Hedging Gone Wild: Was Delta Air Liness Purchase of Trainer Refinery a Sound Risk Management Strategy?

Abstract

In April 2012, Delta Air Lines announced it would purchase the mothballed Trainer oil refinery in eastern Pennsylvania in order to secure access to a local supply of jet fuel and more broadly to incorporate the refinery’s output into Delta’s fuel hedging and risk management strategy. This unique vertical integration experiment was widely derided at the time, but we assess whether the policy has been value-enhancing over the four years since, and conclude it generally has been so. In particular, we find that: (1) the purchase announcement generated positive abnormal returns in stock and bond markets, (2) given the dynamics of jet and crude oil prices, Trainer has a significant potential to reduce Delta’s fuel cost variability, (3) Delta has significantly less equity exposure to the jet fuel crack spread than other airlines’ in the post-acquisition period, (4) Delta’s bond yield spreads and new loan spreads fell relative to its peers in the post-acquisition period. Given the very small price Delta paid for the Trainer refinery–$150 million plus $270 million in subsequent capital investment – and the fact that the benefits detailed above have accrued to Delta in both high and low oil-price regimes, we conclude this policy has proven beneficial.