Delta Airlines buys oil refinery

SAVE on fuel costs, buy a refinery. That’s what Delta Airlines is doing when it announced it had purchased an oil refinery near Philadelphia which would serve its operations at JFK, LaGuardia and other East Coast airports.

Fuel costs are considered an airline’s top expense, making up about 40 per cent of a full-service airline’s bill. In the case of Delta, the cost was on fuel amounted to US$12 billion last year. The investment, according to Delta CEO Richard Anderson, would save the company US$100 million a year over five years.

Will this give Delta an edge in the competition? At less than one per cent in savings, some analysts do not believe it will make much of a difference. But it can provide not only some cushion for the increasing volatility of the fuel price but also a steady supply of fuel in times of uncertainty.

Vertical integration in the supply chain is not a new thing. Consider how the Fairmont Waterfront Hotel in Vancouver, Canada grows its own herbs and rears bees for honey for use in its kitchen. It may have started as a “green” initiative, but its harvest of honey is now sold as a product on the retail shelf. In Singapore, airline caterer SATS Catering has invested in a supply company that provides it with raw products for its kitchen.

However, other airlines are unlikely to consider the Delta initiative. Besides, Delta is not the first airline to enter the oil business. American Airlines bought a couple of oil exploration and development companies in the late 1970s, only to dispose of them later. There might be a fine shade of difference there between potential and actual supply, but still, it looks like a different ball game. Airlines may find it more manageable to adjust fares through the fuel surcharge mechanism.

As for Delta customers who are expecting lower fares, this is likely to be a far call for now. Delta’s object is more likely bottom-line preservation than passing on savings.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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