Delta Airlines going upstream to save costs – are there risks ?

An article in CNNMoney (http://money.cnn.com/2012/04/30/news/companies/delta-oil-refinery/index.htm?hpt=hp_t2) reports on a plan by Delta Airlines to buy the Trainer oil refinery in Philadelphia to produce jet fuel. The claim is that the purchase of the refinery for $ 150 million will allow Delta to reduce its costs of jet fuel by $ 300 million annually. Getting the shuttered plant to product jet fuel will require changes in its product mix, trading of products at the plant with other oil companies, exposure to input prices etc. Delta is an airline that has not operated refineries. Do you think that vertical integration by Delta i.e., owning a refinery will permit the firm to lower its supply chain costs ? Will the control of a dedicated refinery provide better cost control than buying products in the market that is spread across many customers and competing manufacturers ? If new technologies emerge that can improve production yields, will it be more difficult for Delta to justify upgrading than other companies that are diversified both upstream and downstream ?

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About aviyer2010

Professor
This entry was posted in Operations Management, Supply Chain Issues and tagged , , , , , , . Bookmark the permalink.

One Response to Delta Airlines going upstream to save costs – are there risks ?

  1. My gut response is that this will INCREASE Delta’s exposure to oil prices. They will now have to carry oil inventory and learn how to behave in commodities…

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