Originally Posted by
Bucking Bar
You have to understand how energy is bought and sold. Think of it like bringing your own wine to a restaurant and paying a corkage fee. But, your bottle chills in a cellar with 1,000 more bottles of the same vintage. When the Waiter pours your glass, you don't know or care where it came from. But, you know you are getting Jet A, same as you put in.
Oil from this refinery might be put in any jet, refilling a supply in say, Kennedy. Those barrels might actually be replenished in say, LAX. It is easier to transport on paper to where the actual supply is than send the oil to the point of sale.
Energy contracts are commodities contracts. Delta's just getting it's hands on a competitor that it can use to hedge its own crack spread and / or profit by selling refined Jet A. Since hedges don't use real Jet A, this actually has a more linear relationship to Delta's real cash flow.
What I find interesting that it is an example of vertical integration in a Company that's mostly managed the last decade by outsourcing its core operation.
BINGO!!
The idea of DAL owning a refinery has got all of the "experts" baffled. Fact is the transportation network is in place, and they can buy crude on the open market. DAL is the number one user of Jet A outside of the Air Force in the USA. Looking forward, there will eventually be growth and the need for a more stable cost plot wrt to our fuel bill. If DAL can make a penny profit on each gallon of jet A produced it will be a great investment.
Currently, the oil companies charge a constant 7% margin on their product. If DAL did this, and sold it on the open market, the whole hedging plan currently in place becomes less important. This is a capital intensive endeavor, but with it comes the ability to, in the mid and long term, free up a significant amount of capital to invest in other things like jets.
I like the idea, and is the out of the box type of thinking that we need to be at the top of the industry. It comes with risk, but anything worthwhile does.
*Of note:
We hired an oil industry expert a year and a half ago to do our hedging program. I doubt DAL would even be doing this if it was a fools errand.
We also hired Mr Chase most recently, who made a name for himself analyzing DAL. Gentleman like him do not come to DAL unless there is a very high probability of seeing a sigificiant return on the pay cut. He has access to the capital markets in NYC.
This investment, depending on how DAL structures it; within the airline, change the corporate structure where DAL holdings owns the refinery and then the airline, etc, will probably come close to adding a 50% revenue increase to our bottom line. Profits will be strong once it is on line, and as a result, DAL will be a strong, wildly profitable powerhouse.