An analysis of Delta Air Lines' oil refinery acquisition

Abstract

Delta Air Lines acquired an oil refinery in April 2012 as a strategic move to hedge against higher fuel prices. Our paper analyzes the oil refinery acquisition, a backward integration strategy, on the airline's financial and operational performance, for the period Q1 2010 to Q2 2015. The methodology involves descriptive statistics and short-term stock performance as well as an econometric model that estimates the impact of the oil refinery acquisition on Delta Air Lines' net income. The data set consists of quarterly financial and airline operations metrics data. The results indicate that it is too early to ascertain whether Delta Air Lines' oil refinery acquisition has any positive impact on its financial performance since the variable of interest is insignificant in predicting Delta Air Lines' net income. Despite the apparent lack of positive impact of its oil refinery acquisition, however, the stock market has rewarded Delta Air Lines' strategy resulting in its share prices outperforming the S&P 500 and the XAL, an index of major airline stocks, in the 60-trading day period following the announcement of its acquisition.

Firm value in the airline industry: perspectives on the impact of sustainability and Covid-19

“…Finally, the inconclusive findings on the effectiveness of financial hedging implies the necessity of further empirical investigations to obtain a definitive conclusion for the aviation industry. Study Kökény et al ( 2021 ); Wang et al ( 2021 ); Ranasinghe et al ( 2021 ); Giambona and Wang ( 2020 ), Álvarez-Sanjaime et al ( 2020 ), Cui et al ( 2019 ), Hu et al ( 2019 ), Bertus et al ( 2009 ), Gu and Kim ( 2009 ), Tsai et al ( 2008 ), Carlos Martín et al ( 2008 ), Gong, ( 2007 ), Carter et al ( 2006 ), Hung and Liu ( 2005 ), Chen et al ( 2017 ), Qin et al ( 2017 ), Bayer et al ( 2017 ), Bourjade et al ( 2017 ), Manuela et al ( 2016 ), Lee and Moon ( 2016 ), Korkeamäki et al ( 2016 ), Turner and Lim ( 2015 ), Berghöfer and Lucey ( 2014 ), Treanor et al ( 2014 ), Swaminathan et al ( 2014 ), Carter et al ( 2006 ), Weiss and Wruck ( 1998 ), Alam and Sickles ( 1998 ), Singal ( 1996 ),Hersch and Mcdougall ( 1993 ), Ramanchi et al ( 2017 ), Nwude et al ( 2016 ), Kizildag and Goh ( 2011 ), Hofer and Eroglu ( 2010 ), Thomas et al ( 1995 ),Özcan ( 2019 ). Topic area Sustainability Impact variable Environmental, social and governance (ESG), Sustainable Development Goals (SDGs), donation proposals (willingness to pay for sustainability initiatives), negative externalities caused by air travel, willingness to pay (WTP) a price premium for flights using bio-fuel blends, innovation (allocating funding for innovation activities bring potential fluctuations in the risk to an airline’s stock value), corporate social responsibility (CSR), voluntary carbon offsets, top mana...…”

“…Kökény et al ( 2021 ); Wang et al ( 2021 ); Ranasinghe et al ( 2021 ); Giambona and Wang ( 2020 ), Álvarez-Sanjaime et al ( 2020 ), Cui et al ( 2019 ), Hu et al ( 2019 ), Bertus et al ( 2009 ), Gu and Kim ( 2009 ), Tsai et al ( 2008 ), Carlos Martín et al ( 2008 ), Gong, ( 2007 ), Carter et al ( 2006 ), Hung and Liu ( 2005 ), Chen et al ( 2017 ), Qin et al ( 2017 ), Bayer et al ( 2017 ), Bourjade et al ( 2017 ), Manuela et al ( 2016 ), Lee and Moon ( 2016 ), Korkeamäki et al ( 2016 ), Turner and Lim ( 2015 ), Berghöfer and Lucey ( 2014 ), Treanor et al ( 2014 ), Swaminathan et al ( 2014 ), Carter et al ( 2006 ), Weiss and Wruck ( 1998 ), Alam and Sickles ( 1998 ), Singal ( 1996 ),Hersch and Mcdougall ( 1993 ), Ramanchi et al ( 2017 ), Nwude et al ( 2016 ), Kizildag and Goh ( 2011 ), Hofer and Eroglu ( 2010 ), Thomas et al ( 1995 ),Özcan ( 2019 ).…”

“…Also in this category, factors such as flight and network efficiency, launching a mobile app, leasing choices, oil refinery, CEOs’ strategic risk-taking behaviour and technical efficiency have been mentioned as value influencers, which are matched with the theory discussed by Malighetti et al ( 2011 ). For example, in an interesting study, Manuela et al ( 2016 ) investigate Delta Airlines’ oil refinery acquisition strategy to hedge against rising fuel prices and its effect on its financial and operational performance. The results of the study indicate that the strategy positively impacted Delta’s income and that this was rewarded on the stock market via higher share prices following the acquisition announcement.…”

Smoldering Embers: Do State-Owned Enterprises Threaten Fiscal Stability in the Caribbean?

“…For example, an organization that has to pay for oil, like an airline, would buy shares of an oil-producing company. In some very specific cases, this might prove effective in overcoming the imperfect supply of long-term hedging against oil prices (Manuela Jr., Rhoades, and Curtis, 2016;Almansur, Megginson, and Pugachev, 2020). An immediate recommendation for such a tool is not clear, neither should this option be completely dismissed for all scenarios.…”

Performance touristique et gestion du territoire français : l’impact de la réforme NOTRe

“…C'est pourquoi l'évaluation de la performance des fusions est appréhendée dans la littérature par certains auteurs dans différents domaines. À titre d'exemple, Manuela et al (2016) ont récemment analysé la performance opérationnelle et financière post-fusion dans le secteur aérien.…”