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.

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  1. bigdbag says:

    What Took Them So Them? please fix

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  2. Eric M. Jones. says:

    All airlines have special volume discounts….Enormous discounts. Here is the airline fuel info I published on Freakonomics.com 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
    ( http://www.fsbuild.com/features/aircraftperf.htm ):

    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

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  3. Dennis says:

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

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  4. tedder42 says:

    “what took them so them”? hmm.

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  5. Mike B says:

    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.

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  6. Basil White says:

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

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  7. KoketsoM says:

    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.

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    • dwight schrute says:

      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

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  8. Mike B says:

    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.

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