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Delta Airlines - Acquisition of Refinery

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Read the excerpt below from an article titled "Delta buys refinery, becoming first airline to make own fuel" (Reuters, 5/1/2012).
The more context­ specific your answers are the better.

a. What might be the value­ generating benefits of this vertical integration? What transaction costs might be reduced?
b. What costs might be created by this vertical integration?
c. What flaws do you see in Delta's justification of this deal?
d. Can you identify something that has changed that would explain why Delta made this move whereas no airline has previously vertically integrated with a jet fuel refinery?

See link for reference: http://www.reuters.com/article/2012/05/01/us-delta-idUSBRE83T17P20120501.

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a. What might be the value­ generating benefits of this vertical integration? What transaction costs might be reduced?

Delta would save on margins earned by refiners by operating its own refinery. The vertical integration would allow Delta to gain better control over the supply and costs of Jet fuel as it will not have to depend on third party refiners to meet its fuel needs. The ownership of refinery would provide better cushion over the fluctuating oil prices.

b. What costs might be created by this ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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