3 Links I Love: Delta’s Refinery Twists and Turns, Branson’s Troubles, Gogo Numbers

This week’s featured link

Delta Air Lines Bought an Oil Refinery. It Didn’t Go as Planned. – The New York Times
The author clearly thinks that Delta’s refinery purchase was a mistake, but I’m not sure we’ll ever know. Did Delta’s pumping of jet fuel into the market lower the costs to airlines at all? If so, then even a refinery losing money might make Delta richer. On the other hand… maybe it was just a bad plan.

Simulation of the Week: I don’t know exactly how accurate the numbers are, but this simulation gives a sense, at least, of what happened when the Air India Express aircraft ran off the runway.

Two for the road

Will Richard Branson ever be Richard Branson again? – CNN Business
It’s funny, because the one bright spot mentioned in the article is Virgin Galactic, a company that seems to be veering well off its path with this new supersonic transport idea it has. What a mess.

Gogo confirms “extensive” discussions to sell commercial airline inflight connectivity business – PaxEx.Aero
There are some really interesting numbers in here that point to just how far down inflight wifi usage is. For those wondering, that first row in the table (BA) is bizjets, second (CA-NA) is commercial North America operations, and the last (CA-ROW) is commercial Rest of World.

Brett

33 responses to “3 Links I Love: Delta’s Refinery Twists and Turns, Branson’s Troubles, Gogo Numbers”

A

Aug 14, 2020

Re: Delta’s refinery. I wasn’t really a fan of the move back when they did it. Sure fuel is a massive cost and owning your own production sounds nice and all but energy is hugely cyclical….kinda like airlines are. It’s also a fungible product. That’s great and all if you are able to sell the product but right now you’re just flooding the market with more supply than necessary. If the refinery was just outside the fence at ATL and 100% of the jetfuel produced was going into Delta Jets that’s one thing. But a refinery in Philly, not even a Delta hub? That just didn’t make sense to me. I don’t know where the jet fuel Delta’s refinery produces ends up, assuming like most refineries it stays relatively local so it’s sent to PHL? Depending on AA to buy Delta’s jet fuel are we? That just never added up for me.

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1. Dan
  
  Aug 15, 2020
  
  I believe a lot of it ended up in the New York hubs
  
  Reply
S

Aug 14, 2020

Hi Cranky, instead of this tweet, please link to the original creator of the Air India crash simulation. The creator is Youtube channel TheFlightChannel and the video is titled “Boeing 737 Crashes in India | Here’s What Really Happened to Flight 1344”. This channel does great work and has meticulously reconstructed a number of infamous flights. I would encourage you to check them out! Thanks.

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1. CF
  
  Aug 14, 2020
  
  S – I had no idea. This link is far better and more complete. I’ve updated it in the post. Thanks for letting me know.
  
  Reply
  1. Kilroy
    
    Aug 14, 2020
    
    Cranky,
    
    If you haven’t seen it already, I would also HIGHLY recommend checking out the VASAviation channel on YouTube. The creator is a young pilot from Spain (though he does mostly videos from US incidents) who takes crashes, near misses, engine failures, etc, combines the ATC audio, captions for the ATC, radar imagery, and plane simulations into great videos.
    
    Very interesting to watch those videos and listen to ATC move planes around due to a plane coming in due to an emergency, or to hear the calm in the pilots’ voice but the anxiety in ATC’s voice.
    
    Reply
Tim Dunn

Aug 14, 2020

The problem w/ critics of Delta’s Trainer refinery is that there really are actual facts and data to demonstrate the successes of it rather than thin opinions.

Most people argued against the refinery when Delta proposed it because it hadn’t ever been done before and because refineries were/are low-margin businesses.
The real reason for Delta’s refinery purchase – which they clearly stated was to increase the supply of jet fuel and to break the high jet fuel crack spread and they most certainly succeeded at doing that.

Sure, other airlines have benefited from lower fuel prices as well but Delta never said that it was seeking an exclusive benefit and I am certain they understood commodity pricing well enough to know that they would depress prices for all.

Further, the refinery itself has operated on about a break even basis even considering the acquisition and upgrade costs to produce the maximum chemical amount of jet fuel, something no other US refinery does.

The real benefit from the refinery comes from lower jet fuel prices – and that can easily be confirmed from Delta’s financial statements compared to its peers. For 2019, Delta had a 5 cent/gallon cost advantage relative to American and 7 cents per gallon compared to UA – and that has been fairly consistent for years. There are production and distribution cost savings that come from the refinery. DAL execs have said the refinery contributes to a $300 million/year cost advantage for fuel and that has been more than enough to offset the acquisition and operating cost.

And the benefit from the refinery also more than offset the cost of 60 new aircraft – also a goal Delta had at the time; Delta was able to spend less on new aircraft for several years because it got fuel cost savings from the refinery. Delta’s debt levels which are lower than AAL and UAL now are a direct result of the refinery. Delta has engaged in fleet buying so the benefits are not as great now but that doesn’t mean they achieved their goals at the time.

And the entire basis for refineries is changing in a post-covid world but Delta’s need for jet fuel is still there. They would like a deal that uses their capital better but they aren’t willing to walk away from the refinery – or weren’t before covid.

The only people that can’t see the financial benefit from the refinery are those that don’t want to do the research to see that it made sense then and still makes some sense.

And regarding fuel strategy, WN still hedges its fuel, one of the few US airlines that still does so even though they have and still are losing money on those hedges. Their goal, like DL’s is as much about controlling and predicting costs than in winning. The question should equally be asked why WN still hedges fuel alongside DL’s refinery discussion; at least the refinery contributed to lower costs for DL, at least pre-covid.

A,
the refinery is connected by pipeline to the NYC airports. DL’s output from the refinery is used at LGA and JFK and the non-jet fuel products are traded throughout the US with other producers.
There were ample reasons why the refinery made sense as other NE refineries closed and as pipeline capacity from the Gulf to the NE was critical long before covid.

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1. Not Tim
  
  Aug 14, 2020
  
  what are the “real numbers”? Even delta has said it made a loss and Delta is the one who’s been trying to sell their “success story” for the last two years with no success in selling. If they lowered the price of fuel for everyone, they’re the ones paying for it. Ticket prices would’ve naturally risen if Delta hadn’t bought the refinery and the crack spread could’ve risen or fallen but that doesn’t make Delta’s decision any smarter. It just means the industry likely would’ve raised prices to some degree to account for higher fuel costs. There’s a pretty well-documented correlation between revenue and fuel price over time.
  
  Reply
  1. Tim Dunn
    
    Aug 14, 2020
    
    The numbers are in Delta’s financial statements – just as it is for any publicly traded company.
    
    And, feel free to post a link to where Delta said
    “it made a loss” and Delta is the one who’s been trying to sell their “success story” for the last two years with no success in selling.
    
    You can’t because you didn’t get the facts right even with the facts that are publicly available.
    
    Delta said it wanted to keep the jet fuel distribution part of what the refinery does; it wants/wanted to sell the non-jet fuel part of the business.
    
    and, airline prices are not and never have been directly tied to cost. If it were, airlines wouldn’t be losing boatloads of money. And if cost was the driver, then American would not have posted net income margins below 4% last year.
    
    actual facts and data do not support your statements.
    
    bravenet got it.
    
    Reply
    1. Not Tim
      
      Aug 14, 2020
      
      https://www.jpmorgan.com/global/research/summer-travel-2018
      
      https://www.forbes.com/sites/danielreed/2018/09/10/its-no-fun-but-delta-belatedly-is-facing-up-to-its-one-big-mistake-investing-in-an-oil-refinery/
      https://www.reuters.com/article/us-usa-refinery-delta-air-sale-exclusive/exclusive-delta-trying-to-unload-east-coast-refinery-sources-idUSKCN1PQ5QQ
      
      Of course there are varying views on the topic, as Cranky alluded to, but the blind “All hail Delta” view that you suggest is just beyond ridiculous even given the most optimistic view of the refinery purchase. Delta has been trying to get out of the refinery business since 2019. They even realize it wasn’t a sustainable strategy. Why can’t you?
      
      Reply
      1. Tim Dunn
        
        Aug 14, 2020
        
        Forbes’ interpretation of Delta’s actions doesn’t equate to what Delta executives have specifically said and what Delta’s financial documents filed with the SEC show
        
        The refinery has provided a fuel cost advantage. The refinery does not generate the ROIC that Delta wants for its assets. Delta wants to get the benefit of lower jet fuel prices without having its money tied up.
        
        Just because Delta has sought alternatives to direct ownership doesn’t mean that they have admitted failure.
        
        And it also doesn’t change that they have not shut the refinery. Even temporarily other than for scheduled maintenance. If they do, then they will have decided it is not worth retaining the benefit relative to the cost.
        
        Why can’t you read the facts and come to conclusions based on ALL of the data and not just based on your cherrypicked and inaccurate soundbites?
        
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        Never Tim
        
        Aug 14, 2020
        
        You asked for links showing it was unprofitable and that Delta was trying to sell it because you couldn’t believe any reputable website would publish such Delta blasphemy. Done. I’ll believe an independent third-party any day over some Delta execs trying to justify a bad financial decision.
        Believe what you want. I don’t think you’ve ever seen a Delta decision you didn’t love.
        Once Delta does sell it or shut it down, I’m sure you’ll be praising the innate wisdom of the decision and how you were always right…
        
        Tim Dunn
        
        Aug 14, 2020
        
        You can double down on hunting opinions to suit your interpretation but the links you provided simply do not provide factual evidence to support your position no matter how matter how much you want to believe otherwise.
        
        And the third party is Delta’s auditors. If you don’t think they are doing their job, take it up with the SEC. The actual data they put their name behind says your position is wrong.
        
        If it gives you something to do when you wake up to argue using multiple user names, then don’t let me stop me.
        
        I will assess Delta’s decisions based on the facts and data that they provide. You would do well to figure out how to do the same.
      2. Not Not Tim
        
        Aug 14, 2020
        
        Tim is correct. A loss on paper of a wholly-owned does not equate to a loss overall. It is entirely possible the refinery lost money while giving Delta a larger benefit. If Delta was seeking to sell, they could’ve easily included provisions that were beneficial to the seller. For $150mil + $150mil in upgrades, this has easily paid itself off.
        
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        Not not not Tim
        
        Aug 14, 2020
        
        You’re right in one aspect. It isn’t tough for a company to cook the books at a wholly owned so long as the delta, inc passes muster.
        
        The real Tim Dunn
        
        Aug 15, 2020
        
        It’s also easily to cook reality because dealing with and accepting it throws all of the conspiracy theories and biases out the window.
2. El petrolero
  
  Aug 15, 2020
  
  Tim Dunn – Delta management love to claim they have lowered world her fuel prices but the “facts” don’t stand up to scrutiny. Trainer can process about 200,000 barrels per day of crude. That’s less than 0.2% of the total installed capacity of the world’s oil refineries. They don’t have the scale to influence any prices or spreads.
  
  Furthermore the world jet fuel market is 8 million barrels per day. A typical refinery in the US produces 7-10% jet fuel because this is the typical volume of kerosene-range material in crude oil. It is possible with some very expensive equipment to get this yield up to 15% as some on the West Coast do. Trainer lacks this equipment. So when Delta are talking about maximising jet yields from their refinery they are likely adding one or two percentage points to their yield. This works out to about 2000-4000 barrels per day of jet, or roughly 0.5% of global supply at the high end.
  
  I won’t say there has been no effect of the price but I will say it is likely minimal and the cost of achieving this minimal effect on prices has been enormous.
  
  Since NY Harbor jet prices are directly connected to prices in Europe because the US East Coast is must still import some jet under normal circumstances even with Trainer producing maximum jet volumes the effect in price is minimal and Delta would need to find a way to influence prices in Europe to really get US prices down.
  
  The real reason for jet fuel cracks declining in recent years even before the Covid outbreak is excess global refining capacity that has led to a surplus of jet being offered in the Atlantic basin by East of Suez refiners. Millions of barrels per day of new capacity has been constructed in the Middle East, India, China and elsewhere in Asia that exceeds current demand for refined oil in those countries and they export the surplus to the West.
  
  These are facts that can be verified. There is plenty of free oil data available under eia.gov and jodidata.org
  
  Reply
  1. Tim Dunn
    
    Aug 15, 2020
    
    FIrst, Delta NEVER said it has lowered any commodity price; there are plenty of people who have made the connection but no company is going to say they singularly move commodity prices.
    Second, NO ONE has suggested with any kind of math that Delta’s refinery moved anything other than NE USA jet fuel prices.
    Third, the refinery produces about 30% jet fuel which is about the chemical limit that can be obtained from crude oil. Since there are multiple sources that have confirmed that Delta produces about 30% jet fuel, they clearly DO have the equipment.
    Fourth, there is no connection to European prices. See above. Delta did not ever have a goal of impacting world fuel prices. Trainer was previously tuned to refine Brent crude which is the only connection to Europe. However, it has used crude from the Gulf and the northern interior of the US. If there has been a disappointment to Delta’s refinery plans, it has been Delta’s limitations in switching to lower cost crude.
    
    And, again, none of your arguments or any of the users above dispel the fact that Delta HAS HAD lower jet fuel prices for years compared to American and United, its most direct competitors. You can either call the SEC and tell them that Delta is cooking its books to show lower fuel but you’d have to figure out who actually profits from Delta’s scheme and who is willing to take the hit.
    
    The simply fact is that Delta’s fuel strategy including the refinery has led to lower fuel costs; the NYT or anyone else can argue what it has or has not accomplished but no one can legitimately argue against the reality that it has helped Delta lower its fuel costs relative to its competitors.
    
    And Southwest STILL hedges fuel and loses money doing it. American and United don’t hedge. Of the big 4, Delta’s fuel strategy has proven to deliver better results than any other US airline.
    That is not opinion but confirmable from SEC filed financial documents that date back year after year.
    
    Reply
    1. Worldtraveller
      
      Aug 15, 2020
      
      Your blind loyalty and religious devotion to a company that fired you never ceases to amaze. Your ability to keep trolling random aviation websites despite being blocked on most is also impressive.
      
      The geography of the US3’s networks impacts the price of fuel much more than a refinery in Philadelphia (where Delta has little presence) that sources from North Dakota then has to transport the jet fuel from Philadelphia to New York. And Delta’s network is heavily weighted toward cheaper fuel areas of the country (aka what they call the core hubs). Keep trying.
      
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      1. DeltaLover
        
        Aug 15, 2020
        
        Exactly, but the REAL cost will be if/when they close it. The environmental remediation costs will be exhorbitant. Better to sell it for one dollar. Which is about as much as Mr. Dunn’s opinions on the subject are worth.
        
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    2. Tim Dunn
      
      Aug 15, 2020
      
      you two can’t even get the basic facts right. And I mean BASIC facts.
      
      All you need to explain is how Delta managed to save $300 million in fuel costs for 2019 compared to American based on a 5 cent/gallon lower cost.
      
      Don’t give us the ‘they cooked the books’ non-sense.
      
      You don’t understand how the refinery was designed to save money for Delta and it is no surprise that every new post with yet another user name comes with even more statements that show that you understand nothing about the deal.
      
      At the core you can’t stand that Delta figured out how to run a viable business – neck in neck with Southwest in net margin for 2019 – while American was just over 1/3 of both’s margins.
      
      Not only did Delta spend less per gallon on fuel but Delta burned less fuel to generate more revenue than American. After tens of billions of dollars spent on new aircraft over the past 10 years, American spends MORE on fuel both in terms of gallons burned and in terms of price paid.
      
      What a pitiful track record.
      
      THAT is the crux of why you try so hard to find fault with what Delta has done because it achieved what American has not – and you can’t stand to admit that American’s fuel strategies have failed while Delta’s have actually worked.
      
      Reply
      1. Jetlanta
        
        Aug 15, 2020
        
        Who’s talking about American? And who cares anyway?
        This is about Delta’s refinery purchase and now desired sale.
        You’d think Delta would buy another refinery with the incredibly simplistic way you view its success.
        
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        DeltaLover
        
        Aug 15, 2020
        
        Completely agree. When Richard bought the refinery, Gary Kelly was asked why Southwest had not done the same. He said at the time that if Delta was successful, then Southwest would consider it too. Until then, he cautioned, the jury was still out. He was spot-on in his analysis.
        
        Tim Dunn
        
        Aug 15, 2020
        
        You honestly can’t see the differences in Delta’s fuel strategies from American’s? Do YOU read financial statements and are driven by data or not?
        Either they show the success or failure of each carrier’s strategies or they don’t.
        American is deeply in debt because it thought new airplanes would give it a competitive advantage but they spend more to produce a seat mile than Delta.
        Southwest has lost more on fuel hedges as a percentage of costs than Delta ever did. WN still has ‘premium’ fuel costs.
        
        Either you and everyone else makes accurate assessments based on real data or it is all opinions regardless of what the NYT or Forbes says.
        
        Delta’s fuel strategies post hedging have worked better than its peers.
        
        CF
        
        Aug 15, 2020
        
        I’ve been biting my tongue watching this conversation, but I’ve decided to step in. The sniping back and forth isn’t doing anything to advance the substance of the discussion. In fact, it’s very likely turning off others from participating. That concerns me. Please think hard before posting a comment. I’m not blocking anything yet, but I reserve the right to do it if things go too far.
Bravenav

Aug 14, 2020

Tim did a pretty good job of summarizing Delta’s refinery strategy. It was primarily a move to ensure supply for their then fast-growing NYC operations. It’s been a while, but there have been pipeline issues in the past that have limited the availability of jet fuel in the Northeast.

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Eastern 727 Whisperjet

Aug 14, 2020

Cranky – unless I missed it, neither the CNN article you linked to nor any of the other pieces I have seen this week make mention of the other interesting bit of news regarding Sir Branson’s travel empire: Virgin has pulled out of its deal to “brand” the Brightline rail service in Florida (between Miami and West Palm Beach) as a Virgin service. That line is, as I understand it, still building a new alignment to the Orlando Airport (MCO) from Cocoa Beach, where the existing freight line will be upgraded to host an extended passenger train service from West Palm Beach, thus providing a relatively high-speed Miami-Orlando (MCO, at least) run.

This is interesting, as the Brightline service (which is suspended currently due to the pandemic) was America’s first private passenger rail service (that wasn’t a theme park or National Park/ski area “land cruise” service) in quite a while. I am unsure what the full extent of Virgin’s involvement was to be – perhaps just a branding/management agreement – but it nonetheless shows the difficulties the are in quite well.

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1. enplaned
  
  Aug 14, 2020
  
  News articles seem to characterize it the other way around – Brightline pulled out of the deal, with Virgin disputing their right to do so.
  
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2. CF
  
  Aug 14, 2020
  
  Eastern 727 – Yes, that’s another bit of turbulence in the Virgin world.
  It’s not just Florida, but also the odd train to Vegas from Victorville in California. Both will be just Brightline now, but I don’t know much beyond that.
  
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DTB

Aug 14, 2020

Although the video simulation of the Air India crash is interesting, a more factual description can be found at http://www.avherald.com/h?article=4daf960f&opt=0 . In summary, the pilot touched down half way down the runway with a tail wind on a a wet runway.

From the above link, “On Aug 9th 2020 India’s Aviation Ministry reported that according to testimony by the tower controller the aircraft did not touch down until abeam taxiway C (editorial note: about 1030 meters/3380 feet past the runway threshold) and anticipated the aircraft might overrun the runway and therefore instructed emergency services to enter the runway and follow the aircraft. When he did not see the aircraft at the runway end, he activated the crash button, tower instructed the emergency services to look down into the valley. The minister added also, that the aircraft had still sufficient fuel on board to divert to their alternate aerodrome and land there with more than minimum fuel required.”

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1. tharanga
  
  Aug 14, 2020
  
  Cranky, I think the video on the crash was made prematurely, and you should provide a warning to that effect (or even remove the link). There is a lot that is still unknown. In a couple weeks, the video could look incomplete and inaccurate. Patience is in order.
  
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  1. CF
    
    Aug 14, 2020
    
    tharanga – I think they know effectively what happened. What caused the airplane to go off the runway, that remains to be seen. But the details of where the airplane was, what the terrain is like, and what the weather was at the time are facts.
    
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Tim Dunn

Aug 16, 2020

CF.
I am glad you did step in on the refinery discussion.

The first part (current situation) of the refinery as discussed in the NYT articles is as accurate as anything about the airline industry right now which is losing tens of billions of dollars. Anything related to the travel industry is in serious trouble too – including rental cars, hotels, catering etc. The gogo article which is equally as reflective of the poor economics of travel related businesses deserves a good discussion. And yes refineries and oil companies are losing money for all types of fuel because of decreased demand as people – by choice or order – are staying close to home. It isn’t at all debatable – or shouldn’t be – that the intersection of energy and transportation is problematic.

In the historical context, the article also accurately noted that DL execs said that the refinery and associated strategies (distribution, reduction of middleman) would save $300 million/year. DL execs since then have affirmed that was the case in recent years. The fact that the refinery has to operate on a standalone subsidiary basis from an accounting standpoint means it will not show the $300 million benefit for the airline. The financial benefit comes by comparing fuel costs – which can be seen on SEC filed financial statements for each airline.

Delta’s fuel strategy with the refinery was a competitive decision at the time; it was clear that hedging did not work. All strategies can be measured in time; the public nature of fuel cost makes it relatively easy to evaluate fuel strategies. American was the first of the now big 4 to stop hedging but it also spent enormous money on new aircraft. Delta went the refinery strategy which it specifically said was equivalent in fuel reduction cost to buying 60 new generation aircraft. WN still hedges. UA stopped hedging, did not spend as much as AA on new aircraft and no one else went down the refinery strategy. UA did explore buying a Brazilian owned refinery on the Gulf Coast.

None of us knows what the future holds for anything right now, esp anything related to airlines or energy and certainly if Delta decides to shutter Trainer. The NYT piece dusted off on an old topic about which there isn’t much new information specific to Delta or the refinery other than that DL execs have stated it is breakeven – which is better than the airline industry as a whole. Delta likely has little reason to make a rash decision but it is also clear that Delta didn’t achieve pre-covid the changes it wanted for Trainer to increase Delta’s ROIC while retaining the fuel cost benefits.

Thank you as always for posting interesting topics and supporting dialogue on key industry topics.

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1. Tim Dunn
  
  Aug 16, 2020
  
  and let me apologize to you, CF, and the other users for allowing the conversation to be degraded with anything less than facts and data, where they exist, and opinions, where it is appropriate to offer them.
  
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