How Cheap Oil Has Delta Air Lines Jet Fooled
http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/
1/21/2015
In 2012 Delta Air Lines did something strange. It bought an oil refinery. No other airline owns a refinery. But Delta executives, led by CEO Richard Anderson, thought it was time to do something radical about the painful cost of fuel. Back then oil prices were stubbornly high–more than $90 a barrel. Its planes were burning the equivalent of 260,000 barrels a day, representing a third of total costs.
At the time, Delta figured, $2.2 billion of the $12 billion a year it was spending on fuel went to refiners as profit. By making jet fuel in the company’s own refinery, Anderson and his team figured Delta could keep some of that profit for itself. So they plunked down $180 million for an aging Phillips 66 plant in Trainer, Pa., near Philadelphia.
Two and a half years later, “this deal is even more idiotic now than it was then,” says Ed Hirs, an energy economist and lecturer at the University of Houston. Delta has sunk $420 million of capital into the refinery, which has generated roughly $100 million of losses. Is Delta at least getting cheaper jet fuel? Yes, it expects to pay about 50 cents a gallon less this year. But that’s only because oil prices have plunged, which has nothing to do with owning a refinery. Besides, the real test is to compare Delta’s fuel costs to other big airlines. Before the acquisition Delta was sourcing fuel for 9 cents a gallon cheaper than its peers. Its edge today: still 9 cents. Meanwhile, much of its rationale for owning a refinery has disappeared: refiners’ margins have declined, while American crude no longer sells as such a wide discount to imported barrels.
“Even if you can run the operation as well as anyone else, the opportunity cost of the fuel is still determined by the world market,” says Richard Langlois, professor of economics at the University of Connecticut. “It only makes sense if you can run the operation better than others–unlikely for an airline.”
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