Seeking Alpha

Delta Air Lines (DAL) pulls the trigger on its anticipated purchase of the Philadelphia refinery...

Delta Air Lines (DAL) pulls the trigger on its anticipated purchase of the Philadelphia refinery from ConocoPhillips (COP) spinoff Phillips 66. The deal includes pipelines to get the fuel to JFK, LaGuardia and other airports. DAL says production at the refinery combined with agreements to exchange refined products from the refinery for jet fuel will provide 80% of its jet fuel needs in the U.S.
Comments (19)
  • NatGasMaverick
    , contributor
    Comments (521) | Send Message
     
    I just don't have a good feeling about this one. I predict it will end badly.
    30 Apr 2012, 05:26 PM Reply Like
  • bigazul
    , contributor
    Comments (963) | Send Message
     
    I'm curious to see how this works out also. "IF" it does work, we may see a new trend.
    30 Apr 2012, 06:51 PM Reply Like
  • Paul Price
    , contributor
    Comments (1504) | Send Message
     
    This deal got $30 MM in subsidies from Pennsylvania taxpayers.

     

    Not a good trend to start.
    30 Apr 2012, 07:47 PM Reply Like
  • kwm3
    , contributor
    Comments (2453) | Send Message
     
    thank you! PA taxpayers are NOT pleased that they're funding this deal for the benefit of DAL and COP--this will be another abject failure of a well-intended program when we see DAL has no business being in refining.
    1 May 2012, 09:21 AM Reply Like
  • rubberoptions
    , contributor
    Comments (400) | Send Message
     
    great call from DAL for thinking out of the box & daring to be different

     

    given that DAL consumes so much jet fuel, there is every justification for being a first mover; coz it's the Lombardian: jet fuel is everything, it's the only thing @ US$110+ Brent crude

     

    as it is, DAL is 40% hedged for its fuel needs and DAL is just trying to get a step ahead on low cost carriers such as Jetblue & Southwest; a legacy airline taking a quantum leap over lcc's

     

    wish DAL every success
    30 Apr 2012, 09:44 PM Reply Like
  • Poor Texan
    , contributor
    Comments (3529) | Send Message
     
    This will either be a great success and transform thinking in the transportation industry or fall flat on its face and take DAL down with it. The western railroads used their land grants to create captive suppliers but eventually privatized them and either sold them or spun them off. Sounds like a good case study.
    30 Apr 2012, 10:17 PM Reply Like
  • robgra
    , contributor
    Comments (361) | Send Message
     
    I don't understand the logic. If fuel prices go up, will they forego profits to sell the fuel to themselves at a discount? Or will they pass the price increase along to their customers? The former makes no business sense, the latter puts them in the refining business, at which tey are not experts, and in a location abandoned by the experts that are selling them the refinery. I think someone has sold them on a rather bad idea, and think Delta will get their pockets picked on this one.
    30 Apr 2012, 09:44 PM Reply Like
  • kmi
    , contributor
    Comments (3995) | Send Message
     
    The issue is the crack spread, the difference between the price for crude to refine, and the price of the refined products, including jet fuel.

     

    They are hoping to provide themselves with wholesale pricing for jet fuel while selling off the other refined products.

     

    The problem with the specific refinery from what I understand is that it's hard to get the cheaper crudes there because there are no direct pipelines, so they have to bring in more expensive crudes priced higher than, for example, the WTI stuff.

     

    If fuel prices go up they aren't impacted because they are buying crude and refining it for themselves, and they can continue to sell other products refined. For example you can't turn a barrel of crude into 100% jet fuel, there are grades f product some of which may be useful and other may not.
    1 May 2012, 01:19 AM Reply Like
  • robgra
    , contributor
    Comments (361) | Send Message
     
    I still see no sense in selling the fuel to yourself at a discount that is greater than the profit you make carrying passengers. The result is that you give potential profit. Why not sell the jet fuel at market, and just not fly? You make more that way.

     

    The refinery was for sale because the experienced oil company running it couldn't make an acceptable profit selling at market. How does Delta expect to fare any better?

     

    I really see no upside for Delta here. JPM is picking their pocket.
    1 May 2012, 10:53 AM Reply Like
  • NatGasMaverick
    , contributor
    Comments (521) | Send Message
     
    Do you not understand the deal structure with JPMVEC? Delta can't get open credit terms to purchase crude. JPM can. JPM will buy the crude, retain title to the crude and operate the refinery in what is a kin to a tolling agreement. JPM sells DAL the jet fuel at the wholesale price and sells remaining jet fuel produced to the market and "market rates". Its win-win for DAL and JPM.
    1 May 2012, 01:37 PM Reply Like
  • flumeride
    , contributor
    Comments (267) | Send Message
     
    I think it is a brilliant idea. Now Delta can control it's fuel costs. The only issue I see is procuring the crude to be refined. Depending on capacity Delta could sell the excess jet fuel to other airlines.
    1 May 2012, 04:20 AM Reply Like
  • kwm3
    , contributor
    Comments (2453) | Send Message
     
    Delta could always control their fuel costs by entering into a long-term supply contract with producers or through derivative contracts. LUV is the most successful airline because they have a master VP who hedges their fuel (he's best in biz). So, controlling costs is not likely to be a justification for such a transaction. I cannot think of why they are doing this, other than the $30 million gift they receive from PA taxpayers.
    1 May 2012, 09:28 AM Reply Like
  • Paul Price
    , contributor
    Comments (1504) | Send Message
     
    Hedging works only if the direction continues on trend.

     

    Many companies lost fortunes hedging fuel cost in early to mid-2008 when oil was shooting up to $148 on the way back to the $30-$40 range.
    1 May 2012, 11:56 AM Reply Like
  • MillTime80
    , contributor
    Comments (9) | Send Message
     
    Does this have anything to do with the fact that COP is crashing in pre-market trading today? I know COP is spinning off Phillips 66 today also, but this was viewed as a positive move by analysts... What happened?
    1 May 2012, 07:46 AM Reply Like
  • Paul Price
    , contributor
    Comments (1504) | Send Message
     
    Today is the ex-dividend date for the spin-off. The 'crash' is not a crash. COP owners from yesterday now own 1 share of COP and 1 /2 share of Phillip 66 for each of their old shares.
    1 May 2012, 08:01 AM Reply Like
  • MillTime80
    , contributor
    Comments (9) | Send Message
     
    Good info Paul. The new shares are showing on my portfolio page now. I didn't realize how the split was going to work. Just simply assumed something had gone wrong with the spin-off. The clarity is much appreciated!
    1 May 2012, 08:42 AM Reply Like
  • maudie
    , contributor
    Comments (470) | Send Message
     
    "The deal includes pipelines to get the fuel to JFK, LaGuardia and other airports." WHAT? Pipelines? Does Big O know about this? I guess there's no water, people, or animals where these pipelines go.
    1 May 2012, 08:12 AM Reply Like
  • flumeride
    , contributor
    Comments (267) | Send Message
     
    The pipelines already exist.
    2 May 2012, 03:09 PM Reply Like
  • NatGasMaverick
    , contributor
    Comments (521) | Send Message
     
    I think everyone has forgotten the JPM component here. DAL is going to be buying jetfuel from JPMorgan Ventures Energy Corp at wholesale prices and it is JPMVEC that gets to benefit from any upside economics in managing the crude source and excess jet fuel at market rates that DAL doesn't purchase.
    1 May 2012, 09:23 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector

Next headline on your portfolio:

|