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Economic analysts viewed Delta Airlines resolution to acquire the Trainer refinery as a risky endeavor. The experts predicted that the airline would not succeed from the diversification measure. The refinery had closed business in September 2012 due to high operating costs. Delta decided to engage professionals in the airlines industry in order to realize its integration project.
The airline did not have prior experience in the energy industry. It had to conduct an empirical study in order to measure the worth of the diversification procedure. The company decided to change its operations strategy in 2012. It resolved to shift from the adoption of a business plan to a corporate one. The airline began to experience progress after the integration.
A corporate strategy involves diversification and integration mechanisms. These plans incorporate the organizations scope of activities. Delta Airlines decided to buy an oil refinery from ConocoPhillips at $150million. The diversification strategies seemed appropriate for the airlines in terms of helping it to gain competitive advantage in the industry. The company hoped to increase its profits through its diversification strategy. The airlines would manage its risks efficiently and expand its markets.
The organizations acquisition of the oil refinery would cater for future increments in the prices of jet fuel. The company envisioned that it would save $300million annually once it started running the refinery. Delta Airlines intended to meet its diversification costs in a cost effective manner. The business estimated that the costs of entry would be below the envisaged profits. The airlines would have to purchase 60 new narrow-bodied planes that would cost about $2.5billion. This aspect would reduce the costs of fuel for the airline company.
Delta Airlines contracted BP to supply it with crude oil. The airlines planned to exchange petroleum products from its newly acquired refinery for jet fuel. The company incorporated the idea into its vertical integration mechanisms. The concept of vertical integration refers to the purchase of a supply chain of a given company by another related group.
The two businesses must however produce similar products in order for them to achieve their business goals. The acquisition of the refinery would thus help Delta Airlines access cheap jet fuel. This paper evaluates the fuel costs of an airline company to be a third of its total operating expenses in a given fiscal period. Delta Airlines would gain a competitive advantage over its rivals by $40billion.
Delta Airlines may benefit from the vertical integration. The company may gain from the economies of scale due to the reduced costs of inputs and raw materials. The business may reduce its transaction costs of deals with small firms, taxes, regulations and specific investments. The vertical incorporation may help the company achieve monopoly of trade in the airlines industry. This aspect may be enhanced by the low fuel costs that the Delta Airlines may incur as opposed to its business rivals.
The fuel savings may be used by Delta Airlines for other productive investments. The airline may however incur certain costs due to static technology. The team may need to adopt new technologies in order to cope with the diversification project. New technologies may bring about different scales of operation at every stage of the integration process for Delta Airlines. The uncertainties of the integration procedure may bring about losses for the airlines due to unforeseen costs. The divergent scales of operation may create management issues like new departments to cater for the refinery challenges that may include costs and differentiations.
The adoption of diversification plans by Delta Airlines may enhance the spread of risk due to the creation of new operational and management objectives. The combination may cause inflexibility in coping with demand patterns and technological innovation. Delta Airlines may need to develop new software for its diversification venture. The organization may also create new plans to cope with increased numbers of customers.
Delta Airlines may face the risk of failure in its diversification initiative. The share value of the group may have increased by 11% in 2012 due to investors confidence in the integration. The refinery must be managed by experts. This approach may boost the success of the integration due to professionalism. Diversification strategies that involve acquisition of assets may at times reduce shareholders value of particular companies. The mechanisms may only satisfy the decision makers of the organization in the initial stages.
Investors appreciated Delta Airlines acquisition of the Trainers refinery. This aspect meant that the diversification plan increased shareholders value. The integration passed Porters three tests. It passed the aspect of entry test that stipulates that the cost of purchasing the refinery and the take-over for the Delta Airlines must be met by the airlines profits. The diversification passed the better-off test that dictates that the refinery achieve competitive advantage over other refineries in the market due to its association with Delta Airlines.
Deltas diversification decision will be appropriate. First, the Trainer refinery will obtain financial synergy in which the probability of failure of the refinery will be minimal. The sales of the plant will increase hence creating profits for the unit. Delta Airlines will gain a competitive edge over other airlines. The production of gasoline for exchange with jet fuel for Delta Airlines will boost the operation costs of the airlines.
Delta Airlines and the Trainer refinery will pay minimal taxes due to the integration effort. Their values will be merged and taxed as a single income. Delta Airlines will assume control of the market because it will dictate prices of air transport. The organization will also create stiff competition for all airlines. Other airlines will strive to control the industry. Delta Airlines and the Trainer refinery will benefit from shared human resource personnel, ideas and profits.
The companies will also gain from tangible resources like distribution channels, and data. Delta Airlines will benefit from substantial economies of scale like general management issues, purchase of primary inputs for the refinery and reduced transactions expenditure and access to data.
The airline may encounter administrative challenges that may derail its operations management. The difficulty may result from the harmonization of departments of the two organizations. The units may also adopt different strategies of profit maximization. The executive boards of the two companies may need to streamline their human resource and decision making processes.
The decision to acquire the Trainer refinery was an appropriate one for the Delta Airlines because the two companies would benefit from the integration process. The companies may resolve challenges that may arise from the diversification process at the level of the management of the two businesses. The airline may need to continue conducting research on ways of improving the business integration process.
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