The second largest U.S. airline,
Delta Air Lines
(
DAL
) is considering to buy an oil refinery in Pennsylvania. The
company is expected to bid up to $150 million to acquire
ConocoPhillips
' (
COP
) Traineroil refinery.
Given the continued rise in fuel prices, Delta Air Lines expects
this strategy to lower its fuel cost burden to a large extent.
However, many oil refineries in the U.S. are struggling to generate
profitable business given rising crude prices that weighed over
their margins. As a result, selling or closing refineries have
become a trend in the U.S. in order to boost profitability and
improve margin. Last year, one of the biggest oil refining
companies in the U.S.
Sunoco, Inc.
(
SUN
) disclosed its plans to shut down its refineries in Marcus Hook
and South Philadelphia if it fails to seek buyers by July this
year.
ConocoPhillips remains no exception in this weak market
position. In September 2011, the company already announced its
plans to either close down or sell its Pennsylvania based refinery.
All these facts indicate that generating any meaning full synergy
from this deal would pose a significant challenge to Delta amid a
weak profitability outlook for the U.S. airline industry.
The bidding timeline is yet to be disclosed by Delta but
ConocoPhillip has already announced that it would extend its
timeline till May to sell its oil refinery.
Apart from the refinery buyout plan, Delta Air Lines is taking
several initiatives to lower its overall cost including fuel price.
The company is successfully passing the increased fuel costs to
customers in the form of fare hikes. Another way of reducing fuel
cost is by cutting capacity. Delta is planning cautiously on
capacity cuts. Capacity is expected to be down 3-5% year over year
in the first quarter, with 2-4% reduction in domestic capacity and
4-6% international capacity.
For 2012, the company intends to slash its capacity 2-3% year
over year with domestic cuts of 1-3%. In the trans-Atlantic route,
Delta along with its partners, Air France KLM and Alitalia, will
reduce capacity by 7-8% in 2012. Latin America capacity is expected
to grow up to 2% on the back of moderate demand in Brazil and
Central America. Pacific capacity would grow by 1-2% year over
year.
Additionally, Delta Air Lines is involved in fuel hedging
strategies, which provide a cushion to the rising fuel prices.
Delta Air Lines is 66% hedged for the first quarter at jet fuel
price from $3-$3.25 per gallon and 58% hedged for the second
quarter at a jet fuel price between $2.75 and $3.25 per gallon
using collars and call spreads.
However, new advertising rules, competitive threats from
United Continental Holdings Inc.
(
UAL
),
Southwest Airlines Co.
(
LUV
) and
JetBlue Airways Corp.
(
JBLU
), its unionized workforce and heavy investments, might weigh on
the bottom line.
Consequently, we are maintaining our long-term Neutral
recommendation on the stock. For the short term (1-3 months), Delta
Air Lines retains a Zacks #4 (Sell) Rank.
CONOCOPHILLIPS (
COP
): Free Stock Analysis Report
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
SUNOCO INC (
SUN
): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
Report
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