How Delta Bought A Refinery And Wound Up Saving American and United A Ton Of Cash
Jessica Kourkounis/ Getty Images
Delta made the acquisition in April of 2012. Since then, the Delaware refinery has focused almost exclusively on supplying fuel for 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 $100 and the price of a barrel of jet fuel is $150, 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 $40 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 $240 to $320 million for Delta alone.
REUTERS/George Frey
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'll 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 $116 million in 2013. However, after a series of upgrades, the airline expects to make a "modest" profit in 2014.
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