Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
Stock Market Collapse - Take The Opportunity To Bail Before It’s Too Late! - 31st Aug 15
The Most Important Market Chart on The Planet - 31st Aug 15
Stock Market 50% Retracement - 31st Aug 15
Stock Market Crash Red Alert for 2nd Downwave... - 31st Aug 15
Independant Scotland 1 Year on, UK Civil War If the SNP Fanatics Had Succeeded - 30th Aug 15
Gold’s 7 Point Broadening Top - 30th Aug 15
The Day the Stock Market Shook the Earth: Takeaways From the Dow’s 1,000-Point Drop - 30th Aug 15
Gold Price Rally Marked by Short Covering - 30th Aug 15
Aging Stocks Bull Market - 29th Aug 15
Economic Destabilization, Financial Meltdown and the Rigging of the Shanghai Stock Market? - 29th Aug 15
The Stocks You Should Be Buying After the Market Drop - 29th Aug 15
How I Learned to Stop Worrying and Love Market Fluctuations - 28th Aug 15
China's Yuan Devaluation: Why It Was "Expected" - 28th Aug 15
Stocks Go Nuts But the Question Remains – Will the Rally Stick? - 28th Aug 15
Fed’s Stock Market Levitation is Failing - 28th Aug 15
The Eight Energy Systems Driving The Stock Market Rout - 28th Aug 15
Silver Sold, then Squeezed - 28th Aug 15
U.S. Economic Fundamentals 'Look Good' - Bullard of St. Louis Fed - 28th Aug 15
Stock Market Margin Calls Mount - 28th Aug 15
Einstein, Physics, Gold and The Formula To End Economic Decay - 28th Aug 15
The 10 Best Stocks for Options Trading Plays in This Market - 28th Aug 15
Economics of a Stock Market Crash - 28th Aug 15
Currency Wars Detonate; Gold Refuses to Budge - 28th Aug 15
UK Immigration Crisis Hits New Record, Trending Towards Becoming a Catastrophe - 28th Aug 15
The Ultimate Cash-Management Guide - 27th Aug 15
Why a Fed Rate Hike Could Be a Blessing for Gold Prices - 27th Aug 15
Why Devaluing the Yuan Won't Help China's Economy - 27th Aug 15
Stock Market Trend & Trade Signal Of the Decade - 27th Aug 15
Keep Your Eye On the Gold and Silver Bear - 27th Aug 15
Refugees Expose Europe’s Lack Of Decency - 27th Aug 15
How to Profit from China's Currency War - 27th Aug 15
How China's Currency Policies Will Change the World - 27th Aug 15
Chinese Medicine not Impressing Dr Copper - 27th Aug 15
Novel Biotech Novel Technology Platforms with Dramatic Growth Potential - 27th Aug 15
China Stocks Bear Market Crash, Are We Near the Bottom Yet? - 27th Aug 15
Stock Market Crash Black Wednesday Rally Crushes the Bears - 26th Aug 15
VIX Shorts Being Squeezed While SPX Prepares for Another Decline - 26th Aug 15
Why China's Economy is Deteriorating - 26th Aug 15
Citizenship as a Weapon: Travel Controls and What You Can Do About It - 26th Aug 15
Gold and Silver - How To Manipulate a Market - 26th Aug 15
How to Make a Quick 20% When the Stock Market Crashes - 26th Aug 15
Why We Can’t Handle A Stocks Bear Market - State Budgets Will Implode - 26th Aug 15
Stocks Bear Market, Is This 1929 All Over Again? - 26th Aug 15
The One Trading Strategy You Needed for Stock Market Crash - 26th Aug 15
Second Chance To Buy Cheap Gold Mining Stocks - 25th Aug 15
Gold Facts and Gold Speculations - 25th Aug 15
The Stock Market Crash Season is Here… - 25th Aug 15
Liftoff Setback Leads to U.S. Dollar Pullback - 25th Aug 15
The Stock Markets Are Extraordinarily Volatile, Here's What to Do - 25th Aug 15
Israel: The Case Against Attacking Iran - 25th Aug 15
Saudis Could Face An Open Revolt At Next OPEC Oil Meeting - 25th Aug 15
How to Calmly Weather This Stock Market Downturn - 25th Aug 15
Stock Market Sound the Alarm - 25th Aug 15
Stock Market Meltdown - Dow Monday 1000 Point Crash then Rebound, What's Next? - 25th Aug 15
El-Erian: Stock Market Sell off Is Not 1998 or 2008 - 25th Aug 15
Gold the Ultimate Financial Crisis Insurance - 25th Aug 15
Stock Market Black Monday Crash Fizzles Out, Next Black Tuesday? - 25th Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

When an Airline Buys an Oil Refinery

Companies / Corporate News May 14, 2012 - 05:42 AM GMT

By: EconMatters

Companies

Best Financial Markets Analysis ArticleThe biggest news in the airline sector of late is probably the announcement by Delta Airlines to buy a Phillips 66 refinery in Trainer, PA.  Delta will pay $150 million for the 180,000 barrels per day (bpd) facility, spend an additional $100 million to upgrade the plant, and get $30 million in state subsidies for infrastructure and to create jobs.


Under the proposal, JP Morgan is reportedly part of the package as well.  Delta would purchase the refinery and JP Morgan's commodities team would finance the refining process, including buying and shipping crude oil from overseas. Delta would then buy the jet fuel from JP Morgan at a wholesale rate, and the bank would sell the other products made by the refinery into the market.

The reason behind this unprecedented move is to use the refinery as the ultimate fuel hedge by saving Delta about $300 million a year in jet fuel costs. In our view, despite the optimistic savings projection, there are pros and cons of this deal for Delta.

Pros:

(1) Fuel represents the single biggest expense component of the airline industry.  Delta's planes guzzled down 3.9 billion gallons of fuel last year, costing the airline $11.8 billion, or 36% of its operating expenses.  So having an East Coast refinery asset could conceivably give Delta better planning and budgeting, and most importantly, pricing power and a cost advantage, particularly in the very competitive North Atlantic market, over its competitors such as American, British Airways.

Chart Source: IATA

(2) With JP Morgan bankrolling the whole thing, Delta could benefit from JPM's expertise in the energy trading market, as well as financing, thus reducing the risk of taking on the refinery operation alone.

(3) Regardless of the outcome, Delta management at least took a bold and novel approach using physical asset to hedge fuel, instead of the industry standard paper-based hedging program pioneered by Southwest Airlines.

Cons:


(1) The biggest cost component of jet fuel is crude oil, which means any savings Delta seeks is driven by the crack spread--the difference between the price of a barrel of oil, and sale price of refined product.  Trainer plant is one of the older refineries that relies on the most expensive grades of crude oil as feedstock.  Even with JPM's backing, what are the odds of an airline and a banker succeeding where Phillips 66 failed?

(2)  Refining is not Delta's core expertise.  Refinery operation is quite complex, which both Delta and JPM have little experience.  Integrating a refinery into Delta's business will be a major challenge distracting Delta's focus.  Assuming Delta and JPM can immediately put together an appropriate management team, smooth running will still take at least 2 to 3 years.

(3) We also question if the projected $300 million a year savings includes the cost of running the refinery?  Theoretically, if Delta is getting cheaper fuel price from Trainer, that would suggest the refinery most likely is not making money from the transaction.

(4) Furthermore, the jet fuel market on the East Coast has tightened up quite a bit due to the closure the Trainer Plant which accounts for one third of the jet-kerosene capacity in the region. So, re-opening the now idled Trainer refinery could actually increase the jet fuel supply benefiting even Delta's competitors.

(5) Delta seems to have entered this deal out of desperation during the oil price spike from Iran nuclear controversy.  If oil price stabilizes or weakens as some of the forecasts seem to suggest, this could well end up being a wasted investment.  

With almost every US-based airline in bankruptcy at one time or another, the airline industry in general has not had a very good track record of competent management.  On that note, we have to wonder if the money and resource invested in this deal could be better utilized in areas such as customer service and flight safety.  After all, price and quality is what matters the most in any business, including airlines.


Disclosure: No Positions

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2012 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History