Are Delta's Competitive Advantages Sustainable?

[eolesen]

Interesting read from Seeking Alpha.

http://seekingalpha.com/article/2677895-are-deltas-competitive-advantages-sustainable?uprof=82

This particular author hasn't written about DAL before, but in browsing some of his other research in the restaurant/hospitality and online verticals, it's looks like some good analysis, so I'll keep an open mind on this one.

I'm sure that there will be all sorts of comments within the hour on why he's wrong...

 

[WorldTraveler]

first, the article is really about only one issue: fuel.

There is little doubt that debt reduction in and of itself is a good thing for any company. The only reason why other carriers don't copy DL's fleet strategy - which is the heart of DL's debt reduction strategy - is that DL doesn't believe that the cost of new aircraft is worth it compared to the savings they generate, including debt service costs.

His argument about using larger aircraft is simplistic and doesn't acknowledge that the real savings is not because of larger aircraft per se but because of fewer flights, fewer hubs (why CVG and MEM got downsized), all of which lead to fewer employees for whom the company has to provide increasingly cost health care benefits.

And WN is also using the same strategy - fewer flights on larger equipment with fewer connection points on their network.

UA is trying to get there and AA hasn't started but the simple reality is that the industry still has more hubs than are needed - and hubs are costly. fewer hubs produce larger aircraft on the existing network and lower costs.

the real issue is fuel and he misses the heart of why DL has been successful as much as when the first articles were written about refinery.

The problem w/ jet fuel prices was the crack spread. The crack spread is caused by the premium a refiner generates for jet fuel because they control the amounts of each type of product the refinery produces.
The reason why the refinery has worked is because DL can and will produce more jet fuel than other refiners will for the saem amount of crude and DL will keep the jet fuel output for itself. Other refiners are going to adjust their output of jet fuel in order to push jet fuel prices back up - and that is already happening.
DL will sustain their jet fuel price advantage because they control a significant part of refinery output, something other airlines cannot do.

and the argument about transferring petroleum expertise to payroll is just plain silly. No company pays employees an equal amount of the savings or revenue they generate. A pilot doesn't get X% of all the ticket revenue he/she carries. Neither do execs gets an equivalent % of the savings they generate. DL is saving hundreds of millions of dollars because of its fuel strategy. No one is going to get anywhere close to that amount in compensation.

New article that highlights some things that DL does but which still misses the point on DL's whole fuel strategy because the author doesn't understand the principles behind the petroleum and airline industries.

 

[FrugalFlyerv2.0]

The reason why the refinery has worked is because DL can and will produce more jet fuel than other refiners will for the saem amount of crude

 
Please explain how DL is able to refine more jet fuel from 1 barrel of crude oil compared to others?

 

[WorldTraveler]

because refineries can choose to produce more of a number of substances. A barrel of jet fuel can be refined many different ways... .DL is skewing production to the highest percentage of jet fuel chemically possible...

jet fuel is essentially a byproduct of the refining process for most refiners... for DL it is the goal.

 

[FrugalFlyerv2.0]

I'm aware that a barrel of crude oil is refined into various petrochemical products (gasoline, kerosine, diesel, fuel oil, lubricants, asphalt, wax, etc).  I believe that usually approx. 10% of a barrel ends up being kerosine/jet fuel.  How much more than the typical 10% does DL refine at Trainer? You make it sound like DL refines 100% of the barrel of crude oil into jet fuel, which I believe is impossible.

 

[FWAAA]

Delta's plan was to increase jet fuel production from 14% of Trainer's output to 32%:

http://www.bloomberg.com/news/2012-06-15/delta-ceo-says-airline-to-pressure-prices-as-jet-fuel-seller-1-.html

http://www.reuters.com/article/2013/03/04/us-delta-refinery-idUSBRE9230RJ20130304

Jet fuel is essentially diesel/kerosene, so with some tweaks, the percentage can apparently be changed.

 

[WorldTraveler]

thanks, FWAAA.

the limit of jet fuel that crude oil can support is in the mid 30s IIRC.

and no I didn't say or imply that DL could get close to 100% of the refinery's output in jet fuel.

When Trainer reaches its full output of jet fuel, it will produce a fairly high percentage of DL's domestic production. I can't remember the exact percentage. The direct output of jet fuel is used almost exclusively it the NE.

The remainder of Trainer's output is swapped for jet fuel in other parts of the country.

again, the reason why Trainer works is because DL is producing a product which is a small part of the output for most refiners.
Before Trainer, refiners had been slowly cutting the amount of jet fuel because the US is producing less and less gasoline - the primary product for most US refineries.

Expectations are that Europe and the US will use less and less gasoline as cars become more fuel-efficient.

Refiners are adjusting for DL's production in order to get the crack spreads back up which means in time DL will be able to produce a fairly high percentage of jet fuel on its own compared to what is used by other airlines. The price of jet fuel used by other airlines will increase. It's supply and demand.

other airlines could buy a refinery but there are few refineries that are large enough to make a difference, are available, and don't cost a lot more than the benefit obtained. The reason why Trainer made sense was because it was old but retrofittable and included pipeline assets to deliver the product to LGA and JFK where DL has large operations.

 

[DL2WN]

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