Delta Airlines drawing attention with purchase of Pennsylvania oil refinery
An oil refinery in Pennsylvania that was set to be closed has a new lease on life after Delta Airlines bought it to try and bring some stability and cost savings to its jet fuel purchases. Jet fuel accounts for more than one-third of the airline's costs.
Delta Airlines is making a bold, and perhaps risky, move to curb its gas bill.
The airline announced Monday that it had purchased a former ConacoPhillips oil refinery in Trainer, Pa., just outside of Philadelphia. ConacoPhillips had planned to close the plant if it couldn't find a buyer, because of the plaint's diminished profitability.
Delta has said that it spent $180 million on the facility, plus plans to invest another $100 million in upgrading the facility and tuning it to produce the maximum amount of jet fuel possible The state of Pennsylvania is expected to kick back $30 million to Delta, if it meets certain spending requirements at the plant.
Delta is forecasting savings of $300 million per year in jet fuel costs. That fuel accounts for about 36 percent of an airline's costs.
Mary Jane Credeur, reporter for Bloomberg News, said getting into oil refining requires both cash and guts. It, like running an airline, is a tough business to be in, and not one that's been consistently profitable in recent years.
"(Owning a refinery) is something airlines traditionally haven't done, partly because they don't have the money to tie up in that and they've gone with traditional fuel hedges(http://en.wikipedia.org/wiki/Fuel_hedging)," she said. "It's very unusual for crude to have stayed over $100 for as long as it has" — and that's led at least one airline to try and get creative with its jet fuel needs.
But Delta won't just be making jet fuel. In refining a barrel of oil, other petroleum products, like gasoline and home heating oil are also produced. The cost of refining, Credeur said, has gone up almost 70 percent in two years, which has cut into Delta's profits.
"That's part of what Delta is trying to do here, is reduce the volatility of that cost and also guarantee some fuel supply for the northeast and the New York-area airports," Credeur said.
Delta has said it will trade the other oil products with other refinery operators in exchange for more jet fuel. It hopes to get almost 80 percent of its jet fuel needs through trade and what it makes at its own plant, Delta said.
Critics, though, say an airline is ill-prepared to succeed where massive, multi-national oil companies have not. But Credeur said this is less about Delta making money and more about the airline controlling its own costs.
Delta spent almost $12 billion on jet fuel in 2011, nearly $32 million a day. Because it's such a critical cost, it makes sense for Delta to manage that expense as closely as it can.
"It'll pay for itself in the first year, and in the future, they control a little slice of their own jet fuel needs," she said. "And they've got that guaranteed and locked in."
What remains to be seen is if other airlines follow Delta's lead. Either way, don't expect the price of an airline ticket to go down.
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