Sunday, January 27, 2013

Delta Airlines Vertical Integration Strategy

Delta Airlines is attempting to do something that no other airline has done before. Delta is attempting to vertically integrate the jet fuel industry with its airline company. Delta recently bought an idled oil refinery in Philadelphia for $150 million in early 2012 and has since spent $100 million in improvements necessary to make the jet fuel to fly its airplanes. This move is the first of its kind and is expected to save the company $300 million a year (2013) in fuel costs while supplying 80% of the company's jet fuel requirement. This equates to approximately 7 cents a gallon.

Delta has also played with the idea of buying crude oil in North and South Dakota that is almost $20 cheaper per barrel than the current crude oil being shipped over from the North Sea and Norther Africa.  This is a big deal when you factor in their 12 billion dollar bill for jet fuel in 2011.

These two strategies will combined to save the company over $300 million a year and bring the company to the forefront of how aviation business is done. They are in unproven and uncharted territory but the $250 million isn't much when compared to their 2011 net income of $1 billion.

There is a lot of controversy with this strategy considering it is so new and unconventional for the airline industry. A lot of pundits are skeptical because Delta specializes in flight, not crude oil refining.

Personally, I think this is a radically new strategy for an airline and I think that this strategy will catch on if it works. It is obviously a big risk and the first person always gets hit in the face when they try something new. I think Delta can pull it off.

http://centreforaviation.com/analysis/deltas-unconventional-fuel-hedging-strategy-to-be-put-to-the-test-as-new-refinery-opens-82467

1 comment:

  1. There is a great deal of contention with this method thinking of it is so new and whimsical for the carrier business. A great castings deal of savants are distrustful in light of the fact that Delta has some expertise in flight, not raw petroleum refining.

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