I'm sure many of you have seen this, but Delta has been discussing for the past several days a plan to purchase an oil refinery to cut out the middle-man and cut down its fuel bill. More recently, they've been speaking with ConocoPhillips to attempt to acquire a refinery in Trainer, PA -- makes sense considering JFK is a hub and LGA will soon be one.
Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that Delta wouldn't use, Bloomberg reports, citing anonymous sources.Delta's daily 2011 fuel bill was $32 million, and its annual fuel costs reached $11.8 billion last year. The airline uses about 3.9 billion gallons of jet fuel a year. The Trainer deal could save the airline 10 percent on its fuel costs.
This seems like a real power play by Delta, along with a massive capital expenditures bill. I guess I don't know enough about the oil market to make a judgement call on here, but purely from theoretical standpoint, this can go one of two ways for Delta: either they recoup capex costs over time and this ends up being LT profitable, or it this plan creates overstretch and far more trouble than good.
What do you guys think? Should DAL do this? If they do, will others follow suit? What effects will this have on the oil market?
I thought refining margins were very thin. I am surprised that they would be able to save 10% on their fuel costs?
Also, Delta and most of the other US-based airlines are awful at even their core business of operating an airline - i'm sure that they will not do any better operating an oil refinery.
I think that some investment banker made a very good pitch to get them thinking that this is a smart deal...
I don't see it happening, it'll be more trouble than its worth. When you produce jet fuel you also produce a lot of products that they aren't interested in... fuel gas, diesel, LCO, AGO, coke, VGO, etc then they need to find a market for those products and properly balance the yields of the production units by LP modeling. Bottom line is, they would have to "own" the refinery but play almost no part in operating it.
edit: after reading the story a little closer it looks like that's what they're planning
Chem3 is spot on. I'm an eng working for a company that operates most of the refineries in the USA and has a hand in operating power stations is Aus and NZ. So, essentially delta can own the refinery and outsource operations however (to us) and essentially focus on your core game of buying raw and selling refined fuels etc. This is, as you stated, a high volume low margin game which is full of highly specialist players. I am guessing there must be more to this story than meets the eye.
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