Delta Airlines’ announcement last month that they plan to purchase the Phillips 66 refinery in Trainer, Pennsylvania for $180 million caught several aviation and energy insiders off guard. The airline is getting a $30 million grant to assist with the purchase from the state of Pennsylvania and plans to spend $100 million through its Monroe Energy LLC subsidiary to optimize the refinery for Jet-A production.
The endgame here would be obvious for any airline, especially since options to reduce high costs are limited. However, this is an unprecedented move by a transportation company that could end up struggling to mitigate unintended consequences.
This is certainly great news for oil workers in Delaware County PA, since Delta plans to have the refinery back up and running by Labor Day. But the bigger question is what does an airline know about the oil refining industry? Sure Delta has a special division to handle this sort of thing with professionals experienced in energy, however, oil refineries are known to suffer from chronic loses just like airlines.
It is also important to point out that there was a very good reason why the Trainer facility was up for sale in the first place – most of the refineries on the US East coast have dipped in production due to the price of crude and foreign competition.
If you look at the Delta purchase of this refinery more closely though, it begins to look a lot less crazy.
Delta could care less about the historical precedent of “the first airline to directly own a refinery”, but is laser focused on protecting their massive investment in their growing North East operations. After United, Delta is the second largest operator out of the New York City area. Already investing $1.2 billion in terminals at JFK, Delta continues to be in a New York state of mind, injecting further cash in LaGuardia.
The refinery that Delta is purchasing in nearby PA, has the capacity to produce 20% of the region’s Jet fuel and the loss of this refinery would force Delta to import fuel from outside the region at a much higher price.
What makes Delta uniquely attractive for this deal is that the Trainer refinery produces several petroleum products out of which Delta only needs jet fuel. To that end, Delta plans to source the facility’s crude supply from BP rather than current expensive sources in Africa. However, the real deal sweetener is that Delta will trade BP the refinery’s non-jet fuel products for much needed Jet-A at any BP and Phillips 66 outlet nationwide. This supports Richard Anderson, Delta’s CEO claim that the refinery deal would save the airline $300 million annually and meet 80% of its domestic jet fuel needs.
At the end of the day there is no silver bullet to control jet fuel costs. However, with the rising cost of crude and the challenges of hedging, airlines are left with very few options. Delta purchasing the ConocoPhillips refinery was a bold move, but considering what the airline faces in terms of higher fuel costs in the New York area if it closed, an aging fleet, and the potential system wide fuel cost savings, the purchase appears to be the only choice.