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.


What Took Them So Them? please fix

Eric M. Jones.

All airlines have special volume discounts....Enormous discounts. Here is the airline fuel info I published on a while back which is apropos here.

Here are the real figures:
Example; B767-300 269 passengers (24 premium & 245 economy) 340,891 pounds take-off weight cruise fuel flow schedule in pounds/hr. (A gallon of kerosene is 6.8 lbs. and cost about $1.50). Passengers weigh 200 pounds or so. AvFB=lbs./hr average fuel burn.
ACFB=accumulated fuel burn
ACT=elapsed (accumulated) time
Here are realistic figures for a long flight on a B767-300
( ):

H:M Flight Mode Fuel Burn in lbs/hr Accumulated Fuel Burn in lbs.
0:24 Taxi-T.O.-Climb-to 41000 ft. 19605 7842
5:19 Cruising 9034 52267
7:13 Cruising 8824 69151
8:35 Cruising 8333 80590
8:43 Cruising 7906 83385
8:59 Descent 2200 83783
9:15 Approach-landing-taxi 2500 85891

They can make money because: First and Business class are money makers, The maintenance cost of jets/hr. is extremely low. There are some subsidies from governments. They also haul mail and freight. So for a 9hr:15 min. flight, the airplane used $18,947 in Jet-A. Thus the 269 passengers each paid only $70 in fuel. Add on all the extra costs and there is still room to make a profit.

And yes, a gallon of jet fuel is $1.50 when you own the storage and distribution facilities, buy fuel by the million-gallon lots and have a deal with the refinery.
— Eric M. Jones



The current title reads "An Airline Buys an Oil Refinery; What Took Them So Them?" The last word is probably a typo.


"what took them so them"? hmm.

Mike B

What took them so them?

Anyway it would be funny if the airline slowly jet-isons its aircraft operations and morphs into an oil refiner. Sort of how the industrial conglomerate Westinghouse turned into the media company CBS.

Basil White

Note to self: Invent point-of-origin biodiesel distiller to sell diesel fuel to customers at the farmer's market.


The acquisition makes perfect sense and is a logical step in vertical integration.
Hedging against rocketing fuel prices can only take one so far while this move will take them places where they've never been while keeping the price grounded.
Excuse the puns.

dwight schrute

if Delta's concern is managing price risk, there are many ways easier than buying a refinery (and all of the environmental capital headaches) to hedge their price.
with all of the refineries that have shut down on the east coast, I'd be willing to bet (and I don't except on sure things) that Delta is concerned about jet fuel availability in the future not just the price

Mike B

BTW it is worth pointing out that the two east coast refineries that were recently purchased were at a disadvantage due to the continuing price disparity between West Texas Intermediate and North Sea Brent oil benchmarks. The east coast refineries have to purchase their oil on the world market as they are set up to refine light sweeet crude delivered by tanker. Midwestern and gulf refineries can process oil from the new Canadian oil sand fields which is not only heavier and sour, but also subject to transport constraints due to insufficient infrastructure to handle it. This has depressed the price of WTI because its market is effectively captive and thus has given those refiners that can get that oil an advantage.

It's funny because if that oil pipeline Republicans have been promoting ever gets built it might actually raise oil prices as that oil could then be sold on the world market instead of only in North America.



-Penn buys share of oil refinery, expects zero returns-

"$30 million in Pennsylvania state-government aid to help preserve jobs at the site"


This is a bad idea. Delta is taking the one part of outsourcing that makes financial sense and reversing it. Let's bring an otherwise commoditizable service in-house and try to do it better.


I'm having trouble seeing how this would reduce Delta's fuel cost. Practical constraints require fuel to be available at most airports (otherwise one gets into the loop of burning fuel to haul fuel instead of passengers) so a refinery in Pennsylvania isn't going to do much for availability in much of the world. On the other side, the cost of production is going to depend on Delta's cost for the crude oil input.


No, a gallon of jet fuel is not $1.50. If they could buy jet fuel for $1.50, they would be better off just selling it in the open market because oil is worth $105 per barrel today, they can buy jet fuel for $63/bbl, and it is a premium product to oil. Much more profitable than what they actually do with it (40% margins, don't need any unions!).

Eric M. Jones.

"No, a gallon of jet fuel is not $1.50." -Ben

Ben, perhaps not this very day, but all the numbers were true when I wrote this a couple years ago. Oil has it's ups and downs. But you can be sure they have long term contracts, so who knows?...maybe it's even $2.25 a gallon, but I doubt it.

--The point is that it is not hard to calculate the fuel cost of your airline ticket and see that fuel is not the biggest part of the cost.

--The second point is that if you paid for a ticket from Bejing to San Francisco (per this example more or less), you paid only $130 or so for the fuel. This is amazing.

As for buying an oil refinery, I can see the Delta management saying, "Well, we know ABSOLUTELY NOTHING about it, so how hard can it be?"

My bet is that it is a very bad idea. Delta is clueless about this.


Every dollar the Delta owned refinery sells fuel to Delta Airlines below the market price is a dollar of profit the refinery misses by not selling the fuel to another airline at the market price.

When margins fall or become negative, the Delta owned refinery will continue selling to Delta Airlines even though they are lose money on each and every gallon. A "normal" refinery would reduce volume or shut down.

If Delta wants to hedge fuel prices by owning a refinery, they should get into the refinery business rather than operating a captive supplier.

The money in the oil business is in exploration and development, not refining.


Could someone explain to me how this makes sense, please:

"The airline intends to invest $150 million to acquire the complex, ... Mr. Anderson said the assets being purchased are worth $1 billion. …"


Here's a link to a Bloomberg article that explains the economic problems with this idea. In short: Stick with what you do best.


From the Bloomberg article linked to above:

" Delta doesn’t need its own refinery to obtain jet fuel, which is traded in a thick worldwide market, any more than it needs to own a peanut farm to supply in-air snacks."


What a dumb thing for Delta to do. They bought a non-core business with a huge amount of potential liability.


While I agree with other posters that this is outside their core competency, I think it makes sense to see this as a hedge. I was under the impression that there is a limit in refinery capacity allowing this kind of business to be profitable in times of high fuel demand; the very times when jet fuel will be the most expensive and the airline business less profitable.