Strange, But True?

Apr 18 2012 Strange, But True? BY admin TAGS AirlinesDelta

 

We've been following for several weeks the back and forth speculation in the business press about Delta Air Lines getting into the oil business...yes, you read right. The oil business.

This week a credible new organization, Reuters, took the story beyond idle gossip and rumor mongering...

"A deal for Delta Air Lines to buy ConocoPhillips' 180,000 barrel per day refinery in Trainer, Pennsylvania could be announced as early as this week, according to two sources with knowledge of the negotiations. The deal, which could help ease a potential shortfall in fuel in the East Coast this summer, would entail the airline partnering with JP Morgan to help run the idled refinery."

At first blush, the notion of an airline buying an oil refinery may seem like shear folly. Indeed, it may be, but consider the following:

  • The price of fuel is killing the airlines right now. They've raised fares to compensate; they charge for bags; they've reduced the number of flights in the air. Yet, many airlines are expected to report first quarter losses.
  • The cost of fuel is one thing the airlines have little, if any, control over. Wouldn't it be nice to have some control over it?
  • According to Reuters, "Delta spent $12 billion on jet fuel last year, with its average pricing rising by 31 percent to $3.06 a gallon. Last year, the company's aircraft consumed 3.86 billion gallons or just over 250,000 barrels per day of jet fuel."

Would owning a refinery really lower the cost enough to make a difference?

Suppose that owning a refinery lowered the airline's overall fuel cost by just five cents a barrel. Do the math: 250,000 barrels a day, times 365 days a year. That's 91,250,000 total barrels a year. Now multiply that times a nickel. That's a savings of approximately $4.5 million. If Delta makes the purchase, it will be a very interesting experiment.

 

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