In a bold move to control costs that, if successful, could force more cautious competitors to follow, Delta Air Lines said that it will buy the Trainer refinery near Philadelphia in the hope of cutting $300 million a year from its jet fuel bill. Delta is paying $150 million, including $30 million in job-creation assistance it expects to get from the state of Pennsylvania. No airline has ever attempted such a strategy.
This risky move comes when rising fuel prices have pushed major U.S. airlines into the red for the first quarter of 2012. At the same time, many East Coast refiners have also been pushed to the brink of insolvency, with a quarter of the region's initial 1.6 million barrels per day of capacity already shut down. Trainer, which has been idle since last year, is one of three refineries in the Philadelphia area that would have been be permanently shut if a buyer hadn't been found. Watch a news report about the unprecedented purchase:Delta has a major hub in New York that it has just expanded. Shutting Trainer would have constrained Delta's jet fuel supply from a plant set up to make twice as much jet fuel as other East Coast plants. Even counting the additional $100 million Delta has budgeted to upgrade the refinery, the cost is tiny compared to Delta's whopping $12 billion jet
fuel bill last year, 33 percent higher than the previous year.
"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," said Richard Anderson, Delta's chief executive officer. "This modest investment (is) the equivalent of the list price of a new widebody aircraft." (Read Delta's press release.)
According to AolEnergy, Robert Mann, an airline analyst with RW Mann & Co. called Delta's move "very creative hedging" of its fuel costs, and said its estimate of saving $300 million a year in fuel costs is "a credible number."
But Mann said that it will take time to see whether Delta's purchase has been a success, but that won't stop some of its competitors "kicking themselves for not being quite so creative" in the meantime. Payback for the investment will be quick. Watch Platt's to see an overview of airline industry energy problems:
fuel bill last year, 33 percent higher than the previous year.
"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," said Richard Anderson, Delta's chief executive officer. "This modest investment (is) the equivalent of the list price of a new widebody aircraft." (Read Delta's press release.)
According to AolEnergy, Robert Mann, an airline analyst with RW Mann & Co. called Delta's move "very creative hedging" of its fuel costs, and said its estimate of saving $300 million a year in fuel costs is "a credible number."
But Mann said that it will take time to see whether Delta's purchase has been a success, but that won't stop some of its competitors "kicking themselves for not being quite so creative" in the meantime. Payback for the investment will be quick. Watch Platt's to see an overview of airline industry energy problems:
Will other airlines follow Delta?
Photo: Delta jet, Delta; Delta CEO, A
target="_blank">PI video; refinery - Phillips66
Comments
Exciting stuff, they might be able to produce up to 80% of their US fuel needs. Interesting to see how all their logistics (partnerships for get crude, swap products regionally, and operate) are developing. Read some articles that while the a first for the airline industry, not the first time people have bought refineries to control energy supplies. Including Dow and US Steel in the 80s and farmers in Coffeeville.
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Thought I would answer the actual question posed. I don't think that there will be any airlines that follow. The traditionally most aggressive risk-taker in the industry has been Southwest and they have been extremely successful using traditional hedging on the futures market, no real reason to change things up there.
For other airlines, matching the alignment of distressed seller+high jet fuel production portfolio+location in major hub is pretty unlikely. And that kind of match is what it would take to make this kind of risk worthwhile. Now if Delta proves this a success in 12 months and the market for refineries remains a buyer's market, then there might be some that take the plunge. But I think this is likely the only one for at least the near term. If you are interested in any more thoughts:
http://szczrob.blogspot.com/2012/05/kinetic-energ...
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Isn't there a European refinery company in bankruptcy right now? Petroplus. Since these refineries are using the same high-end crude, aren't the dynamics similar to the Philly Trainer plant? They can use the same Crack spread tactic, reconfigure and then pumping out higher % of Jet fuel.
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I have not heard of too much trouble out of the European refineries (minus the YPF/Repsol problem - which recently spilled over into ham imports - and the general malaise that is the European financial system). I think there are some factors that might be different enough.
There is a higher percentage of state owned/run refineries in Europe - less likely to get a refinery on the cheap. Their domestic diesel demand is higher, which competes with the jet fuel cut. The markets in Europe are generally a little less flexible, adding further complication to the arrangement. Getting the sweet crude from Africa is a little less complicated politically and logistically for Europe. I don't know the geography of the market, looking into this story Trainer fit so well with its size and location in a hub combined with it relatively high jet fuel capacity. Not sure if there is one in Europe with that good of a fit.
It does look like that overall though, there are similar pressures on European refining and that Petroplus is a Swiss company. There is a refinery near London that might make a decent proxy for Trainer. But it is a little less settled - without the imminent closing (as was the case with Trainer) it might not force a decision from an airline. They can still play the waiting game. Also, there are the proposed carbon emission rules in the EU. Refueling inside the Euro zone might become a major disadvantage.
Even if I were a gambling airline, I might think that the European refining market still has a little bit to go down and while I wait for a better price can see how the Delta arrangement works out. This is all guessing.
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This will be VERY interesting to watch - business models seem to be cyclic - one moment vertical integration is all the rage and the next moment businesses are shedding units that aren't part of their core competencies. This is a pretty major move in vertical integration, it will be interesting to see if an airline company can make it successful.
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I guess the major variable to watch, which motivated Delta's decision, is the "crack spread" for jet fuel. Right now, it's pretty wide - making Delta's move seem pretty smart at the moment. Per Robert, there aren't too many refinery/Airline combos that make the same sense, so there may not be room for a trend to emerge.
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