They were saying they estimate it will cost around 90 million to upgrade the refinery.

 

Chump change considering we paid 1 Billion more in fuel last year. Smart move from mahogany row. Lets hope it works out. I'm all for minimizing cost except the ones related to us!

 

Maybe, and I hope so, but their track record is not very good:

Buy COMAIR and ASA for billions - sell for millions.
Stock Buybacks prior to BK - oops!
Underwater on fuel hedges for hundreds of millions.
Hey lets rebuild the BOS terminal!
Hey fuel is cheap lets buy hundreds of high cost 50 seat RJs and lock into 20 year contracts. Whats that? Two wars in the middle east - no worries.
And my personal favorite - although not financially a big deal , it cracks me up. Hey, lets advertise Gotomeeting.com on our jets because really, what airline wants businessmen buying last minute tickets to attend meetings?

I'm sure that I am missing a few others and yeah, I know this is a new management team and all. Well I am rooting for them in this endeavor - I am just not overly optimistic.

Scoop

 

I'm right there with you, however I do have confidence in RA. Yes he had made mistakes, but I feel the biggest were made prior to his tenure.

 

Without a distribution network, theres no way this Jet A will be used to fuel (many) Delta airplanes.

Delta will still have to use middle men. Buying from different sources across the country/world. So, in essence, this has nothing to do with their airplanes and they're just getting involved in the oil refining business. Doesn't make much sense to me... Delta is an airline, they know about flying airplanes.

Why not just invest in an oil refining company instead of buying an actual refinery and trying to act like you know what you're doing in a completely different industry?

 

Just like in their heyday, SWA was more of an oil trader that happened to fly airplanes. This could be a very very interesting turn of events in that even though we would be refining the product, it wouldn't necessarily have to be used in our jets, but would instead be used as a similar hedge to what SWA used when they were so successful. We sell the refined product at retail, and buy at wholesale. This has great potential IMHO. And as the CNBC article said, if DAL can gain a consistent .05 per gallon cost advantage over everybody else.. that's HUGE. I actually find this pretty exciting.

Back of the napkin math follows: DAL spent (Adjusted) for fuel in 2011, $11,757 (million). That averaged $3.05/gallon. IF.. DAL were able to save that $.05/gallon that CNBC mentioned, it would only take 6 months in fuel savings to pay for the whole deal. (The $100 million for the refinery + the $90 million for the upgrades) Now.. that does not take into account the day to day operations of the facility, but even if one assumes a $.01/gallon savings with the remaining $.04 going to refinery operations it still seems like a pretty good investment. Any thoughts?

 

I freely admit not knowing much about the logistics behind jet fuel supply and what you say makes since.

However, if the objective is to get some sanity back into the jet fuel cracking spread (think bribe to make jet fuel vs gasoline) you can put your jet fuel sold at cost (ie minus the cracking spread) on the market and start some pressure back the other way.

Overall, I think this is a good thing. Anything to let a little air out of this bubble may just work.

Ferd

 

^^^this^^^

but no cheerleading.........man law

 

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.

 

to build on what tsquare said (and now i just noticed Bar's), but buying a fuel refinery is just a form of hedging. you can't hedge jet a, but you can hedge using heating oil futures. but those instruments weren't working anymore.

i believe that was because jet A's cost to refine oil to gas, crack spread, was out of whack in comparison to the cost of doing that with heating oil and the like.

so buying the refinery is a better idea to keep the hedging in line with the volatility of jet A. whether it makes it to our airplanes or not is not the goal i believe.

i'll go double check though. don't take my word for it.