Delta Weighs Refinery Bid to Cut Fuel Costs

By ISABEL ORDONEZ, SUSAN CAREY and TOM FOWLER
The Wall Street Journal

Delta Air Lines Inc., DAL -1.05% burdened by the soaring cost of jet fuel, is considering entering the oil-refining business by buying an idled ConocoPhillips COP -1.08% refinery near Philadelphia, people familiar with the matter said Thursday.

The world's second-biggest airline by passenger traffic is in talks with Conoco to acquire its Trainer, Pa., facility at a cost of between $100 million and $150 million, one of those people said. Delta would hire an outside firm to run the refinery.

The move could help supply Delta's operations at New York's LaGuardia and John F. Kennedy International airports, and save it most of the so-called "crack spread," or the difference charged by a refinery between the cost of a barrel of crude and a barrel of jet fuel.

In March, the spread between jet fuel and Brent crude, which is the benchmark that determines the price of most crudes delivered to the U.S. East Coast, was $12.85 a barrel, according to energy consultancy IHS Purvin & Gertz. The Trainer refinery, idled since October, has a processing capacity of 185,000 barrels per day, including 23,000 barrels per day of aviation fuel, according to the U.S. Energy Information Administration.

In addition to jet fuel, a refinery produces byproducts such as gasoline and diesel fuel. Atlanta-based Delta would swap those products with a partner or partners, who would sell them. In return, Delta would be able, through those same partners, to lock in lower jet fuel rates at other airports where its planes refuel.

Delta's unorthodox bid underscores how the airline business is scrambling for innovative ways to lessen the impact of skyrocketing crude prices. Delta spent $11.7 billion last year on fuel for itself and its regional carrier—about 36% of its operating cost, and $2.8 billion more than in 2010. The airline has been among critics of the role that speculators play in crude oil prices.

But refining is also a challenged business, as demonstrated by a wave of refinery closures and divestitures in the U.S. East Coast, which pay a premium for the crude they buy and face dropping demand for automotive fuel. Some analysts were queasy about Delta's potential involvement in what is seen as a capital-intensive and declining industry.

"We are a little uncomfortable about the company going outside its core expertise," said Hunter Keay, an analyst who covers Delta for Wolfe Trahan & Co. "I can't recall any other airline buying a refinery."

The talks have lasted for months, people familiar with the situation said. A deal could come together as soon as the end of April, a person said, but things are very fluid and the entire plan could fall apart as there are other bidders for the facility and there are numerous parties who would have to agree to work with the airline.

The person said that acquiring the refinery isn't critical for Delta's strategy, although it has been studying that possibility for about six months.

Houston-based Conoco declined to comment, but said that the company is "continuing our efforts to find a buyer for the Trainer Refinery." The company, which originally had intended to sell the refinery by the end of the first quarter, says it now hopes to conclude a sale by May.

Source:  http://online.wsj.com