DL Refinery article

[SplitBar]

My intent was to say there could be Ford fuel stations all over the country, why isn't there? Same business concept of integration and core competency. This has no relation to vertical monopoly, it is vertical integration to control hold up problems more than cost.

Folks, it's working, good for Delta. But it is risky business, far more than hedging.

Comparing Ford/GM owning it's own fuel stations to Delta owning a refinery is an apples to oranges comparison. Ford doesn't need fuel stations like Delta needs Jet A.

 

[Quack]

Correct me if I am wrong, but doesn't Delta owning a refinery help the rest of the industry as well? If they can reduce the crack spreads and lower their fuel costs, wouldn't that put pressure on the competing fuel companies who supply United, American, SWA, etc to lower their pricing or become a little more competitive? If so, I see it as a win win for the other carriers without the overhead.

 

[SplitBar]

Correct me if I am wrong, but doesn't Delta owning a refinery help the rest of the industry as well? If they can reduce the crack spreads and lower their fuel costs, wouldn't that put pressure on the competing fuel companies who supply United, American, SWA, etc to lower their pricing or become a little more competitive? If so, I see it as a win win for the other carriers without the overhead.

Yes, even if Delta loses $$ on the refinery they still come out ahead due to the pressure that it puts on the crack spreads. So, yes, other airlines benefit as well.

 

[zasca]

They make profit off the crack spread when oil is expensive and other refiners maintain the big spread. If oil goes down and the spread narrows, the airline makes profits off low fuel prices. It is a very good, low cost hedge for a company heavily dependent on a fluctuating commodity. (as long as nothing goes wrong with the plant)

 

[scoreboardII]

Comparing Ford/GM owning it's own fuel stations to Delta owning a refinery is an apples to oranges comparison. Ford doesn't need fuel stations like Delta needs Jet A.

It's not apples to oranges. It's at worst Macintosh to Ruby Red. If you control all the aspects of a product start to finish in vertical integration, then controlling the fuel to a car is exactly like controlling the fuel to the jet, sorry.

 

[Andy]

Well, they did once didn't they? I have vague memories of high school history teachers droning on about the "trusts" and the "trust busters". Didn't one of the car manufacturers have oil, rubber, steel, etc. companies under it's umbrella? Maybe that was standard oil I'm thinking of. I can't recall high school course work all that well. I was a bit pre-occupied with...well...other things.

Standard Oil. http://en.wikipedia.org/wiki/Standard_Oil

Correct me if I am wrong, but doesn't Delta owning a refinery help the rest of the industry as well? If they can reduce the crack spreads and lower their fuel costs, wouldn't that put pressure on the competing fuel companies who supply United, American, SWA, etc to lower their pricing or become a little more competitive? If so, I see it as a win win for the other carriers without the overhead.

Some jerk wrote this back in June:

Delta's Trainer refinery has been a success in reducing the JetA crack spread. A 'normal' refinery produces ~9% JetA as its final product. Delta was looking for mid-30s JetA for its final product; I've read it's 'only' running in the high 20s. Frankly, that's a huge success in reducing JetA crack spreads. The much higher percentage of JetA production vs other oil based products cannot be understated. This is a huge benefit for all airlines.

The problem with Delta being the only airline with a refinery is that all airlines (especially those that have large presence in the vicinity of Trainer - JetBlue, Yonited, US Scareways, American) benefit from the reduced crack spread. So to measure Trainer's performance by traditional profit/loss metrics is a bit flawed.
Bottom line: on paper, Trainer may appear to be a money loser, but the reduction of JetA crack spread will likely make it a moneymaker for Delta. For the rest of the airlines, they will freeride off of Delta's refinery investment.

A lot of the northeastern refineries have been closing due to refined gasoline being shipped from Europe. There has been a shift in European vehicles from gasoline to diesel, and as a result their refineries produce excess auto gasoline - that gasoline gets shipped to the east coast. But they're not shipping jet fuel to the east coast. As a result, there was less jet fuel produced on the east coast, driving up jet fuel crack spreads. With Trainer being tweaked to produce a much higher percentage of refined product as jet fuel, the jet fuel crack spread has dropped considerably.

They make profit off the crack spread when oil is expensive and other refiners maintain the big spread. If oil goes down and the spread narrows, the airline makes profits off low fuel prices. It is a very good, low cost hedge for a company heavily dependent on a fluctuating commodity. (as long as nothing goes wrong with the plant)

Crack spreads aren't based on raw material input prices (ie the price of a barrel of oil). Crack spreads are more a function of supply and demand.

The Trainer refinery provides Delta with a crack spread hedge. It does not provide a hedge on the price of a barrel of oil.


By driving down the cost of jet fuel on the East coast, Trainer is more successful than simply a $3 million profit. Here's an example; while New York jet fuel prices were dropping, New York refined gasoline prices were rising in April: http://www.bloomberg.com/news/2013-...l-hits-all-time-low-as-inventories-build.html

 

[SplitBar]

It's not apples to oranges. It's at worst Macintosh to Ruby Red. If you control all the aspects of a product start to finish in vertical integration, then controlling the fuel to a car is exactly like controlling the fuel to the jet, sorry.

Ford owning gas stations does not help control Fords current cost structure. Delta owning a refinery does help control Deltas costs. Apples to Oranges, sorry.

 

[Diesel-9]

I will bet you another refinery is to be purchased on the west coast within 18 months.

 

[scoreboardII]

Ford owning gas stations does not help control Fords current cost structure. Delta owning a refinery does help control Deltas costs. Apples to Oranges, sorry.

It does if they sold gas at point of purchase.

 

[scoreboardII]

Ford owning gas stations does not help control Fords current cost structure. Delta owning a refinery does help control Deltas costs. Apples to Oranges, sorry.

I said it would be like, not that it is, I said it would be as if Ford supplied the fuel as part of the contract to sell the vehicle. Vertical integration.

 

[flyboyike]

My intent was to say there could be Ford fuel stations all over the country, why isn't there?

I don't know, but my 2006 Focus had a label on its fuel cap stating "Ford recommends BP/Amoco". My 2012 Focus has no such label, however.

 

[scoreboardII]

sigh.........

 

[wood pecker]

Any Texas refineries for sale? Maybe that's how we will hit 15%

 

[BOX OFFICE]

Car makers have owned steel mills, tire factories, etc.

http://www.thehenryford.org/rouge/historyofrouge.aspx

Located a few miles south of Detroit at the confluence of the Rouge and Detroit Rivers, the original Rouge complex was a mile-and-a-half wide and more than a mile long. The multiplex of 93 buildings totaled 15,767,708 square feet of floor area crisscrossed by 120 miles of conveyors. There were ore docks, steel furnaces, coke ovens, rolling mills, glass furnaces and plate-glass rollers. Buildings included a tire-making plant, stamping plant, engine casting plant, frame and assembly plant, transmission plant, radiator plant, tool and die plant, and, at one time, even a paper mill. A massive power plant produced enough electricity to light a city the size of nearby Detroit, and a soybean conversion plant turned soybeans into plastic auto parts.

 

[Uncle Bunkle]

Refinery says what?