The Gate reported in April earlier this year that Delta Air Lines was considering the purchase of an oil refinery, which was considered an unusual business transaction for a commercial airline — and a risky one at that.
Many of the problems associated with owning an oil refinery are considered outside of the scope of resolving issues with operating an airline. For example, maintenance of an oil refinery can be quite costly and is different from maintaining aircraft — although it may not be all that different from maintaining supplies in fuel tanks currently owned by Delta Air Lines. One might even venture to say that Delta Air Lines should limit itself to what it knows and does best: transporting passengers and cargo by air to destinations worldwide, which it does successfully.
However, since Delta Air Lines purchased the oil refinery in Trainer, Pennsylvania and operates it under Monroe Energy LLC — a wholly-owned subsidiary of Delta Air Lines — it appears that the gamble is paying off.
While Delta Air Lines proudly displays its first output of jet fuel at its world headquarters in Atlanta — I have not seen it yet but I visit Delta Air Lines often enough that I will eventually see it — its bottom line is starting to show signs that Delta Air Lines is not only saving money, but also profiting as a result.
According to The Wall Street Journal, Delta Air Lines has invested $180,000,000.00 on the acquisition of the oil refinery, plus an additional $100,000,000.00 on upgrades and improvements aimed at maximizing the production of jet fuel — yet it expects to save approximately $300,000,000.00 per year, meaning that the oil refinery will pay for itself within a year, plus a twenty million dollar surplus.
Delta Air Lines consumes between 260,000 and 300,000 barrels of jet fuel per day worldwide and reportedly spent $11,800,000.000.00 — yes, that is $11.8 billion — on jet fuel in 2011. The oil refinery is expected to eventually produce 52,000 barrels of jet fuel per day, with 70 percent of the output of the oil refinery producing such refined products as gasoline and diesel fuel, which will be traded with certain oil companies in exchange for additional jet fuel. Jeffrey Warmann, who is the chief executive officer of Monroe Energy LLC, reportedly said that Delta Air Lines “expects to realize a 12-cent-per-gallon price advantage over competitors, while hedging strategies have historically produced only a two-cent price advantage.”
Despite oil refineries being vulnerable to extreme inclement weather such as hurricanes, the oil refinery in Trainer was operating through the historic storm known as Sandy. Although pipeline outages hindered the transport of refined oil products, it was a temporary situation with minimal impact on the production of products by the oil refinery. While Delta Air Lines may have reportedly lost approximately $20,000,000.00 due to the cancellation of flights as a result of the storm, the fuel produced by its refinery purportedly commanded a premium price due to the fuel shortages experienced in the northeastern United States, which may have helped mitigate that loss.
Was its purchase of an oil refinery a brilliantly successful move by Delta Air Lines? It initially appears to be so but remains to be seen over the long run — but it has reportedly prompted Jeff Smisek, who is the chief executive officer of the parent company of United Airlines, to consider purchasing an oil refinery.
What are your thoughts?