical integration successfully.
DL is not buying more refining capacity that it can use and it isn't trying to build a network of refineries - it made that point clear. DL's interest is in making sure it has enough jet fuel at reasonable prices for its operations in the NE where it is concerned that the shutdown of refineries could have a negative impact on prices for fuel. DL is tuning the refinery to produce a much higher percentage of jet fuel than many people thought was possible - 32% - and is trading the refinery's production of other products from the refinery - largely gasoline - for jet fuel in other locations. Thus, DL is doing what it is doing to supply its own needs, not invade the oil company's space in the industry. That is probably why BP - one of the largest suppliers of aviation fuels - and P66 are working w/ DL.
The refinery is part of DL's efforts to do what it does do - provide airline passenger services - with some of the best financials among its network carrier peers.
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I think the biggest fear that alot of people in the airline industry have is that DL will end up being right and they will gain a significant advantage on the biggest cost advantage in the industry - and it will make it that much more difficult for other carriers.
That is the nature of business in a highly competitive industry - and other companies have used similar tactics to shift business to themselves in the past, including AA's first efforts to put Sabre on travel agent desks and then bias the display to show only - or first - AA flights.
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You can be assured that DL will be very closely scrutinized for how well this transaction works and they should be.
At the least, the refinery deal will have a negligible effect on DL's finances and DL will be competing on the same basis as every other airline - and on that basis they have been doing a pretty good job. The best scenario from DL's perspective will be that they gain an advantage that could be part of a fundamental change in the industry.
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We will probably begin to know the impact of the decision by the end of the year.
Jim,
we have heard the "noble" efforts of AA to stay out of BK for years - but staying out of BK was all predicated on turning the company around.. .which AA did not do.
You can argue if you want about the valor AA had in not filing sooner and protecting stockholder value, but the real test will be whether AA does enough to turn the company around.
My personal assessment is that even though AA waited way too long to address its problems, it will ultimately succeed because other airlines are in worse shape in terms of their ability to compete - specifically UA which is facing labor pains and escalating costs necessary to finish its merger and US which doesn't have the size to compete on the east cost against AA, DL, UA, and WN - all of which have much deeper pockets and broader networks that will put enormous pressure on US.
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Thus, AA will probably come out ok relative to its peers but there is no doubt that AA has lost alot of competitive advantages and those will continue to be reduced as other competitors take advantage of the unwanted situation that AA now finds itself in during BK.
