Airlines are bringing in a lot of money through newfangled baggage fees, premium seat upgrades and fuel surcharges. Yet, they still send a ton of money out the door paying for jet fuel.
About a year ago, Delta announced it would no longer rely on outside distributors for its fuel. Instead, it decided to operate an in-house refinery.
In some ways, this reminds me of those wanna-be entrepreneurs who cite, “I’m going to be my own boss!” as the primary benefit of going it alone… failing to realize the downside to this scenario is: “As my own boss it’s up to ME to PAY me!”
Critics of Delta’s move towards vertical integration say the airline is using a similar argument. The Economist quotes Virginia Postrel, a Bloomberg columnist, who explains:
“You might think that owning a refinery would at least protect the airline from price fluctuations. But, crude oil prices affect the profits of airlines and oil refineries exactly the same way. When oil prices go up, their profits go down. Owning a refinery would simply magnify the effect. If anything, it increases the risk exposure that has bedeviled the airline industry for years.”
It’s been a year now since Delta announced this move. Let’s see if it’s helping or hurting the company relative to its competitors.
Below is a percentage-change chart, going back about a year, for Delta Airlines (NYSE: DAL), U.S. Airways (NYSE: LCC), Spirit Airlines (Nasdaq: SAVE), Southwest Airlines (NYSE: LUV), JetBlue Airways (Nasdaq: JBLU), and Allegiant Travel (Nasdaq: ALGT).
As you can see, Delta’s stock has performed strongly over the past year. It’s up 66%. Yet, it hasn’t really broken away from the pack.
A quick review of Delta’s recent quarterly earnings reports shows the company is listing, as a separate line item, “refinery impact.”
Ideally, this number should be negative… showing a reduction in overall fuel costs, thanks to Delta running its own refinery. Yet, in the last two quarters, Delta’s refinery has actually increased its overall fuel expense… by $22 million last quarter and $63 million the previous quarter.
I realize that Delta may need more time to make its refinery operation worthwhile. But I have my doubts.