DL looking at buying an oil refinery?

[WorldTraveler]

Jim,
If you'd like to provide a quote where I said that DL should do this, please do so.
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I said from the very beginning this is an attempt by DL to deal with the problem of soaring fuel prices - something that no one else has come up with any recommendation beyond what is currently done today.
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I am just as realistic today as I was when I first participated in this thread that this may be a solution - but it may not be.

 

[Kev3188]

Not yet, but plenty of others have. Are you okay with that?

So.......if you owned a landscape company, had 10 employees, only needed 6 of them to get the job done, you would keep the other 4 and let them sit around playing cards.......correct ?

Yeah, something like that. 🙄

I'll take your hackneyed response to mean that, yes, you're okay with people getting furloughed. Sad to see, but can't say I'm surprised.

 

[signals]

So.......if you owned a landscape company, had 10 employees, only needed 6 of them to get the job done, you would keep the other 4 and let them sit around playing cards.......correct ?

A simple yes or no will suffice !

Hmmmm...lets see, most airline employees in my area have hours of down time during their shift. What a waste! Maybe the airlines would save millions if it only paid their employees actual hours worked.

Yeah, that'll work 🙄

 

[eolesen]

No US airline that I know of has ever owned an oil refinery - so this would be ground breaking if it happens.

Splitting hairs, you're wrong.

TWA owned 16% of Texaco back in 1989, thus they had an ownership stake in its refineries.

It's not ground breaking -- 35 years ago, AMR was engaged in both exporation and buying up land for the oil and gas rights. That subsidiary was eventually sold to Anadarko Petroleum, who still manages to do quite well without garnering the level of contempt that people have for ExxonMobile, BP, etc...

Owning the source, owning the company, owning the refining plant.... It's still the same basic concept of trying to have upline control the supply chain.

Some older industries still do that --- steel companies own mines in Minnesota, used to owned the railroads which transport the ore to harbors, and it's still transported on their ships to the mills. But more & more, the transport is being taken out of the picture --- the railroads have been sold off to rail operators (primarily BNSF & CN), and some of the ships are now owned by shipping conglomerates.


Others, like GM, spun off parts supplier Delphi, engine builders Alison & Detroit Diesel, etc. knowing that owning the supply chain has its downside.

Ford still owns Motorcraft and Chrysler still owns Mopar, although they are now more of a brand name as opposed to manufacturers.

 

[BoeingBoy]

Jim,
If you'd like to provide a quote where I said that DL should do this, please do so.

You're right - you were too busy extolling the benefits to actually say that DL should do it...

Jim

 

[WorldTraveler]

You're right - you were too busy extolling the benefits to actually say that DL should do it...

Jim

No, you were too convinced that it was a wrong thing that you didn't actually bother to read that I never gave an opinion one way or the other.
You were convinced you were debating an issue with someone who had never laid out a position on the matter.

 

[BoeingBoy]

Oh, you expressed plenty of opinions - I quoted a few earlier. They seemed to be about all the pros with nothing about the cons...

Jim

 

[Kev3188]

An analyst weighs in against the idea here.

 

[WorldTraveler]

The whole topic of Delta Air Lines buying a refinery has been a very hot topic on the internet over the past week. A Google search turns up over a million hits.
The concept has generated enormous interest.
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The topic likely won't die down in the coming weeks since some of those sources say that DL has submitted a bid - and it may even be a competing bid.
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Maybe DL will say something about its plans - earnings releases start in a couple weeks and those nosy analysts get a few minutes per month to fire away at the executives.
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There is the possibility that DL will have made a huge mistake that could take down the company or they could literally gain a competitive edge that could allow to put so much distance between their competitors and themselves that the airline industry will be permanently changed.
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The early 2000s shows that a fuel price advantage as WN enjoyed at the time can go a very long ways to build a competitive advantage in the marketplace for an airline. Even if DL spends the $200M or so to acquire and overhaul the refinery and then resell it in a few years if the market tanks, DL, like WN could gain an advantage that could allow it to reshape the industry permanently, including acquiring key assets in the industry, eliminating competitors and/or separating its financials from other its peers such that investors would have no trouble deciding which alternative to pursue.
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Let's once again keep this whole thing in perspective...... DL spends over $10B a year on fuel. The cost of acquiring and getting the refinery up and running might require an investment equal to 3% of DL's annual fuel expenses - probably less.
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And given that DL has demonstrated it can gain a 3% price advantage on fuel right now using its hedges, the chances that it will lose enough to offset the gains it already gets is pretty small.
But what none of the articles I have read mention is that DL, as a participant in the petroleum business, might actually be able to obtain even better prices at the pump as it actually has products it could trade with other petroleum producers and just not be looking at someone to offset the financial risks involved in fuel price hikes.... and given that there is very little sentiment that fuel prices will decrease, there will be an even fewer number of entities who will be willing to become the counterparty in fuel hedge strategies..

Of course there is the possibility that DL could get it all wrong about the refinery and have wasted money on a refinery - although the chances they could recoup part of their expenditures is still pretty high - because we all know that a refinery doesn't produce only one product.
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IOW, the worst case is that DL's costs could rise to levels comparable to other network carriers excluding UA which, assuming AA successfully restructures, will become the high cost provider in the industry by a margin of 10% or more.
In the best case, DL will build on its very favorable cost position to have 3-5% better costs than its peers, an amount that is more than enough to provide a competitive advantage - on top of the other cost control moves DL is taking.
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The chances that a failed refinery purchase could take down DL or lead to significant losses are very, very slim particularly since DL is generating fundamentals above average for its peers.
The chances that it could provide a significant advantage are very much real.
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We also haven't heard if DL could obtain any government incentives to reopen the closed refinery which would offset some of its costs.
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It is also possible that DL could use this deal to deepen its presence in the Houston air travel market possibly including adding new flights since C-P is a major corporate travel account in one of its competitor's backyards.
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This transaction has the potential to be a game changer in the industry... it will be more than a little interesting to look at how each person's take on the transaction - which does appear to be moving forward - compares with the reality, which in time will become apparent enough to know if the decision was right or now - thanks to those prying accounting rules that Delta must follow.
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It is worth noting that UA, the only other large carrier that reports its actual fuel price paid, has not released its March traffic and operational performance data so far.
It could be that they are having a hard time getting their arms around their traffic numbers in the first month after their computer cutover which has not gone well. But even before the cutover, they were expecting RASM results that would have put them far below DL's double digit RASM increase, the first to have been reported and alot lower than US' which was still in the high single digits.
Notably, WN, who has also reported very low RASM increases for several months also has not reported a week into the new month.
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2012 will be the year when the herd gets thinned and the fittest survive and the the rest....

 

[WorldTraveler]

deleted-dupe

 

[signals]

An analyst weighs in against the idea here.

"Delta already tries to cover its own oil price risk with hedges. But once it has a refinery its hedging program will have to get far more complex."

Maybe it was me that misunderstood, but I thought airlines couldn't hedge fuel?

"A 185,000 barrels per day refinery like Trainer necessarily produces far more gasoline and diesel than it does jet."

People might not see that even this serves it's purpose. Delta doesn't necessarily have to use the products on aircraft. Selling gas and diesel on the open market can generate revenue. Even though the refinery was a loss, rising fuel prices and not many refineries may make it a future investment.

 

[BoeingBoy]

Maybe it was me that misunderstood, but I thought airlines couldn't hedge fuel?

There's only a small market in futures for jet fuel, so airlines generally don't hedge fuel directly - WN is the only carrier I've noticed that has some small hedges using jet fuel futures. Generally airlines use futures in similar petroleum products whose price fluctuations correspond closely with that of jet fuel, like fuel oil and heating oil.

"A 185,000 barrels per day refinery like Trainer necessarily produces far more gasoline and diesel than it does jet. 5,000 barrels per day refinery like Trainer necessarily produces far more gasoline and diesel than it does jet."

People might not see that even this serves it's purpose. Delta doesn't necessarily have to use the products on aircraft. Selling gas and diesel on the open market can generate revenue. Even though the refinery was a loss, rising fuel prices and not many refineries may make it a future investment.

About 9% of a refineries output (about 4 gallons/bbl of crude) is jet fuel (a refinery produces about 45 gallons of product per 42 gallon barrel of crude because of additives to some products), although that can be tweaked a little either way. Who knows what the future will hold, but currently U.S. refineries are only operating at about 85% of capacity (90-95% is full capacity since periodic shutdowns are necessary for maintenance), so currently lack of capacity isn't a problem.

Unfortunately, Trainer and similar refineries were built when crude was much cheaper and plentiful so are designed to use more expensive crude - so-called light sweet crude - which is the most expensive. Trainer apparently used a lot of Brent crude when it was operating, one of the most expensive grades of crude there is. Thus it's output tends to be more expensive than refineries that were built or have been modified to use lower grades of crude, and those refineries represent the bulk of refining capacity.

Jim

 

[WorldTraveler]

According to the C-P document which I linked earlier, the Trainer facility is designed to produce up to 35% jet and related fuels and 55% gasoline.
A number of sources do say that alterations to the plant - remember it is due for an overhaul and a change in petroleum sources - could increase or decrease the percent of products which are desirable to DL, presumably primarily jet fuel.
But the notion again is that this is a potential step in the direction of having a major consumer of petroleum products (several sources say DL is the largest consumer of civilian jet fuel in the world) become part of the production process.
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The obvious motive for DL is that they do not believe that hedging petroleum products is sufficient to provide control over their the price of what is quickly becoming their largest expense item.
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The perspective is that the cost of acquiring and overhauling the refinery will likely amount to less than 5% of DL's total annual fuel expense... and of course those acquisition costs can be spread over many years while the operating cost advantage or loss, if one is obtained, can be derived rather quickly.

 

[BoeingBoy]

According to the C-P document which I linked earlier, the Trainer facility is designed to produce up to 35% jet and related fuels and 55% gasoline.

That's all distillate production, not jet fuel production...

Jim

 

[WorldTraveler]

That's all distillate production, not jet fuel production...

Jim

you're exactly right, Jim.

According to the C-P document which I linked earlier, the Trainer facility is designed to produce up to 35% jet and related fuels and 55% gasoline.
A number of sources do say that alterations to the plant - remember it is due for an overhaul and a change in petroleum sources - could increase or decrease the percent of products which are desirable to DL, presumably primarily jet fuel.