Delta Buys Refinery to Get Control of Fuel Costs
By JAD MOUAWAD
Published: April 30, 2012
Interesting idea. We'll follow it to see if it has the intended benefits
"Delta said that it would spend $150 million to acquire the Trainer refinery, which has been shuttered for six months, after receiving $30 million from the state of Pennsylvania as part of a deal to support job creation.
The airline said it would spend $100 million more to refurbish the plant to increase its output of jet fuel.
Richard H. Anderson, Delta’s chief executive, said the investment was a modest one, equivalent to the list price of a new wide-body plane like a Boeing 777. The company estimated that it would reduce its annual fuel expense by $300 million, once the refinery was refurbished and operating again.
To achieve similar fuel savings, Delta would have to buy 60 new-generation narrow-body planes like the Boeing 737, a capital investment that would total $2.5 billion, according to a regulatory filing.
Delta said it had also struck a three-year agreement with BP to supply crude oil to the refinery....
....Combined with the jet fuel produced at Trainer, Delta said these deals would provide 80 percent of its fuel needs in the United States. The purchase “is an innovative approach to managing our largest expense,” Mr. Anderson said in a statement....
.....These rising fuel costs have forced painful restructurings for airlines in recent years, helping to push many of them into bankruptcy and spurring consolidations across the industry. The airlines have set up elaborate hedging strategies to try to counter the rising fuel costs. But the hedges backfired when crude oil prices rose or fell in unexpected ways. Buying a refinery will not erase Delta’s fuel bill. The airline will still need to buy crude oil at world market prices. But in justifying the purchase, Delta said the cost of manufacturing jet fuel had risen more rapidly than crude oil costs. It also said that demand for jet fuel and diesel, both by-products of the refining process, had been rising steadily in recent years, while demand for gasoline was falling, adding to the pressure on jet fuel prices."