5/9: Delta buys a refinery

Moderated by Rick Badie

Delta has bought an oil refinery in suburban Philadelphia to cut fuel costs. The world’s second-biggest airline estimates the in-house oil provider will save it $300 million on its annual fuel bill, which hit $12 billion last year.

Today, Delta CEO Richard Anderson explains the purchase while an airlines analyst deems it an interesting experiment. Also, the president of the American Fuel & Petrochemical Manufacturers writes about  how refiners are being squeezed

10 comments Add your comment

LB Roofing

May 10th, 2012
10:43 am

I didn’t think refineries were allowed on US soil (isn’t that why we’re shipping oil to Mexico to be refined)?

Vonzella

May 9th, 2012
12:05 pm

Now Exxon needs to start an airline.

Bob Loblaw

May 9th, 2012
9:48 am

Does this mean Delta won’t need any fuel tax credits anymore?

jimp

May 9th, 2012
9:18 am

Great idea! The Gov let all of the oil companies merge and the price of oil and gas went up so high their largest customers decided they needed to get into the business themselves! You will see companies like UPS and FedEx getting in the oil business if this works out.

Poor Boy from Alabama

May 9th, 2012
8:54 am

This will indeed be an interesting experiment. I’d be concerned if I were a Delta shareholder. Richard Anderson suggests savings of $16 per barrel of jet fuel (just under 40 cents per gallon) while an independent analyst pegs the savings at 19 cents a gallon. It would be nice to understand why those estimates are so far apart.

Part of the problem may be the way Delta thinks about refinery economics. The reality is that a barrel of crude yields a slate of products that impact the ultimate “crack spread” – the difference between the cost of a barrel of crude and the sum of the revenues a refiner can get for all the various products that come out of a refinery. Even if Delta can make money on jet fuel, how will they do with solvents, gasoline, lubricants, heating oil, asphalt, tar, and all the other stuff that comes out of a barrel of crude? Are they prepared to make the investments necessary to conform to environmental regulations? These are the kinds of things that will determine the attractiveness of the deal?

Running a refinery in the Northeast is incredibly difficult these days. Both Sunoco and ConocoPhillips are heading for the exits. Common sense makes one wonder why Delta thinks it can make money on a refinery when an established oil company couldn’t. Let the games begin.

Ken

May 9th, 2012
7:47 am

Smart business.

dc

May 9th, 2012
7:45 am

Like any “captive”, this operation will get fat and lazy….. very strange business strategy.

nelsonhoward

May 9th, 2012
4:48 am

Delta will not use all the fuel refined. If the cost of crude drops they will lose big time. A lot of refineries have been going out of business.
However, if prices escalate they will make a lot of money.
Out in the midwest homeowners have been putting derricks in their backyards.
The latest cost saver for energy are windturbines[generators] on top of the houses. They cost $12,000 and the cost is recovered quickly by selling access electricity to the electric co.

ByteMe

May 8th, 2012
9:42 pm

Saving less than 3% on that expense with the risk of losses and loss of business focus as well as environmental risks for any errors they might make running the plant?

Dumb. In keeping with this experiment, maybe they’re going to buy a tire company next, with all those tires the planes need. And then an advertising firm. And so on.

Just dumb. Smart businesses focus on what they need to do best.

Out by the Pond

May 8th, 2012
9:01 pm

Vertical integration lives