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VOL. 127 | NO. 83 | Friday, April 27, 2012

Delta Declines to Address Oil Refinery Rumors

By Bill Dries

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When it was time for questions on this week’s earnings conference call by Delta Air Lines Inc., the company’s president evaded questions about reports that Delta is considering buying an oil refinery in Pennsylvania.

ANDERSON

Ed Bastian said Atlanta-based Delta does not respond to “industry rumor and speculation.”

The report surfaced earlier this month that Delta is considering a bid to buy the ConocoPhillips refinery in Trainer, Pa.

According to Reuters, the Delta board has met twice to discuss a potential bid for the refinery, which, when operating, was turning out 185,000 barrels a day. Conoco extended its deadline for selling the plant by two months, also according to the Reuters report.

The reaction has been mixed.

The “Motley Fool” syndicated column by Navjot Kaur concluded the deal “has the potential to give Delta the winning edge over its competitors.”

Bloomberg columnist Virginia Postrel said it was vertical integration taken too far.

“Vertical integration fools a lot of people,” she wrote. “Delta doesn’t need its own refinery to obtain jet fuel … any more than it needs to own a peanut farm to supply in-air snacks.”

Delta on Wednesday, April 25, reported it had posted a net loss of $39 million in the first quarter of 2012 including taxes, but thanks to fuel hedging gains the airline posted its best March quarter since 2000.

Delta’s decision not to respond came on an earnings call in which company executives remained bullish on a philosophy of permanently cutting capacity and passing on fuel price increases to customers.

They also touted recent moves at LaGuardia Airport in New York aimed at increasing Delta’s share of the business passenger market.

“We like the trajectory we are on, so we will stay the course,” Delta CEO Richard Anderson said of what he described as “very disciplined capacity management.”

“This plan is the same strategy we have discussed with our investors for the last three years. So, please expect the same.”

The capacity decisions have negatively affected Memphis International Airport, where Delta operates one of its seven U.S. hubs and is the dominant carrier by a wide margin. Capacity cuts at Memphis International started in August, and passenger traffic here was down more than 20 percent in March compared to March a year ago.

The cuts came while Delta expanded at LaGuardia and began preparing for the opening of the new international terminal at Hartsfield-Jackson International Airport in Atlanta, the Delta flagship hub in the city it calls home.

These moves enforced Delta’s view of the smaller role Memphis International plays in its relatively new and still-emerging system following the acquisition of Northwest Airlines that closed in 2009.

Anderson and other Delta executives usually don’t mention Memphis during earnings calls unless they are specifically asked about it. When they have been asked about Memphis, they have said the airport’s role in their system is to take overflow passengers from Atlanta.

Anderson and the rest of the Delta team make the argument every quarter and at presentations to analysts at conferences that the overall philosophy is the correct one given the company’s results for investors.

This month, Anderson added a few pages to the gospel of capacity, likening jets to factories in terms of investment.

“There are a myriad of actions you take,” he said. “We’re going to continue to shrink the fleet, update the fleet and improve the profitability of each shell.”

And while smaller jets for connecting flights at 50 seats and below have been part of the Delta capacity mantra since gas prices spiked, the airline is being more specific saying it doesn’t want to wind down all of the jets at that capacity.

“We didn’t say we expect to get rid of all of them,” Bastian said when asked specifically about the 50-seat jets. “We said we will be reducing them over time.”

But Bastian did not say where.

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