Airline Buys A Refinery To Combat Rising Fuel Costs

Delta Airlines has decided on a novel approach to rising fuel costs and has announced the purchase of its own oil refinery. Delta will spend a reported $150 million for the Conoco/Phillips 66 refinery in Trainer, PA. The airline plans to spend another $100 million in improvements to the refinery in order to increase its output of jet fuel. The State of Pennsylvania will kick in an addition $30 million for job creation.

According to a report in USA Today, fuel makes up between 25 and 40 percent of an airline’s costs, and soaring prices in the past several months have cut deeply into industry profits and led to higher fares for the flying public. "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.

Beyond producing its own jet fuel, Delta plans to sell or trade off the diesel, gasoline and other petroleum products it will produce for additional jet fuel. Together these moves are expected to fulfill about 80% of Delta’s fuel needs in the U.S., the airline said.

Some analysts cautioned that refineries are hard to make profitable, and the airline is taking on a venture that is not its primary expertise. But it’s not as if Delta’s upper middle managers are suddenly going to be reporting to work wearing hard hats. The airline is expected to hire a refinery manager to run the unit. "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  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."

The key question now is, in an industry that tends to play a lot of follow the leader, will other airlines follow suit and seek their own fuel production facility? The purchase of the refinery is expected to be completed by June with production starting in the next three months.

FMI: www.delta.com, www.conocophillips.com