The purported goal of this acquisition for Delta is to reduce exposure to the Crack Spread. The cra

Beauty, supported by Prudence, Scorns the Offering of Folly , by Angelica Kauffman - 1780 (neoclassic allegorical painting, now on exhibition at the Kadriorg Palace, Art Museum of Estonia, Tallinn, Estonia)
Some are patently obvious on their face, like the Netflix/Qwikster fiasco, some are revealed discount car rental phoenix airport as idiotic only in retrospect (such as Decca Records deciding NOT to sign up the Beatles).  Still other boneheaded moves just leave some of the outside watchers shaking their head, softly muttering under their breath, They ll be soooorry .
I must have been living under a rock since last April 30th, when Delta Airlines broke the news that they had purchased from Philips 66  its currently idled refinery in Trainer, Pennsylvania, for the sum total of $180 million.  In the press, Delta executives droned on at length about synergies, saving of $300 million a year, market opportunities, strategic visionzzzzz .
For their part, the executive team at ConocoPhillips discreetly refrained from excessive comments, restricting the hysterical laughter, high fives and champagne-popping to the confines of wood-paneled boardrooms.
The purported goal of this acquisition for Delta is to reduce exposure to the Crack Spread.  The crack spread* is is simply the difference between the market price of a barrel of crude oil, and the total revenue from the mix of refined petroleum products derived from said barrel.  These products could be jet fuel, diesel, gasoline, naphta, and lubricants, to name a few.
Delta s CEO Richard Anderson calls the pig-in-a-poke moneypit sinkhole refinery a relatively discount car rental phoenix airport modest investment, comparable to buying a new Boeing 777 (except that airlines don t buy their aircraft, they lease them ).  $180 million for a corporation with a $9 -billion-and-change discount car rental phoenix airport market capitalization is probably that, small by comparison.
Philadelphia-based Sunoco sold out their Tulsa lubricants refinery last year to HollyFrontier. discount car rental phoenix airport Refiners in the Northeast have been bleeding arterial red for quite some time.  To hear Sunoco tell it:
And with Philadelphia-based Sunoco set to close the largest refinery in the region in July, expect gas prices to keep going higher. discount car rental phoenix airport Our Northeast refining business has lost nearly discount car rental phoenix airport a billion dollars in the past three years, and those losses have threatened Sunoco s very existence as a company, said a Sunoco spokesman. ( source )
But never fear, Delta shareholders, an airline sure knows how to run a refinery on the East Coast.  Next stop in the vertical discount car rental phoenix airport integration merry-go-round, Delta plans to resurrect the McDonnell-Douglas brand and make their own aircraft.
In her classic book The March of Folly , historian Barbara Tuchman goes on at length discount car rental phoenix airport about four periods in history where actors and institutions persevered on courses of action which ultimately led to ruin.
The Trojan Horse, the Protestant secession, the American Revolution, and the U.S. war in Vietnam. In each of those cases, even though the present course of action might have been recognized as profoundly counter-productive, the decision-makers or institutions just kept at it.
King George kept on blithely proclaiming new and nifty taxes, and went on his way erecting a multitude of New Offices, sending hither swarms of Officers discount car rental phoenix airport to harass the people, and eat out their substance .
Who knows how this turd of an idea got squeezed out at Delta Airlines.  Perhaps the CEO woke up at two in the morning with a mental light bulb flashing.  Perhaps the greasy advisory team at JP Morgan (who will be handling the commodities discount car rental phoenix airport transations for a fat fee, of course) really turned on the charm at the golf course. What s for almost certain is that Delta will stay on course to lose operational discount car rental phoenix airport money from this decision, discount car rental phoenix airport and will keep on doing it for quite some time before crying Uncle!
Unknown who the naysayers at Delta were or if dissenting voices against this folly were raised. I d wager not.  Junior executives and yes-men do just that, keep mum and keep their job.  No personal profit in speaking out.  Are you going to tell the CEO that this whole refinery deal is batshit crazy?  Yeah, you go right ahead Sparky, no skin off my nose, I like my corner office, leather chair and expense account.
discount car rental phoenix airport In general, were there dissenting voices heard? Sure.  Knowledgeable oil industry analysts were consistent in their head-scratching.  And not just oil industry insiders, in obscure journals and publications. This from mainstream Bloomberg columnist Virginia discount car rental phoenix airport Postrel:
The proposed purchase "doesn't make a huge amount of economic sense in fact quite the opposite," discount car rental phoenix airport says Craig Pirrong, a finance professor and director of the Global Energy Management Institute at the University of Houston's Bauer College of Business.  Pirrong notes, 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 discount car rental phoenix airport a refinery would simply magnify the effect. "If anything," he says, "it increases the risk exposure discount car rental phoenix airport that has bedeviled the airline industry for years."
In the spirit of disclosure, I hold a few ConocoPhillips shares, purchased before the spin-off of the Phillips 66 refining operations.  The few shares of PSX were disposed discount car rental phoenix airport of, and the balance re-invested in COP .
About the only exposure to Delta is the 190,000 miles in the 101C SkyMiles account balance. Now with rumors swirling that Delta might devalue its miles (again), cashing them in for awards or tickets might happen sooner rather than later.
And lastly, discount car rental phoenix airport readers would be well advised to stay away from any investments having to do with airlines. This whole refinery thing for Delta will likely be the equivalent of skateboard dude trying the ride the rail, and ending up nutting himself. Temporary pain, but he ll survive.
If you'd like to stay current on future high-flying posts and commentary , just join the Centavos Email community. Frequent readers might favor the RSS feed . For a quick in-flight snack, try Twitter .
Wow! I always though airlines just hedge their fuel costs. Buying a refinery seems like a strategic change in the direction of the company. Something that should not be taken lightly. It certainly would divert their focus and energy to their non core business.
Rather than buy a refinery, discount car rental phoenix airport Delta could have poached discount car rental phoenix airport the whole hedging department out of Southwest, paid them all a handsome above-market salary and incentive bonuses based on money saved, and have come out millions ahead. Maybe big companies don t think like that.
I think it s pretty interesting that the only way a company has been able to generate above-average returns in the airline industry is to predict fuel prices with some accuracy. You know, if there were any brains in the whole operation discount car rental phoenix airport they d just sell off the planes, fire the pilots, stewardesses, and every employee who isn t on the desk trading and put all their capital behind their best traders, since that s where all the profits come from. Why bother with sending people around the world when you can make just as much money betting on fuel?
[...] giving top spot this week to 101 Centavos, who makes fun of Delta Airlines for their boneheaded decision to buy a oil refinery. Hey, why stop at being really bad at being an airline discount car rental phoenix airport when you can be a bad oil refiner too? [...]