Delta Air Lines has bought its own oil refinery in hopes of reducing its fuel costs. The airline took an already-closed refinery near Philadelphia off ConocoPhillips’s hands for $150 million and plans to spend $100 million to make it crank out as much jet fuel as possible. It will also continue to make gasoline and other refinery products. The fuel will be sent by pipeline to Delta’s hubs in the Northeast. Although the logic seems obvious, analysts say the move is nevertheless risky for Delta because it will be at the mercy of world oil prices when buying its feedstock. Most airlines try to cushion against big variations in oil prices by hedging their future fuel needs when prices are favorable. Although it seems like a big risk, the experiment has to be viewed in the context of Delta’s staggering $11.8 billion annual fuel bill, and the potential $300 million saving will amount to only a few dollars per passenger flight.
Nevertheless, analysts predict that more airlines will consider the option as fuel costs continue to eat up more of the bottom line. Coincidentally, the oil industry has some refineries on the block. It seems refining is among the most volatile and least profitable aspects of the business and the major companies are shedding refining capacity in the face of reduced demand in the automotive market and cheap imports from Europe.
