Delta buys oil refinery in a bid to offset rising fuel costs
— -- Delta Air Lines is buying its own oil refinery, a novel step that it says will shave hundreds millions of dollars off its biggest expense — fuel.
The airline announced Monday that its subsidiary, Monroe Energy, has reached a deal to buy a Phillips 66 refinery in Trainer, Pa. It will pay $150 million for the facility, and get $30 million in state funds designated for better infrastructure and to create jobs.
"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," Richard Anderson, Delta's CEO, said in a statement.
Anderson said the "modest investment," which he likened to the cost of a new wide-body jet, would cut the airline's fuel bill by $300 million a year.
Fuel makes up between 25% and 40% of an airline's costs, and soaring prices in the past several months have dug into industry profits and led to higher fares for the flying public.
The Pennsylvania refinery's output, along with additional jet fuel acquired by exchanging the diesel and other products it produces, will fulfill 80% of Delta's fuel needs in the U.S., the airline said. The purchase of the refinery should be completed by June, it said, with production starting in the following three months.
There are plans to make $100 million in improvements to the refinery to raise the output of jet fuel, and once completed in the fall, Delta said it expected to save more than $100 million in fuel costs this year.
Some analysts cautioned that refineries are hard to make profitable, and the airline is taking on a venture that is not its primary expertise.
"This investment isn't risk free," said Henry Harteveldt, an airline and travel industry analyst. "It's possible that jet fuel costs could fall. And this is clearly not part of the airline's core business."
But he and others praised the purchase as a creative way to deal with an unpredictable and escalating cost.
"The investment is an interesting defensive move," Harteveldt said. "Based on Delta's estimates, the investment should pay for itself in slightly more than one year's time, which means it's a net positive for Delta after that."
Matthew Jacob, senior airline analyst for ITG Investment Research, said the deal "almost seems like the ultimate attempt to try to hedge against rising fuel prices."
In an industry that tends to fall in lock step, whether it's charging for checked bags or carving out premium sections of coach, other airlines may eventually follow Delta's lead.
"If Delta is successful," Jacob said, "this may be something the other airlines can view as a positive test case and try to do, as well."
