High fuel costs are the bane of the airline industry, and carriers will do anything to reduce them, whether it's agreeing to billion-dollar mergers or making you pay $20 extra to check in your bag. But Delta has recently hit on a novel, if blunt, solution: It's simply going to buy an oil refinery in Pennsylvania from ConocoPhillips for $150 million. Delta will be the first airline to enter the oil refinery business, and the decision to go where no airline has gone before carries huge risks — and possibly offers huge rewards as well. Is Delta's refinery purchase a smart idea?
Delta could save a lot of money: While Delta will still have to pay market prices for crude oil, the company says it can save $300 million a year in the "crack spread," or the price difference between crude and refined jet fuel, says Mark Trumbull at The Christian Science Monitor. Because Delta is effectively cutting out the middle man, it believes its crack spread will be lower than other airlines, and result in "a sizable chunk of change," even for a company that shells out $12 billion a year, or about a third of its costs, on jet fuel. "In the highly competitive airline business, something like the hoped for 'crack spread' edge can be important."
"Oil prices drive Delta Air Lines to buy its own refinery. Will that work?"
But refining oil is tricky: Refining is a "notoriously difficult business" plagued by boom-and-bust cycles in the oil market, says Chuck Saletta at The Motley Fool. In fact, the refinery Delta is buying is "slated to be closed, due in large part to continuing losses" from volatility in the oil market. The crack spread won't immunize Delta from a spike in crude prices, and there's no reason to "believe that Delta, a company with no refining experience," can navigate such a treacherous industry.
"Delta tries to close the crack spread"
Delta is better suited to oil refining than you think: Delta, like other airlines, knows "a thing or two about managing high-risk, logistics-intensive industries through a slump," says Janet McGurty at Reuters. And the benefits go beyond the crack spread: Delta will control its own supply line, import less expensive jet fuel from overseas, and better serve its main hub of planes in the East Coast. Analysts are "joking that a company from the money-losing airline sector would be right at home in the money-losing world" of refining, but Delta "could have the last laugh."
"Delta's refinery bid looks better on second glance"