ATLANTA (TheStreet) - Although it has become, at least for the moment, the leading U.S. airline, Delta DAL has broader aspirations.
In its recent move to buy an oil refinery, Delta bolstered the perception that following a 2009 merger, smaller Northwest took over Delta, replacing a genteel Southern corporate culture with a more combative, more assertive one, more willing to embrace causes and break precedents.
The refinery acquisition is either brilliant or inane -- that judgment will be made in the future -- but it is most certainly bold. Some airline analysts applaud the purchase from Phillips 66, a refining company being spun off from ConocoPhillips COP , while the consensus among oil analysts is more along the lines that the oil people knew what they were doing when they decided to abandon the facility.
On the US Airways LCC earnings call in April, an analyst asked CEO Doug Parker what he thought about the pending deal and Parker offered this enigmatic commentary: "We (as an industry) have made a lot of progress if airlines are looking at investing their capital in things like that."
Among the big three in the U.S. airline industry, Delta is clearly the leader. It has digested its merger and is producing improved metrics as a result. By contrast, United's UAL second quarter reflected merger difficulties, primarily hundreds of millions of dollars in costs associated with combining reservations systems, and United still faces labor integration issues. Meanwhile, AMR AAMRQ.PK , is operating under bankruptcy court protection.
New Delta's audacious approach emerged as the largely non-union carrier resisted unionization efforts associated with bringing in organized workers from Northwest. At times, that effort veered beyond enlightened self-interest into ideological warfare.
As a dysfunctional Congress battled over whether anti-labor provisions should be inserted into a long-stalled Federal Aviation Administration reauthorization, Delta waded in. In a 2011 story about the role of Rep. John Mica, (R-Florida), The Washington Post reported that "letting his anti-labor ideology take over, (Mica) tried to use the FAA bill to overturn a decision by the National Mediation Board to rescind an old rule that had made it unusually difficult for airline workers to organize. Delta Air Lines furiously lobbied Congress to intervene."
Another Delta battle, against the excesses of the Export-Import Bank, is a
righteous one . The bank's supposed role is to finance foreign purchases of U.S. goods for customers who couldn't otherwise afford it. Because Boeing BAC is the largest U.S. exporter, the bank's principal function is to finance purchases of Boeing aircraft. But the buyers, in many cases, are wealthy foreign airlines who use the aircraft to compete against U.S. airlines.
Boeing is so closely tied to the airline industry -- it is even one of nine creditors in the AMR bankruptcy -- that Delta is the only carrier willing to speak out. Given that airlines are politically unpopular while Boeing is among the U.S. companies most skilled at playing politics, this is a lonely battle that Delta was doomed to lose, yet chose to fight.
But why stop at challenging labor and Boeing? Last week Delta said it will spend $150 million to buy a refinery near Philadelphia and then spend $100 million for conversions to maximize jet fuel production. It will also trade refinery products -- gasoline, diesel and others -- for additional jet fuel. In the end, the facility will provide 80% of Delta's jet fuel needs. The $250 million investment "will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast," said CEO Richard Anderson, in a prepared statement.
The oil industry has always been defined by risk --- great if you hit a gusher, impossibly costly if you don't. Refining too "is a tough business," said Tanjila Shafi, oil and gas storage analyst for Standard & Poor's Capital IQ. In the Northeast, "refiners have been shutting down refineries," because crude oil costs less elsewhere.
"Mid-continent and Gulf Coast refiners have higher margins," she said. "The oil that comes (there) from Canada and the Gulf Coast is far less expensive than crude oil from West Africa and the Middle East" that is delivered to the Northeast in ships.
Dahlman Rose analyst Sam Margolin has doubts about Delta's purchase. "This hasn't been a high performing refinery," he said. "Out of 150 refineries in the U.S., it is one of four that will close. So Delta saw something nobody else did, including people who are active in the oil industry."
On the other hand, Margolin noted that Delta "didn't pay a lot relative to what oil refineries usually sell for (because) Conoco was a distressed seller. As far as capacity valuation, on dollars per barrel, this is the lowest price that has been reported." Even the simple fact of keeping the refinery open means Delta will maintain capacity in the Northeast, which could help keep jet fuel prices down, he said.
Finally, Adam Bedard, a senior director of energy analysis at Bentek Energy in Denver, pointed out that the Utica shale formation in Ohio "could be a phenomenal new oil play, a source for the Northeast, that could have significant implications for that refinery."
In other words, perhaps Delta will strike oil. But the point is that oil refining, like any complex industry including airlines, is fraught with risks best assessed by those who worked to master the business. Delta is a great airline, perhaps the best of them, because it worked so hard to get there.
Moving beyond that -- to goad labor, challenge Boeing and compete with Big Oil -- defines a company that wants to believe it has no limitations.
-- Written by Ted Reed in Charlotte, N.C.
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