Delta Airlines considers buying Refinery

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Originally Posted By: Bluestream
They should stick with what they know best; losing money running an airline...


A core competence of losing money transfers well to any industry....
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How is this refined fuel in Pennsylvania supposed to help their global airline costs? It might help their fuel costs locally, but it's not like they can cheaply get their own fuel to Dallas or Los Angeles?
 
Originally Posted By: D189379
How is this refined fuel in Pennsylvania supposed to help their global airline costs? It might help their fuel costs locally, but it's not like they can cheaply get their own fuel to Dallas or Los Angeles?
Originally Posted By: bruno
Trading is widely practiced in the oil industry . It saves transportation costs .


Yup, google has a lot of fiber bandwidth all over the place so they can trade their traffic with other backbones to minimize cost.

I'm not sure how running a refinery will make them any money if they don't own the upstream (drilling, pumping, etc).
 
Looks like Delta isn't the only one interested in the refineries...

Are Financial Firms Looking at Becoming Oil Refiners?

Quote:
The Wall Street Journal reports that Sunoco is currently in discussions with soon-to-be-public Carlyle Group to form a joint venture to keep Sunoco’s 330,000 barrel/day Philadelphia refinery in operation. The reported deal between Sunoco and Carlyle appears to be very similar to the Delta-JPMorgan deal. Sunoco would contribute the Philadelphia refinery to the joint venture in exchange for a non-operating minority stake. The company would have no obligations to support the refining operations. Carlyle would adopt a role similar to Morgan’s proposed role with Delta.
 
Delta closed their deal. Congrats to them for thinking outside the box. Reports are that the acquisition will pay for itself within one year.
 
Note to Delta: Combining two money losing businesses does not make one profitable business. Despite what the public thinks, refining (particularly on the east coast) is a sucky business.
 
Originally Posted By: BMWTurboDzl
Delta closed their deal. Congrats to them for thinking outside the box. Reports are that the acquisition will pay for itself within one year.


Sure. Conoco, who knows the business inside and out, wanted out of this profitable refinery so bad that it gave up the possibility of investing in the refinery to make more jet fuel and sold to delta at a one year payback. Delta sure skunked them. Ha ha. The real motivation for Conoco is likely to get out from under, or at least push into the future, the liabilities associated with cleaning up the environmental contamination around an old refinery.
 
Originally Posted By: BMWTurboDzl
Reports are that the acquisition will pay for itself within one year.


Can you provide a source for those reports?
 
Originally Posted By: Burt
Sure. Conoco, who knows the business inside and out, wanted out of this profitable refinery so bad that it gave up the possibility of investing in the refinery to make more jet fuel and sold to delta at a one year payback. Delta sure skunked them. Ha ha. The real motivation for Conoco is likely to get out from under, or at least push into the future, the liabilities associated with cleaning up the environmental contamination around an old refinery.


That's a very inciteful and good post....

If trading makes this profitable, then it must have been profitable in the first place, and no reason for a sell off.

A 2 year pay back on a new capital job is about what business is after, so I doubt a part of the business would be sold for 1 year.
 
I hope Mr. Delta doesn't mind me posting this information. It's from a internal memo and explains the decision to buy the refinery:

"While Delta continues to build momentum, one of the challenges we face is the impact of high fuel costs on our business. Jet fuel cost Delta more than $12 billion last year and crack spreads, the premium we pay refineries for jet fuel, were $2 billion of that amount. We have seen more than $3 billion of fuel cost increases in the past 18 months.

In the face of historically high fuel prices, we have taken a number of steps to control costs since 2008 including creating an integrated Fuel team, retiring less-fuel efficient planes, installing winglets, strictly managing capacity, using fuel hedges and pricing our tickets to reflect the cost of fuel. But the reality is that crack spreads are the fastest growing part of our cost structure, more than tripling over the last three years.

Today we announced that through a separate subsidiary, Monroe Energy LLC, we have acquired from Phillips 66 an oil refinery south of Philadelphia . We will modify the plant to increase jet fuel production and that fuel will be used for our operations. Net of $30 million in government assistance, we will invest $150 million to acquire the Trainer refinery from Phillips 66 and $100 million to maximize the amount of jet fuel it creates. The Trainer facility will operate separately from Delta through Monroe Energy, overseen by a board of directors and led by a team of experienced refinery managers and operators.

As part of this initiative, we will also enter into strategic partnerships with two of the world’s leading energy companies. BP will supply the crude oil to be refined at Trainer and BP and Phillips 66 will exchange the gasoline, diesel and other non-jet fuel products from Trainer for jet fuel in locations throughout the country. The production at Trainer, combined with the jet fuel received from our partners, will account for 80 percent of our domestic jet fuel needs."

So, when a company spends $12 BILLION dollars a year in fuel expense it's easier to see how removing the middle man can be profitable.
 
Originally Posted By: FowVay
Jet fuel cost Delta more than $12 billion last year and crack spreads, the premium we pay refineries for jet fuel, were $2 billion of that amount.

The reality is that crack spreads are the fastest growing part of our cost structure, more than tripling over the last three years



Crack spreads on jet fuel are up because demand for, and crack spreads on gasoline, are down. Since refineries try to avoid being non-profit organizations, they have to make up the losses on gasoline somewhere. Owning a small refinery does not change that fundamental, nor will BP and Phillips guarantee Delta a price spread between gasoline and jet fuel in the exchanges.

The refinery business is extremely cyclical and buying a refinery based on current high crack spreads of one particular product, does not strike me as great business strategy.

A fool and his money are soon parted.
 
Quote:
According to Anderson, the $150-million purchase — “the equivalent of the list price of a new widebody aircraft” — will save the company $300 million per year over five years. Last year, Delta spent $12 billion on fuel.

http://overheadbin.msnbc.msn.com/_news/2...igh-prices?lite

Might be a good gamble for them. Sounds like it is in the right place at the right time.
 
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Since Delta isnt looking to make a profit on the refinery products necessarily, it may drive down costs far and wide, which would be interesting.

A zero-profit stream, specific product-optimized refinery could really do damage to jet fuel prices Id imagine...
 
It's similar to Delta manufacturing their own aircraft parts. They buy raw material and turn it into expensive components without having to pay a profit to some other company. They have approval from the FAA to do this for their own fleet so long as they don't sell the in-house produced parts to other carriers.

If they have a strong grasp of what it takes to operate a refinery then I think it's a good move for them. They claim that it will meet 80% of their domestic requirement which would be a huge savings. I certainly hope it works out for them!
 
Sounds like they've done their homework and have pros to operate it for them-they won't hit the lottery, but they'll make a few bucks as long as the jet fuel prices stay high.
 
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