Delta Air Lines’ oil refinery investment losses concern sceptical investors and observers

[700UW]

Delta’s exuberant purchase of an oil refinery near Philadelphia, Pennsylvania has been tempered during the last year as the losses at Trainer for 4Q2012 and 1Q2013 were close to USD85 million.
As 2Q2013 earnings reporting season nears, the carrier’s investors will be carefully scrutinising Delta’s results to determine if management declarations of a break-even performance of the refinery come to fruition.

Delta’s rationale for purchasing Trainer in 2012 seemed cute. Through a smallish USD150 million or so investment (which has now risen to USD250 million), Delta was to gain some control in unruly crack spreads (refining costs) that accounted for USD2.2 billion of its total 2011 fuel bill of USD12 billion. In Apr-2012 Delta estimated that its crack spread cost per available seat mile jumped from USD0.41 to USD1.22 from 2009 to 2011. Part of the bet was on Bakken Shale crude being cheaper than Brent.

http://centreforaviation.com/analysis/delta-air-lines-oil-refinery-investment-losses-concern-sceptical-investors-and-observers-119749

 

[WorldTraveler]

you missed this sentence in the article
"Obviously it is too early to predict success or failure in terms of Delta’s attempt to attain more control over unruly fuel costs." especially since DL has already said that the crack spread is lower this year than it has been for a number of recent years. The chart which the article cites is not current data.

You also missed that the reason the refinery lost money in 1Q as stated in the article was because of operational problems. If you have tracked the refinery story, you know an exec who is now no longer at DL made the decision to keep the refinery operating during Sandy when it suffered damage; DL says in the article that the refinery operated at 75% during the quarter. We have still not seen financial results for a quarter in which the refinery operated normally and on a sustained basis but perhaps this quarter will be it with DL's financial reports next week.

But while you and others continue to be giddy with the prospect that Trainer will lose money - undoubtedly in part because I supported the purchase while you and a host of others did not - you still can't seem to grasp the concept that DL spends $12 billion per year on jet fuel and is the largest non-government fuel purchaser in the US. Even if Trainer does lose $100M per year, that amount is a very small percentage of DL's overall fuel costs.

BTW, DL has said in SEC filings that they expect Trainer to be profitable this quarter which makes the whole article look silly given that DL has not given any reason to change that guidance.

BTW, you do realize that DL's market cap is worth more than UAL plus LCC or LUV plus ALK combined, and continues to climb higher? Apparently, Wall Street is not overly concerned about the refinery. Maybe it will lose some money but they somehow manage to make more money than other airlines to offset those losses.

 

[700UW]

Hook, line and sinker

 

[WorldTraveler]

IOW, you are simply baiting because you have nothing to discuss of merit regarding the converstion...

The simple fact is that DL doesn't need to show a profit for the refinery in order to reduce its fuel prices on an overall basis.

Again, let's see what they have to say about the refinery on the next conference call and whether your interest in the article had any merit other than to fan the flames.

 

[700UW]

Last time I checked a business needs to make a profit sooner or later otherwise the won't be in business.

 

[Glenn Quagmire]

You also missed that the reason the refinery lost money in 1Q as stated in the article was because of operational problems.

Well that should make all investors feel better about the losses???

Even if Trainer does lose $100M per year, that amount is a very small percentage of DL's overall fuel costs.

See my above response again...

Maybe when the "New American" takes the place of the "largest non-government fuel purchaser in the US", Delta can unload Trainer on them and cut their losses.

 

[WorldTraveler]

Last time I checked a business needs to make a profit sooner or later otherwise the won't be in business.

and yet DL has generated some of the largest profits the US airline industry has seen in decades despite losing a little chump change in direct refinery operations.
but you also continue to fail to grasp that DL's goal for the refinery was to control the price of fuel, its largest cost. Because refineries continue to close refineries, for which jet fuel is a side product, the supply continued to decrease and the crack spread continued to increase. The refinery may never show a profit on a standalone basis which is what is required for accounting purposes but DL could achieve its goals - and likely already has done so - by forcing down the crack spread and thus the cost of its overall fuel bill.

Well that should make all investors feel better about the losses???



See my above response again...

Maybe when the "New American" takes the place of the "largest non-government fuel purchaser in the US", Delta can unload Trainer on them and cut their losses.

who said anyone was happy w/ a loss? The losses so far have been directly attributable to startup of the refinery and were compounded by the damage to the refinery during Sandy. Given that the exec in charge of the refinery quickly yet quietly left after a fairly short period, you have to consider the possibility that DL's board and CEO was very unhappy at the decision to keep the refinery going to accelerate the startup process even while most other refineries shut down during Sandy.

And, again, DL's stock price and market cap continues to increase which means that investors really don't see the refinery as an issue and likely are able to understand the true dynamics of the refinery and fuel costs.

It is doubtful that any other airline will buy a refinery because it is not certain that a 2nd refinery would achieve the same results in pushing down the crack spread as DL has achieved. Not that DL execs said that the crack spread for jet fuel has fallen in the NE but not in the Midwest. DL's solution stated then was to consider sending its own jet fuel to the Midwest to push down the crack spread in a region where DL has two hubs and is the largest purchaser.

AA or UA could try to do the same thing in Texas (UA did consider a refinery purchase) but there are few regions where there are both large airline operations and available, idled refineries that could be put back in service producing higher levels of jet fuel than refineries normally produce.

The principle of DL's refinery decision is to put more jet fuel on the market and push down prices and as long as Trainer operates it will achieve that goal regardless of the standalone costs of operating the refinery.

It also doesn't change that the refinery deal is less than a year old and businesses of all type consider the finances of established lines of the business differently than they do established lines of business. DL isn't thru w/ working on its refinery strategy.