Delta Airlines Takes A Dip In The Oil Business
Delta Airlines Tries Hot Oil
The subtext of this post is really about how surprised I am at such an obvious thing: fuel expenses are high for airlines. Call me naive, but with all of the hundreds of complex and no doubt expensive things that airlines must contend with on a daily basis, the fact that fuel is 36% of Delta’s operating costs is pretty amazing. Therefore it really shouldn’t have surprised me that Delta Airlines has acquired an oil refinery in Trainer Pa, from ConocoPhillips. But they did. An airline in the oil business? Really?
It certainly makes plenty of sense for an airline to (attempt) to do this, but will it work? In the USA Today report linked above, and this one, (which is a Q&A … with someone… they don’t say. Wait, I think it’s a Q&A with themselves! Silly USA Today!) Anyway, they ‘report’ some interesting numbers. Delta estimates that for only a paltry fraction of their $11.6 billion fuel bill, writing a check for $150 million (the cost of the refinery) seems like a good investment. They believe it will save them $300 million per year. That’s also paltry, but unless oil prices tank, the refinery should return their investment in just over a year. It almost seems like a no-brainer.
Is making ones own jet juice in-house really a good idea? On paper of course it looks good for them. But the main concern is lack of experience in the field. I’m sure Delta believes they have plenty of experience, being such a large consumer of the product. I’m sure they think making fuel is just about boiling some oil in a vat (and how hard could that be?) But there is a big difference between being a buyer and being a seller. I mean would you trust ConnocoPhillips to run an airline and be profitable in a year? Or perhaps more apt, would you trust Delta to also build their own airplanes, because aircraft are also a huge cost. Now Delta will surely hire or retain experienced staff to run the distillery. But when key decisions are to be made, will they have the experience to make the right choice outside of their core expertise?
GE Of The Skies
Of course there are plenty of conglomerates who operate in many dissimilar areas and are successful. Case in point: General Electric. GE has their hands in pretty much everything, from jet engines to financial investments and computer systems. They also do pretty well with it. But then they’re also used to operating that way. Airlines are mostly used to being airlines.
Cost Reduction Or New Revenue?
What isn’t clear about this strategy is how Delta plans to handle logistics. Will the fuel be directly transported to Delta’s hubs, or will they choose to sell it with the aim of increasing supplies of J1 and thus lowering market prices? Or, maybe they’ll just start selling fuel? Exxon is the most profitable company in the US (against Apple, depending on the month), so might Delta discover that making fuel is a more profitable business than running an airline? Wouldn’t it be interesting if in 10 years we find that Delta has divested their airline business and is instead an energy company? I doubt that’s in the cards, and presumably they are choosing direct transport to their hubs approach, but it’s fun to theorize. Besides, flooding the market with jet fuel would also benefit the entire airline industry by lowering prices, and thus help their competitors. That’s probably not something the company wants to do.
No matter, it will be interesting to watch and see what happens. When and if fuel prices inevitably do move drastically higher, I think we will see many strange things happening as companies get more desperate. I think this won’t be the last fuel production crossover we’ll see.