Monday, April 30, 2012

Delta Buys A Refinery

Very interesting that Delta (DAL) is going forward with buying a refinery in PA. The refinery is located on the Delaware River in Trainer, PA and has a crude oil processing capacity of 185K barrels per day of light, low-sulfur crude oil.

The benefit is that the refinery will provide jet fuel reaching Delta's operations throughout the NorthEast, including its hubs at LaGuardia and JFK. That is at least the theory.

What could go wrong? How much do you want to bet that in 2-3 years, Delta will be paying more for jet fuel than the average airline?

The concept sounds great. One of the highest expenses for airlines is jet fuel and by purchasing a refinery a airline can provide itself with stable supplies. Thats the only hitch, airlines don't have issues with supplies, bur rather costs and jet fuel costs are based on crude oil. Something that a refinery won't actually control.

The part that does make sense is that this was one of the refineries being shutdown and by reopening it Delta might be able to help pressure prices lower by increasing supply of refined products. Does this help them or the other airlines? Now JetBlue (JBLU) will be buying jet fuel from a refinery that no long has Delta as a client.

Delta claims that the refinery will allow it to reduce fuel expense by $300M annually. Anybody got the math on that? If it was that simple to run a refinery than why is everybody closing them in the US? Why isn't every transportation company including other airlines and trucking companies not lining up to buy refineries?

Keeping up with the regulatory changes will be a headache and what happens if a fire closes it for weeks or months. Will Delta be forced into massive buying on the sport market while also absorbing the expense of a closed refinery? This is why somebody very reliant on a product typically isn't locked into one source.

Delta will spend on $150M to buy the refinery and roughly $100M  to convert the existing infrastructure to maximize jet fuel production. Not an insane investment considering the expenses of running a major airline.

My guess is that combining two historically bad businesses won't make a good business. Definitely will be worth watching though.


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