For airlines, the biggest cost of doing business isn’t multi-million dollar planes — it’s jet fuel. Air carriers deal with this in different ways, but Delta Airlines took the unprecedented step of spending $US150 million for an oil refinery.
Delta made the acquisition in April of 2012 through subsidiary Monroe Energy. Since then, the Pennsylvania refinery has expanded production of jet fuel to supply Delta’s operations in New York and Boston.
But here’s where things get interesting.
The refinery has been useful for Delta. But it’s also caused the price of jet fuel to fall throughout the airline industry, according to Vinay Bhaskara, a senior aviation analyst at Airchive.com.
It’s simple supply and demand: by focusing production of the former Phillips 66 refinery on jet fuel, Delta has flooded the marketplace with supply it would otherwise have purchased, helping its competition to save money on fuel.
The profitability of refineries is measured by something called the “crack spread” — the difference between the cost of crude oil and the price of the refined product (in this case, jet fuel). For example, if a barrel of crude oil costs $US100 and the price of a barrel of jet fuel is $US150, the crack spread would be positive 50.
Since Delta bought the refinery in 2012, the crack spread for jet fuel in the U.S. has dropped roughly six points, yielding a savings of $US40 million dollars in fuel costs per point for the airline, Bhaskara told Business Insider. Based on his calculations, this change translates into annual savings upwards of $US240 to $US320 million for Delta alone.
This is exactly what the airline was hoping for when it bought the refinery. In a 2012 interview, Delta CEO Richard Anderson told CNBC owning the refinery would allow the airline to participate in the pricing of jet fuel in the United States and have greater control over that critical business expenses.
Over the past few decades, many airlines in the U.S. have engaged in fuel hedging activities, such as buying jet fuel futures contracts. However, none have followed Delta’s example and purchased a refinery. In fact, according to Platts, competitors like American and merger partner US Airways have stopped hedging on jet fuel while United and Southwest have cut their hedging activity significantly.
With a fleet of more than 700 aircraft, consisting mainly of older and less fuel-efficient planes, Delta benefits from the acquisition for obvious reasons. Delta’s big competitors, United Airlines and American Airlines, won’t reap the same savings.
But they will still save a lot. Bhaskara estimates that it could run into the hundreds of millions of dollars annually.
The refinery hasn’t been a consistent moneymaker for the Delta. According to Philly.com, the facility reported losses amounting to $US116 million in 2013. However, after a series of upgrades, the airline expects to make a “modest” profit in 2014.
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