There is little doubt that at some moments Australian airline managers would have dreamed about doing what US giant, Delta Airlines is now doing.
Which is to buy its own oil refinery, to cut out the costs of hedging, and transporting fuel, as well as to secure supply.
But it is not a move all financial analysts think will work out as planned, and it isn’t something likely to be practicable for our carriers, in the absence of a suitable refinery for sale or a certain supply of the optimum grades of crude oil feedstock.
When the plan to buy a Pennsylvania refinery that Phillips 66 intended to sell or close down was first floated earlier last month, Bloomberg ran this intriguing critique of Delta’s intentions, and how it revived memories of a fad for vertical integration in the 80s, which included some big failures across a range of industries, and turned the post graduate wisdom of business schools into large scale exercises in employee and shareholder misery.
Delta’s CEO, Richard Anderson, said that “acquiring the Trainer refinery is an innovative approach to managing our largest expense,” and called it a modest investment comparable to the cost of a new wide-body airliner that would cut the airline’s fuel bill by $300 million (US) a year, and in little more than a year.
The airline is paying $150 million of its money, plus a $30 million grant from the state of Pennsylvania for the facility, and will spend another $100 million optimising it, for an operation in which the gasoline and diesel fuels that it will also make in the process of refining aviation grade kerosene will be bartered for additional av gas.
Anderson said the “modest investment” would cut the airline’s fuel bill by $300 million a year.
Those are ambitious returns on a total spend of $250 million in the first year, leading to even larger returns in subsequent years, if the oil price remains as high if not higher than it is now.
All eyes are going to be on Delta world wide to see if this works.
In this country, if the ambitions of Qantas and Virgin Australia are realised, their comparable investments are likely to be in bio-fuel blend production, ranging from total ownership, to participation in consortiums.
And the same questions will arise here as in the US, in that an airline may not need to own its fuel supplies, if the market provides competitive supplies without the risk and cost of diverting airline capital into refinery ownership.