Is JPMorgan (NYSE: JPM) Setting Delta Airlines (NYSE: DAL) Up For a Crash?

The devil is in the details.

That's what I thought when I read that Delta Airlines (NYSE: DAL) may be hopping into bed with JPMorgan Chase (NYSE: JPM).

According to various reports, Delta is in talks to purchase the idled "Trainer" refinery facility in Philadelphia with assistance from JPMorgan Chase as its financier.

On the surface, the deal seems to make perfect sense. Jet fuel is very expensive.

Delivering jet fuel to New York Harbor would have cost you $1.94 a gallon five years ago. Today it's $3.12, or 60.82% higher according to Bloomberg.

Owning a refinery would be a good way to lock up supplies and keep fuel costs down in today's world.

It's so smart I'd watch for United, British Airlines and Lufthansa to do the same in short order. Perhaps even the regional carriers will get in on the action at some point, too.

All are "route heavy" on the Eastern U.S. seaboard where many refineries have to pay for more expensive imported Brent crude because they can't access less expensive West Texas blends or alternatives coming from North Dakota shale fields.

But what the frack?

Ordinarily, airlines would simply hedge price increases like this in the futures markets.

So there must be something else at work that would make Delta and presumably other carriers so desperate they're willing to enter the refinery business. After all, it's a tough business -- even for oil companies.

Two thoughts come to mind specifically about Delta: a) its geographic concentration, and b) its credit rating, which stinks, may be so bad the airline can't cost effectively hedge in the open markets.

Few people realize this but several major oil companies, including Sunoco, Hess Corp, Valero and ConocoPhillips -- just to name a few -- are planning to close, idle or otherwise shut down refineries on the east coast.

That would remove 51% of U.S. East Coast refinery capacity from the equation by some accounts.

This means that delivering fuel into the northeast corridor's airports is going to become especially problematic and more expensive.

In that sense, one could argue that Delta is taking prudent steps to secure its own supplies while building in defenses against higher prices ahead.

I can't find fault with that given that every penny increase per gallon costs Delta $40 million more on an annualized basis, according to Bloomberg. I would be thinking along the same lines.

But I don't "buy" it even though the airline spent $11.8 billion on fuel last year and understandably wants to save money.

Here's where it gets interesting (and I get suspicious).

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Ed Proffitt | April 13, 2012

    Thanks for the info…sounds like an interesting ride. Another question…why are so many refineries closing on the east coast, is it just Brent or something else?

  2. Chris Persky | April 13, 2012

    Hmm, I like taking risks so I think i'll throw a few bucks in with Delta just to see what happens. But like I said, just a few bucks, no more than I'd care to part with.

  3. James Lyons | April 13, 2012

    Some year back I had prefered stock with Delta and lost 11,000.00 dollars. I was told by a stock broker how good this was and how safe it was. A year or so later they went belly up and that cost me 11,000. Never again.

  4. Iceobar | April 13, 2012

    Other major carriers are on to their scam …as this savy CEO airline indicated

    “You think you’re going to win, but in the long term you always lose,” Clark said yesterday at the Gulf carrier’s head office near Dubai International Airport. “When we enter into derivatives, betting whatever it may be with counterparties who actually control the price of fuel in the first place, you have to ask yourself, ‘Is that smart?’”

    http://www.bloomberg.com/news/2012-03-21/emirates-says-whole-load-of-airlines-will-fail-in-fuel-squeeze.html

  5. Bigoak | April 13, 2012

    For an "Investment Strategist" there are a lot of questions and "sneaking suspciions" in this story rather than facts or real information. Seems this guy has an agenda.

  6. John Smith | April 13, 2012

    Hedging can smooth out short-term ups and downs in prices but cannot protect against long-term, persistently increasing prices.

  7. David Hazen | April 13, 2012

    I strongly suspect that the so called publishing experts are attempting to drive DAL stock down as low as they can; it’s a No Brainer folks, go figure.

    When DAL is as low as they think it will go, they will be the first to buy as much as they can afford.

  8. fallingman | April 13, 2012

    There is nothing more important to your success in life and business than associating and doing business with people of integrity.

    When you say JPMorgan, does the word integrity come to mind? Hardly. But sleazy does. Loathsome does.

    These people are white collar con men and swindlers, criminal sociopaths who have complete immunity from any substantive prosecution , because they are agents of the Fed. They ARE the Fed, for most intents and purposes.

    Delta would be crazy to have anything to do with them. Just ask Jefferson County Alabama.

  9. omasu | April 13, 2012

    Humm, from what I have read, about derivatives and JPM, and Airlines in general of late, one would have to consider: Can they win the business race each using one crutch & joined at the elbow in the middle?Looks like its' time to leave the party to me, for either way, if they "win"(survive these times)it is gonna be an ugly win, and if they "loose" all the stockholders will be left wondering "what WERE we thinking????"

  10. Hankgh | April 14, 2012

    Rule #1 Never invest in airlines

    Gotto respect warren buffet..the best investor on earth

  11. Robert Grimes | April 15, 2012

    I have followed Fitzgerald for some time now, he is right a lot more often than most, I would say his `agenda` is experience, what is your agenda Bigoak ?, easy to cast aspersions.

  12. victoria ariyo | April 18, 2012

    I will like to the $5 a month to try for 3 months if I like it I will continue with it

  13. Inboedelverzekering | June 11, 2012

    I think this is among the most significant information for me. And i'm glad reading your article. But wanna remark on few general things, The web site style is wonderful, the articles is really nice : D. Good job, cheers

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