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
Date Written: August 26, 2018
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
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