In a move that shows how serious high fuel costs have become for airlines, Delta Air Lines has reached a deal to buy an oil refinery for $150 million.
Fuel is Delta's largest expense, and the airline expects the deal to cut its fuel expense by $300 million annually.
In the unusual deal that ended weeks of speculation, a Delta subsidiary called Monroe Energy LLC reached an agreement with Phillips 66 to buy a ConocoPhillips refinery in Trainer, Pa., south of Philadelphia.
"It’s an important and innovative step at Delta," Delta Chief Executive Richard Anderson said during a conference call briefing on the deal. "We had a great opportunity to acquire a great asset."
Monroe, a wholly owned subsidiary, will receive $30 million in state government assistance from Pennsylvania for job creation and infrastructure improvement. In addition to the $150 million price tag, the company will invest $100 million to convert the facility later this year to produce as much jet fuel as possible.
That production, along with deals to exchange gasoline, diesel and other refined products for jet fuel, is expected to cover about 80 percent of Delta's jet fuel needs in the United States.
A third of the $3 billion increase in fuel costs for Delta last year came from the higher cost of refining, rather than from higher crude oil prices themselves, according to the airline.
In a written statement, Anderson called the refinery purchase a "modest investment," comparable to the cost of a new wide-body airplane.
The deal is expected to close in the first half of this year, and jet fuel production would start in the third quarter.
Amid questions about whether an airline can run a refinery any better than an oil company can, Delta said it expects to get more than $100 million in fuel savings this year and recover its investment in the first year of operations.
With the deal, Delta is taking advantage of an unusual opportunity. ConocoPhillips announced in September that it had begun the process of idling the facility on the Delaware River, about 10 miles from the Philadelphia airport, and was seeking a buyer. It had planned to permanently close the plant if it couldn't make a sale. The United Steelworkers union lobbied to keep the Trainer facility and other refineries in operation.
Monroe is entering into a three-year deal for BP to supply crude oil to be refined at the Trainer facility. The refinery can process crude oil at 185,000 barrels a day, and it will produce about 52,000 barrels per day of jet fuel. Delta said pipelines will be able to deliver the jet fuel to its operations in New York and throughout the Northeast.
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