Vertical Integration as an Input Price Hedge : The Case of Delta Air Lines and Trainer Refinery

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