Of late, Supply Chain Matters has provided a number of commentaries concerning a trend toward more vertical integration of a firm’s supply chain components.  The context has been industry specific, or the notion of closed vs. an open supply chain.  Some examples are Hon Hai Precision for the former, and Hyundai Motor for the latter.

We were therefore surprised to read a report in today’s Wall Street Journal (paid subscription required or free metered view) indicating that Delta Air Lines is in talks to acquire a previously idled Pennsylvania oil refinery.  While industry and Wall Street observers are viewing this potential acquisition with some healthy skepticism, from a supply chain lens, it can be viewed as a bold and innovative strategy.

According to the WSJ, Delta spent $11.7 billion in 2011 on aviation fuel, roughly 36 percent of the airline’s operating costs. That certainly qualifies fuel cost as Delta’s key value-chain lever for margin improvement. Delta also has a good concentration of its operating hubs located in the U.S. east coast region, where fuel costs typically are higher than other regions of the U.S.

Delta talks with Conoco Phillips regarding the idled Trainer Pennsylvania refinery are reported to be in a price range of $100 to $150 million, the equivalent of a new wide bodied aircraft. Estimates are that if successful, Delta could save $20 to $25 per barrel on some of its aviation fuel costs by configuring the refinery for optimized aviation production while support existing buyers for other fuel products.  Delta would also seek an experienced operator to manage refinery operations.

The WSJ notes that whether or not this acquisition ever comes to fruition, this might be the first airline that has ever considered owning a refinery. Supply Chain Matters complements Delta for its bold thinking on the possibilities and outcomes of vertically integrating the biggest component of its supply chain.

Process innovation can come from external or internal forces and bold thinking has been the basis of many supply chain capability breakthroughs. That sometimes implies ignoring Wall Street’s one-quarter time perspectives.

Bob Ferrari