Delta (yes Delta!) Buys Oil Refinery for $125M

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    May 01, 2012 10:53 AM GMT
    Indeed - hard to belive, but Delta through its wholly owned subsidiary bought the ConocoPhillips Trainer PA (south of Philly) refinery for $125 million. It is slated to close on or before July 1st. The CEO calculates just this year alone the asset will save DL $100 million. Trivia: why is the wholly owned subsidiary named Monroe Energy LLC?
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    May 01, 2012 2:25 PM GMT
    Interesting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif
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    May 01, 2012 2:29 PM GMT
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif
    No, it will translate to higher profits for Delta.
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    May 01, 2012 3:54 PM GMT
    Makes sense as a hedge; they already buy tons of fuel futures and this is just taking it a step further. If the price of fuel goes up, the airline's costs increase, but the refinery revenue helps compensate. If the price of fuel decreases, the refinery makes less but the airline has fatter margins. Less about being more profitable than being more predictable.
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    May 01, 2012 8:43 PM GMT
    paulflexes said
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif
    No, it will translate to higher profits for Delta.


    Lower tickets prices would do the same thing, as well as improve company image, translating to even more profit in the long term.
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    May 01, 2012 8:47 PM GMT
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    lower? ticket prices are already way too low
    Airline's have some of the slimmest margins in the world: ~5% maybe as high as 10%... it's no wonder so many of them have gone bust leaving how many thousands unemployed?! we should all be paying a lot more to travel than we already are to be honest.
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    May 01, 2012 8:51 PM GMT
    If we are talking Delta Airlines is it because Monroe, LA is where DAL got it start? =)
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    May 01, 2012 9:01 PM GMT
    Air Canada was the first to buy a refinery.... and it proved to be a good deal. Now the other airlines are playing catchup.
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    May 01, 2012 9:01 PM GMT
    k3l3k0 said
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    lower? ticket prices are already way too low
    Airline's have some of the slimmest margins in the world: ~5% maybe as high as 10%... it's no wonder so many of them have gone bust leaving how many thousands unemployed?! we should all be paying a lot more to travel than we already are to be honest.
    Exactly. The deregulation of the airlines is what drove the prices down. Up until then, only the wealthier people could afford to fly, but the airlines made MUCH more money. Now everyone can fly, and the airlines are struggling to stay in business.
  • metta

    Posts: 39078

    May 01, 2012 9:09 PM GMT


    Delta plans to reopen Pa. refinery by Labor Day
    http://www.cbsnews.com/8301-505245_162-57425458/delta-plans-to-reopen-pa-refinery-by-labor-day/
  • Latenight30

    Posts: 1525

    May 01, 2012 9:16 PM GMT
    k3l3k0 said
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    lower? ticket prices are already way too low
    Airline's have some of the slimmest margins in the world: ~5% maybe as high as 10%... it's no wonder so many of them have gone bust leaving how many thousands unemployed?! we should all be paying a lot more to travel than we already are to be honest.


    If you can afford to take yourself, your fat wive and your 4 screaming kids to Disney on Delta, well then just drive cause I don't want you on the flight.
    Flying is a privilege not a right.
  • conservativej...

    Posts: 2465

    May 01, 2012 9:24 PM GMT
    A little brain-power on mahogany row. icon_smile.gif It's a good deal for $150MM plus other costs.

    From Delta's internal website (likely the same in the public release):

    In its next step to address rising fuel costs, Delta Monday afternoon said it has an agreement to acquire the Trainer oil refinery south of Philadelphia. Delta subsidiary Monroe Energy LLC will operate the plant independently from Delta, converting the plant to maximize jet fuel production to supply Delta’s Northeast operations.

    “Today’s announcement is an innovative step that will help us reduce the impact that fuel has on our business,” Richard said in a memo to employees. “This investment is one among many strategic actions we are taking to address our fuel costs and make Delta stronger, more resilient and more profitable. Improved profitability allows for additional investment in our product, greater returns for our shareholders and higher profit sharing for Delta people.”

    Delta will enter into multi-year agreements with Phillips 66 and with BP to source crude oil for the Trainer facility as well as exchange nonjet fuel byproducts of the refining process in exchange for more jet fuel throughout the country.

    The refinery acquisition will save Delta $300 million a year by not having to pay the premium required to convert or “crack” crude oil into jet fuel instead of other petroleum products, such as gasoline. Delta paid $3 billion more for fuel last year than it did in 2010, and of that amount $1 billion was reflected in the additional cost attributed to what analysts call the “crack spread.”

    This acquisition and the exchange agreements to swap refinery byproducts for more jet fuel around the nation will combine to supply 80% of Delta’s domestic jet fuel needs.

    After using a $30 million grant from the Commonwealth of Pennsylvania, Delta will invest $150 million to buy Trainer from Phillips 66. Delta will spend approximately $100 million to improve the refinery and maximize its jet fuel production, which will feed Delta’s operations in New York and around the region.

    “In the face of historically high fuel prices we’ve taken a number of steps to control costs since 2008 including creating an integrated fuel team, retiring less-fuel efficient planes, installing winglets, strictly managing capacity, using fuel hedges and pricing our tickets to reflect the cost of fuel,” Richard said. “But the reality is that crack spreads are the fastest growing part of our cost structure, more than tripling over the last three years.”

    Delta’s fuel bill in 2011 was more than $12 billion, its largest single expense. The company’s hedging strategy and careful capacity planning are aimed at making sure higher fuel costs don’t threaten Delta’s sustainability.

    “We expect the Trainer acquisition to be accretive to Delta’s earnings, expand our margins, and to fully recover our investment in the first year of operations,” said Paul Jacobson, s.v.p. and chief financial officer, in Delta’s press release. “We look forward to closing this transaction and moving quickly to begin capturing its benefits.”

    The acquisition creates about 400 Monroe Energy jobs to operate the Trainer plant. The deal is expected to close in early summer, with the facility expected to be modified and producing more jet fuel later this year. The Commonwealth of Pennsylvania is offering grant assistance to lower the cost of acquiring the plant.
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    May 01, 2012 9:27 PM GMT
    Yeah, I can see it more worthwhile as a hedge, and for predictable availability. It makes no sense to sell the refined product with significant opportunity cost in order to subsidize the airline portion of the business, but it would help even-out revenue.
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    May 01, 2012 9:42 PM GMT
    Latenight30 said
    k3l3k0 said
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    lower? ticket prices are already way too low
    Airline's have some of the slimmest margins in the world: ~5% maybe as high as 10%... it's no wonder so many of them have gone bust leaving how many thousands unemployed?! we should all be paying a lot more to travel than we already are to be honest.


    If you can afford to take yourself, your fat wive and your 4 screaming kids to Disney on Delta, well then just drive cause I don't want you on the flight.
    Flying is a privilege not a right.


    Damm rights
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    May 01, 2012 11:09 PM GMT
    QuickieTI saidIf we are talking Delta Airlines is it because Monroe, LA is where DAL got it start? =)


    You da man! I knew that and said "ah, that makes sense" when I saw the name in todays Phila. Inquirer.
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    May 01, 2012 11:18 PM GMT
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    I imagine not. 100M over what period of time? I think this may be a good move for Delta, but I dont think it will translate into lower fares across the board. If anything DL can keep their fares and increase profit margins.
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    May 03, 2012 12:27 AM GMT
    ZbmwM5 said
    geographic_info_systems saidInteresting. Now, will this translate into lower ticket prices for cost-conscious consumers? icon_idea.gif


    I imagine not. 100M over what period of time? I think this may be a good move for Delta, but I dont think it will translate into lower fares across the board. If anything DL can keep their fares and increase profit margins.


    And thats what they will do. $100M projected just for the rest of the year after they close on it. Projected $300M annually!