Delta Airlines Buys Oil Refinery to Control Fuel Prices

by | May 2, 2012

Delta Airlines has agreed to buy a refinery from oil giant ConocoPhillips in an effort to reduce its $300 million-a-year jet fuel bill.

The airline announced Tuesday that its subsidiary Monroe Energy will buy a Phillips 66 refinery near Philadelphia for $150 million. Under the deal, the airline will receive $30 million in state funds that will be used to create jobs and improve infrastructure. Monroe Energy plans to spend another $100 million to convert the existing infrastructure to maximize jet fuel production, the company said in a statement.

Production at the refinery, which has a capacity of 185,000 barrels a day, combined with multi-year agreements to exchange gasoline, diesel and other refined products from the refinery for jet fuel, will provide 80 percent of Delta’s jet fuel needs in the United States. Under a three-year agreement, BP will supply crude oil and receive the refinery’s non-jet fuel outputs in exchange, according to the airline.

Delta is the first airline to buy a refinery, though it’s not the first end-user to make such an investment. A Reuters analysis notes that Midwest farmers, steel companies and more recently private equity firms have bought into the refining industry.

But the Delta refinery deal was initially met with skepticism by analysts who criticized the airline for jumping into an industry that is not its primary expertise, USA Today reported. And industry insiders joked that a company from the money-losing airline sector would be right at home in the money-losing world of East Coast refining, according to Reuters.

Upon further review, some say the country’s no. 2 carrier may win in the end. They contend that airlines have experience managing high-risk, logistics-intensive industries through downward cycles.

Others view Delta’s purchase as a defensive maneuver to prevent a run-up in fuel costs. According to the Reuters analysis, the refinery’s only other bidders wanted to run it as a terminal, a development that could have slashed East Coast jet fuel supplies by more than a fifth.

Delta also appears to have closely evaluated the opportunity and the risk long before placing a bid on the refinery. Delta sent a team of refinery specialists to examine the plant as early as last November, Reuters reported. The company established its subsidiary Monroe Energy in December 2011.

Nevertheless, the deal isn’t without risks. Major US airlines have suffered losses as rising fuel prices, which account for between 25 percent and 40 percent of their costs, have undercut profits. The east coast refining industry is arguably in a worse position. High-cost imported crude oil, waning local demand and competition from a flood of modern plants that have come online in recent years have squeezed margins. As a result, a quarter of the east coast’s 1.6 million barrels per day of capacity is shut down, according to the Reuters report, which cited US government data.

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