Delta Airlines Vertical Integration Strategy Shows Initial Promise
In April, we alerted Supply Chain Matters readers to business media reports that Delta Airlines was in talks to acquire its own oil refinery. Our commentary viewed this development as an interesting play on vertical integration of supply chain. Delta subsequently reached an agreement with Conoco Phillips to purchase the previous idled Trainer Pennsylvania refinery. Delta planned to invest $150 million to acquire the complex and invest an additional $100 million to retrofit the refinery to optimize its ability to refine jet fuel, while securing additional distribution agreements for the gasoline and diesel fuels produced by the refinery.
Yesterday, the first indicators of the investment became evident to Delta shareholders. The Wall Street Journal reported that Delta boosted the bottom end of guidance for fiscal third quarter operating profits indicating its new refinery helped lower fuel costs. Delta expects to report an operating margin of 10 to 11 percent. The airline further indicated guidance for jet fuel costs to $3.15 per gallon, and expects to record a $450 million mark-to-market gain on its fuel hedges, having taken a big paper loss in the three months ended June 30.
Thus, the initial indicators of Delta’s vertical integration strategy are trending positive. While one quarter does not form any basis of a firm conclusion, the concept of an airline taking control of one of the most critical supply components of its value-chain will be an interesting one to observe in the coming months as Delta continues to compete in an industry challenged with lower margins.