xliioper

Um, why is Detroit south of Toledo and about where Cleveland should be?

wetrat0

I'll take a stab at this. Everything you have said is correct, but there is another question at hand: whether the "X amount of fuel" is even produced at all. In other words, with refineries closing down recently, capacity (and consequently supply) has decreased, leading to an increase in prices. By buying and operating the refinery they are increasing refining capacity and increasing supply of jet fuel, which will drive down prices. Thus, we have something more like the following:

Scenario 1: Refinery is closed, supply is restricted and X amount of fuel sells for $1100 on the open market.
Option A-- buy fuel for $1100.

Scenario 2: Refinery is operating, supply is expanded and X amount of fuel sells for $1000 on the open market.
Option A-- use own fuel.
Option B-- sell fuel to AA for $1000.

In Scenario 2, either option costs $1000. But in Scenario 1, there is only one option, and it costs 10% more!

It should also be noted that neither scenario encompasses any externalities, so if there happens to be a disruption in refining capacity elsewhere in the country (or if more oil companies shut down their refineries), both scenarios would change.

This example is not designed to show that Delta made a [good/bad] purchase per se, simply that the situation is not as simple as it seems. The refinery purchase is essentially a giant hedge against decreased capacity.

RatherBeOnATrain

I hate to be the one to break this to you, but the freight trains in the New York City metro area are all burning diesel fuel.

exwannabe

Scenerio 3) JP Morgan wants cover to assist in gamimg the futures market, and is tossing DL $200M or so a year to make their play look legit in a market that might soon have political repercussions against pure speculators. DL actually has little control over anything, and the discount fuel just arrives in NY.

adamj023

Tracks are electrified in the New York City market. But diesel allows more torque which is why they are also often used on trucks so it can pull more. They could always build out an electric train that provides more torque.

But thats another issue. I presume they will be able to pipe the gas throughout the whole area. Streets aren't hard to run pipelines through. Natural gas lines have been replaced now with new PVC pipes in sections for a long time and they still likely aren't even fully finished.

It is a done deal and come September we will see Delta having access to more jetfuel.

While Delta is assuming they will save significant funds here, it is true they will still be subject to the fluctuation of crude oil prices. But in order to sustain their business they need to pay for jetfuel regardless. This way they will be getting access to more fuel since they will be refining more of what meets their actual needs.

http://upload.wikimedia.org/wikipedi...l_Reserves.png

I think Delta found the right method here to sustain its business for the long haul.

motytrah

One wonders why it was Chase and not Goldman Sacks then. I wouldn't have thought chase had it in them to play at that level.

AlohaDaveKennedy

Wait a second here - Refinery+Delta IT=? Anyone else got a sinking feeling about this - I can see all the refinery screens showing no low priced fuel availability for any flights.

adamj023

Back in the days we had the old railroads who built and expanded, then we turned into the modern era with air travel which we take for granted.

And I think it is a great move Delta is buying this refinery. If Delta plays its cards right this will be a significant game changer down the road.

The sad part was really they had to obtain an older refinery to upgrade it to add for more jet fuel.

I don't think may other refineries are for sale and the other airlines are going to have a hard time getting access to those or will have to build out some new facilities from scratch close to their hubs.

The refineries for natural gas and automobile and the like are all well established. The part which was lacking was the jet fuel refineries.

The USA has by far the largest amount of jet fuel produced but I do estimate that air travel is likely to pick up sharply and in fact air travel has been picking up steam.

Delta was getting access to Jetfuel from refinieries just like Trainer in the past. The only thing different is that Delta adds some of its own capital to make more jetfuel at an existing plant.

But unlike other airlines, Delta seems to have an older fleet and seems more intent on spending on small expenditures like this rather than further fleet modernization.

It is planning on modernizing its fleets, just seems like its doing it at a much slower pace than other competitors in the industry which will have more fuel efficient planes than Delta as time goes on.

737-900ER's only have 100 orders, and Dreamliners won't be arriving till 2020. So what we will see is the new 737-900ER fleet along with the Trainer facility.

If there is more profit though and buying Trainer does work, hopefully they will be able to modernize and expand the fleet and grow the business as well down the line when competitive needs require it.

ffI

With Boeing buying old Airbus from China and Delta making jet fuel cheap by increasing capacity, I think the next Kryptonium elite can fly his own A340 with DL jet fuel from JFK to LGA. Anyone want to ride with me?

adamj023

No slots available to fly from JFK To LGA. It is done at times due to repositioning and the like, but it is not allowed for regularly scheduled jet service.

exwannabe

My understanding is that nobody builds new refineries now, they just expand and modernize old ones. NIMBY lives.

As to this plant, it produces a large fraction of kerosine/JF and can deliver direct to NYC airports.Seams like a logical choice.

dcline414

+1 ^

By far the best post yet in this thread!

adamj023

Not against it if you haven't already noticed. One plant happened to be on the market for a good price and Delta acquired it. Will make air travel better for all involved. It is a win for the airline as well as consumers.

Remember, Delta will have the largest marketshare out of JFK + LGA combined. With all that marketshare will need more jetfuel to service the area. and supposedly they will be upgrading the plant to maximize jetfuel production even though it will still produce other fuels which will be traded for jetfuel.

Allegedly . Carlyle Group is considering buying into Sunoco's Philadelphia refinery.

StayingHomeIsBetter

Refineries now typically have computerized control systems. An operator sits in front of a console that graphically depicts the equipment. If he wants to close a valve, he selects the icon for the valve, which brings up a window that allows him to input the command to close the valve.

Can you imagine the DL refinery operator, wishing to close the valve, receiving a response from the computer:
The operator, frustrated as hell, goes to RefineryTalk to post his rant and, not surprisingly, gets 6 responses from DOs (Diamond Operators), all of the nature:

pbarnette

It may have been explained but, as is usual for FT, by people that don't seem to truly understand what they are talking about.

How about you account for Delta's own demand and then tell me how much money is lost? Until DL miraculously stops needing jet fuel, the only net cost (or profit) from this transaction will be the difference between the cost to produce internally and the cost to secure externally.

You erroneously end the transaction flow after the LLC sells the fuel to AA, ignoring the fact that DL then has to buy the foregone fuel at the same market rate they just sold at. Under either scenario, DL is in the same ultimate position.

Heck, by your logic, DL should sell all of their jet fuel even today. After all, they are forgoing cash by putting it into their own planes. They might as well sell the planes too.

Again, this ultimately saves or loses money depending upon whether DL's costs to operate are above or below the portion of the price of jet fuel attributable to the refining process. I have my doubts they will save a lot of money, but your argument about losing out by not selling on the open market is way off the mark.