OIl Refinery...again....Vertical Integration

http://www.bloomberg.com/news/2012-04-19/delta-s-oil-refinery-plan-flies-against-economic-sense.html

Delta Airlines acquired a Philadelphia refinery in hopes of saving over $200 million a year in fuel costs but it could prove costly. This is a huge risk for the company. The article above also describes a scenario where Delta would have to choose between selling high priced fuel to their competitors and cancelling flights, vice using the high priced fuel for its self. 

The more I read about this vertical integration move, the more I become wary of this strategy. I feel that an airline has no business owning a refinery. It seems silly and I find it hard to believe that they will be able to refine oil better than an oil company.

I also feel that the hierarchal costs associated with owning a refinery will be astronomical. There is just so much more red tape and administration because the two different hierarchies really have nothing in common with each other; the efficiency factor is going to be extremely low.

However, I do see why Delta did this. Page 282 talks about vertically integrating into areas where the firm already posses a competitive advantage. Delta doesn’t really have a competitive advantage per-se, but they are currently making larger profits and conducting business more efficiently than the other guys. Buying a refinery will give Delta the competitive advantage to really pull away from their competitors.

Owning a refinery for yourself is also rare, valuable, and costly to imitate. Delta will have the competitive advantage for quit some time until another airlines decides to follow suit. I would image that other airlines are banking on Delta failing and will not follow their lead.

Overall, this doesn’t seem like a great idea. There seems to be more risk than reward. However, because there is so much risk, there is also more reward. If this works, it will payoff it in the end.