Delta Refinery Q&A
NEW YORK—Delta Air Lines says it is buying an oil refinery for $150 million, a move it hopes will save $300 million in fuel costs.
It's the first time an airline has bought a refinery and taken over its own fuel production. The refinery, located outside Philadelphia, is currently owned by a unit of ConocoPhillips.
Q: Why is Delta buying the refinery?
A: Fuel is the largest and most volatile expense for airlines. By owning a refinery, Delta is ensuring itself a steady supply of fuel and possibly more control over sudden price swings. The airline's planes burned through 3.9 billion gallons of fuel last year, costing the airline $11.8 billion -- 36 percent of its operating expenses.
Q: Why is ConocoPhillips selling its refinery?
A: The refinery has struggled to generate profits. The company won't break out the financial performance for the Trainer, Pa., facility, but in September the refinery said it had been dealing with "severe market pressure for several years." The company cited weak demand for gasoline and other refined fuels. It also said the refinery had to deal with especially stringent and costly regulations. The refinery also has higher costs: It uses a great percentage of expensive, foreign crudes than Gulf Coast refineries.
Q: If buying a refinery is such a good idea, why hasn't an airline done it before?
A: Owning a refinery comes with risks. Some oil companies are getting out of the business because it's notorious for rapid booms and busts. It's also capital-intensive, meaning it takes a lot of money to operate. Until recently, many airlines didn't have enough spare cash to buy new airplanes.
Q: How much does Delta think it will save on fuel, and will it pass those savings along to consumers?
A: The airline estimates an annual savings of $300 million. Delta could take some of that savings and lower airfares, but most passengers wouldn't notice. The airline took in $33.1 billion in airfares last year. Saving $300 million would lower a $400 ticket by about $3.60.
Q: Could this benefit drivers?
A: Yes. If Delta hadn't bought the refinery, ConocoPhillips would have likely closed it. That would have further reduced supplies along the East Coast. Gas stations would have made up for the difference by buying more gasoline and diesel from far-away refineries in the Gulf Coast and United Kingdom. The longer distances could raise the risk of supply delays and other problems following major storms that disrupt shipping. That could cause price spikes at the pump.