Delta Considers Buying idled refinery

[AirlinePilot]

I am deeply interested in what folks here think about this bid by Delta..my airline..for the Trainer facility in Philadelphia, PA.

At the moment I am skeptical about the ability to overcome the reasons the refinery shutdown to realize savings on Jet A production. The way I see it, the refinery closed due to its inability to make money and that wont change with it reopening. This is definitely another milestone along our peak oil road. No airline has ever done anything like this that I can recall.

http://www.bloomberg.com/news/2012-04-11/delta-said-to-seek-10-fuel-savings-with-conocophillips-refinery.html

[Plantagenet]

It might work if refineries were making huge profits.

Delta could buy a refinery, run it at cost, and then save some money on the Jet-A they get from their own refinery.

But my impression is that refineries aren't making much money because they are squeezed by the high price they have to pay for crude oil. It doesn't seem like Delta will be able to squeeze out enough savings there to make such a risky move worthwhile.

[Outcast_Searcher]

Airlinepilot, I'm with you on this one. Horizontal integration used to work great before there was so much specialization, and before things were so complex.

With all the competition, Delta (like all the other major carriers) struggles to do what they specialize in well. Why does devoting resources and focus into a completely different (though related, since it is an input) industry help?

It seems to me Delta would be MUCH better off focusing on a strategic plan to effectively hedge the price of their fuel. THAT might actually lead to some kind of competitve advantage -- given the very strong long term correlation between airline profits and the cost of oil.

[dorlomin]

My one thought, if they buy a source of oil to go with that then they may be locking themselves outside of the oil market. Sort of the ultimate long term hedge.

Although in a few years the oil will perhaps be more profitable than the airflights.

[PeakOiler]

My older brother is a pilot for Fed-Ex, and he told me Fed-Ex owns, or at least is heavily invested in, a refinery in Memphis. That was a few years ago, I'm not certain if that's true today.

[AirlinePilot]

It seems to me Delta would be MUCH better off focusing on a strategic plan to effectively hedge the price of their fuel. THAT might actually lead to some kind of competitve advantage -- given the very strong long term correlation between airline profits and the cost of oil.

Delta already does that as most of the major carriers do. The problem comes with the volatility we have seen. Its a bit of a crap shoot as we all well know by now. I think this is basically the same idea, but there is more chance at stability longer term. That only exists if costs can be kept at a level to realize any savings. At this point, I am doubting that.

[OilFinder2]

From what they were saying on CNBC yesterday, it sounds like it's mostly going to be JP Morgan who will operate the thing. IIRC, JP Morgan will help finance the purchase, they'll sell jet fuel at wholesale prices to Delta, and then sell whatever else the refinery produces on the open market. So, JPM only has to put up part of the purchase price, but they'll get to sell the majority of the refinery's products (since jet fuel is only a minority of its output I think) on the open market. Or something along those lines. Basically JPM is trading off reduced prices received for jet fuel in exchange for a reduced purchase price. Delta is putting up part of the purchase price but getting cheaper fuel in return. Plus I bet they're both getting the refinery at a relatively cheap price from Conoco.

I don't know if they can pull it off, but it did sound like an interesting arrangement. And it sounds like JPM is taking most of the risk.

[AirlinePilot]

The deal was inked yesterday. This is going to be interesting. I didnt think vertical integration was an "in" thing in corporate America these days.

[AirlinePilot]

Im still pretty skeptical. Would really like the "industry" types around here to comment.....







Im trying to figure out how you trade jet fuel for gasoline diesel etc. Is this done normally in the energy markets? I understand options etc but this looks to be real assets traded for jet fuel. Seems somehow weird to me.

[radon]

All the good valid reasoning in the above posts: danger of lost focus because of the diversification, squeezed refinery margins disincentivising integration..

So when you think about why such a strange move now two things come to mind:

1. Some interest group within Delta lobbies it.
2. Delta anticipates supply shortages and wants to secure physical supply in case critical shortages arise on the market. They do not want to rely on financial instruments as, justifiably, they anticipate that these instruments will be unreliable in a non-market situation prone to rationing + counterparty risk involved etc. If critical shortage arises, they will have crucial advantage over the competition in the form of secured physical supply rather than contractual paper obligation. Obviously, the clients will prefer Delta to the competition, knowing that they will certainly take off on schedule rather than wait hours at the airport before the fuel arrives. This is similar to China seeking to secure bilateral energy agreements for their supply instead of relying on the oil markets. In other words - peak oil in play. The downside is the cost of diversification, but it might start to make sense for them strategically, given the situation in the market.

This may also be a combination of the above factors.

Obviously, they don't need much of non-aviation fuels, and they have to trade them for aviation fuel out of necessity - this is not a benefit for them, this is more a headache and another cost of the chosen strategy. May still make sense.

[radon]

Also, this may actually be a step towards barter economy, if you think about it. Loss of faith in the paper money. Non-aviation fuels as hard currency with its own intrinsic value.

[OilFinder2]

They're about to start bringing in Bakken oil for this refinery.

Delta Air Lines to bring N.D. crude oil by train to its Trainer refinery

Who knew that the economic solution for the region's beleaguered oil refineries would arrive on a slow train from North Dakota?

Delta Air Lines, the new owner of the Trainer refinery that is scheduled to reopen later this month, on Thursday became the third fuel producer in the Philadelphia area to announce plans to bring in crude oil by rail from the Bakken oil field in the upper Midwest.

Edward Bastian, the airline's president, told an investor conference in New York that Delta plans to replace some imported oil at Trainer with domestic crude brought in by rail. The cheaper North Dakota crude could enhance the airline's plans to produce its own jet fuel, Bastian said.

[...]

[dorlomin]

Very old school vertical integration.