Charles Pfeffer

Executive Coaching & Leadership Consulting

Vertical Integration Coming to Airlines?

There was a report today on CNBC speculating that Delta Airlines might buy an oil refinery from ConocoPhillips as a way to stabilize their fuel costs. Is this a good idea? Well, one big question would be, can an airline run an oil refinery? Could they even get the regulatory approvals to do so, let alone could they retain the managerial and engineering capabilities. A second would be, would it work? Could an airline that ran its own refinery gain a cost advantage over other airlines that bought fuel in the open market.

Assuming that the price for crude is the same for everyone (a reasonable assumption), then for this to work, Delta would have to be able to run the refinery as efficiently as the companies that focus on refining do now, less the margin that refiners add to their finished jet fuel. Of course, the price of crude fluctuates and therefore, so will the input costs to Delta. Also, why would ConocoPhillips want to sell this refinery? Is it because it is more efficient than the industry average? Probably not.

If this deal happens, I’ll be very interested to see how Delta chooses to run this operation. Maybe they can create a structural advantage to other airlines by taking more control of their supply chain. I am skeptical, however that airline executives can run an oil refinery.

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