The WSJ reports that Delta Airlines wants to acquire a Pennsylvania oil refinery. The reporters, quoting the ubiquitous “people familiar with the situation,” says that Delta “could save between $20 and $25 a barrel on some of its jet-fuel costs by acquiring the refinery, a big advantage as industry costs now approach $140 a barrel, up 11% so far this year.” But how? No particular economies of integration are mentioned in the article (apparently the WSJ doesn’t consider this an important point). Jet fuel is a standardized commodity, so asset specificity isn’t an issue. Organizational capabilities don’t seem to be relevant. Market power? Price discrimination? I don’t see it. In short, I can’t imagine where these cost savings would come from. Any ideas?Delta may think that ownership of a refinery would guarantee them supply in times of uncertainty but the market for jet fuel seems to work perfectly well so I don't see why owning a refinery is necessary to ensure supply. What's the bet that the deal won't go though or if ti does it will be reversed quickly?
Thursday, 12 April 2012
Vertical integration sometimes looks very strange
This odd sounding example of vertical integration comes from Peter Klein at the Organizations and Markets blog: