An Airline Buys an Oil Refinery; What Took Them So Long?

(Photo: DixiePistols)

Fascinating article in today’s Wall Street Journal, by Susan Carey and Angel Gonzelez: “Delta to Buy Refinery in Effort to Lower Jet-Fuel Costs.” Coupled with the news of Microsoft bankrolling B&N’s Nook business, the Delta deal shows how far and fast existing business models are shifting, and how vertical integration continues to not be dead.

The Journal piece is a great window into the current state of both the airline and oil industries. Noteworthy snippets:

Delta Air Lines Inc.said Monday that it reached an agreement to buy a refinery complex near Philadelphia in a bid to cut the carrier’s yearly jet-fuel costs by $300 million.

The nation’s second-largest airline by traffic, after United Continental Holdings Inc., said it will purchase the Trainer, Pa., complex from Phillips 66, a refining and marketing business that will be spun off from ConocoPhillips on Tuesday.

Under the deal, Atlanta-based Delta would become the first U.S. carrier to buy a refinery. The airline intends to invest $150 million to acquire the complex, and expects to receive $30 million in Pennsylvania state-government aid to help preserve jobs at the site. The company plans to spend a further $100 million to retrofit the plant to maximize its ability to produce jet fuel, and will enter marketing and sourcing pacts with Phillips 66 and London-based energy company BP PLC. …

“Acquiring the Trainer refinery is an innovative approach to managing our largest expense,” Delta Chief Executive Richard Anderson said in a written statement. “This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast.” Mr. Anderson said the assets being purchased are worth $1 billion. …

In 2011, Delta spent $11.7 billion on fuel, which amounted to 36% of its operating costs. The previous year, when the tab was $2.8 billion lower, fuel consumed 30% of Delta’s expenses.

The airline’s unorthodox acquisition underscores the dramatic transformation experienced by the refining sector in the past decade. Refiners are struggling to adjust to waning demand for motor fuels in the U.S., and the rising cost of crude oil.