An unusual story surfaced this week, stating Delta Air Lines has bid on a now-closed Pennsylvania-based oil refinery that ConocoPhillips has been trying to sell. UPDATE (5-15-12): The $150 million acquisition is now said to be a done deal.
UPDATE (11-1-13): According to media reports, the refinery turned a profit in the third quarter of this year.
Listen as analyst Rick Seaney tells Anne McDermott about the not-so-distant past when oil was $8 a barrel:
Will Delta Get into the Oil Business?
While such an acquisition by a fuel-hungry entity like an airline may seem a good idea at first glance – after all, the rising cost of oil has hurt industry profits – experts say running an oil refinery is as difficult as – well, running an airline.
And yet, as air travel analyst Rick Seaney said, “I find this fascinating.”
Airline Could Save on High Cost of Jet Fuel
Seaney actually began his career in the oil and gas industry (he was hired by Mobil while still in college) before diving into the air travel industry to mass an immense database of current and historical airfares in order to help travelers find the cheapest flights available. So the airfare expertis uniquely qualified to evaluate the concept of a refinery-owning airline and offered this possible scenaro: “With fuel costs similar to labor today coupled with the volatility of fuel hedging programs — it makes sense for a jumbo sized airline to investigate moving down the energy food chain in search of cost savings – add in a sprinkle of new fuel efficient aircraft and you have a recipe for better airline health”.
The problem is, refineries are on the block because refining oil is a tough business – as The New York Times reports, “they are not competitive.”
Airline + Refinery: Crazy or Smart?
So is a ‘Delta buys refinery’ scenario – as a way to cut its fuel costs – a plausible one? Seaney said the problem is while this might be useful for the airline’s needs, it is likely that for any large refinery only part would be dedicated to kerosene jet fuel, so whoever owns it would have to devote a some portion of its capacity to traditional markets such as gasoline, heating oil, plastics and other oil-based refined products and that’s “been a difficult business recently.”
Seaney adds, the scenario isn’t wholly implausible – and he gives Delta high marks for thinking outside the traditional cost-cutting box – even as he looks forward to the next move in this particular dance.