Hedging Gone Wild: Was Delta Air Lines’ Purchase of Trainer Refinery a Sound Risk Management Strategy?

45 Pages Posted: 14 Nov 2016 Last revised: 30 Aug 2018

See all articles by Abdullah Almansour

Abdullah Almansour

King Fahd University of Petroleum & Minerals (KFUPM)

William L. Megginson

University of Oklahoma

Leonid Pugachev

University of Oklahoma - Michael F. Price College of Business, Students

Date Written: August 26, 2018

Abstract

In April 2012, Delta Air Lines (Delta) purchased a mothballed oil refinery. We use this case to illustrate when, how, and why vertical integration can hedge input price risk. First, we show that stockholders and creditors expected the move to create wealth. Consistent with their predictions, Delta’s exposure to refining margins, cash flow volatility, cost of debt, and default probability all decreased, relative to peers, post-acquisition. Our evidence is consistent with the refinery influencing Delta’s operating strategies, especially in its most affected markets. The case demonstrates how asset specificity and financial hedging frictions can justify vertical integration.

Keywords: G32, G31, L1

JEL Classification: Financial risk and risk management, Capital budgeting, Industrial organization-Market structure

Suggested Citation

Almansour, Abdullah and Megginson, William L. and Pugachev, Leonid, Hedging Gone Wild: Was Delta Air Lines’ Purchase of Trainer Refinery a Sound Risk Management Strategy? (August 26, 2018). Available at SSRN: https://ssrn.com/abstract=2868734 or http://dx.doi.org/10.2139/ssrn.2868734

Abdullah Almansour

King Fahd University of Petroleum & Minerals (KFUPM) ( email )

Dhahran, 31261
Saudi Arabia

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Leonid Pugachev

University of Oklahoma - Michael F. Price College of Business, Students ( email )

OK
United States

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