Fuel is an essential segment of the airline industry?s value chain. As the article suggests, fuel accounts for a third of airline?s operating costs. On this premise, Delta chose to diversify, through backward integration, into the refining business by acquiring Trainer Refinery. Applying the framework that we discussed in the class?by subjecting this diversification to porter?s three tests?we will test if the Delta?s corporate strategy meets the standards.
Attractiveness test
Refining industry is an unattractive business mainly because of heavy competition (~160 refineries in the US), price-sensitive buyers, huge fixed cost, heavily regulated and highly cyclical industry.
Cost of Entry
As described by the Delta?s executive, the capital (capex & opex) of 250 million entry is modest one for acquiring the Refinery. This expenditure is equivalent to buying a new Boeing 777.
Business be better off
According to the article, the Trainer Refinery (business unit) offers an advantage of cost savings on jet fuel (by self-producing vs. purchasing) that will in turn help the Delta Airlines (corporation).
The Delta diversification clearly doesn?t meet the attractiveness test; therefore, this diversification mostly likely will fail to create shareholder value. Exploring further?having worked in the 5th …show more content…
200K barrel capacity Refinery is equivalent to 8-10 interrelated chemical plants. Delta management cannot afford to make any mistakes in any of these interrelated units as the ROI will turn downwards. There are no synergies that exist between airline and refining industry; hence, Delta cannot transfer any skills or expertise to run a Refinery. In addition, the lack of ability to share activities between Delta and Trainer Refinery doesn?t offer any competitive advantage and only adds to the operating
Attractiveness test
Refining industry is an unattractive business mainly because of heavy competition (~160 refineries in the US), price-sensitive buyers, huge fixed cost, heavily regulated and highly cyclical industry.
Cost of Entry
As described by the Delta?s executive, the capital (capex & opex) of 250 million entry is modest one for acquiring the Refinery. This expenditure is equivalent to buying a new Boeing 777.
Business be better off
According to the article, the Trainer Refinery (business unit) offers an advantage of cost savings on jet fuel (by self-producing vs. purchasing) that will in turn help the Delta Airlines (corporation).
The Delta diversification clearly doesn?t meet the attractiveness test; therefore, this diversification mostly likely will fail to create shareholder value. Exploring further?having worked in the 5th …show more content…
200K barrel capacity Refinery is equivalent to 8-10 interrelated chemical plants. Delta management cannot afford to make any mistakes in any of these interrelated units as the ROI will turn downwards. There are no synergies that exist between airline and refining industry; hence, Delta cannot transfer any skills or expertise to run a Refinery. In addition, the lack of ability to share activities between Delta and Trainer Refinery doesn?t offer any competitive advantage and only adds to the operating