Taking a Cue From Delta’s ‘Vertical’ Fuel Strategy

When Delta Air Lines purchased an oil refinery near Philadelphia in the spring of 2012 for $150 million, you could hear the snickers at 30,000 feet. What does Delta know about the oil business, the naysayers nayed? One blog put it succinctly: “The math doesn’t work.”

But on Oct. 22 Delta will announced its financial results for the third quarter of 2013 and when it does, it will disclose the fact that Delta’s fuel prices are the lowest among any domestic carrier. That is at least what Richard H. Anderson, chief executive of Delta, told a closed meeting of business editors I attended last week.

Indeed, last week Delta reported that its projected fuel price per gallon in September was $2.98 to $3.03. The spot price for Jet A in August was $3.00, so as long as the September price is the roughly the same, Delta will have paid the market price for jet fuel, while before it purchase the refinery, Delta was paying more than market rates.

“Delta will have the lowest fuel prices in the industry in the third quarter,” Anderson vowed.

The news is certainly good for Delta, but it portends to something else for air cargo carriers. Anderson made a point of saying that its purchase of the refinery is not just an attempt to “control its own destiny” in regards to how much it pays per gallon of jet fuel. Rather, it is emblematic of the necessity for carriers to “move up the value chain,” known as vertical integration, and realize financial return from businesses currently adjacent to the core aviation business.

While the air cargo space continues to suffer from lackluster traffic and even more lackluster yields, such advice cannot be ignored. There is evidence of pursuit of a more vertical approach to air cargo. Certainly, FedEx has pursued it — but not to the degree it should or, in my view, will. Other market participants should, as well. ACMI ventures come immediately to mind here. The value chain within which ACMI sits is long and, in some ways, challenging. This offers an opportunity to create new services that butt against the ACMI portion of the transportation continuum.

Technology seems to me to be the path to vertical integration. The constant drive for efficiency on the part of shippers means that there is always an appetite for technology that makes the shipping/customs process/product delivery better.

At Delta, Anderson is a convert to vertical integration. Delta’s approach is at least worth consideration for air cargo companies drowning in capacity and red ink.

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