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Delta Air Lines - Getting Refined

|Includes: Delta Air Lines, Inc. (DAL)

Thought this was interesting:

AP:

Delta Air Lines (NYSE:DAL) is doing what anybody with a huge gas bill dreams of doing - buying an oil refinery to make its own fuel.

Delta said Monday that it will pay $150 million for a refinery near Philadelphia that is being sold by division of ConocoPhillips. It's aiming to slice $300 million a year from its jet fuel bill.

Jet fuel is the refinery product that garners the fattest profit margin, "and they're taking it from airlines," Delta CEO Richard Anderson said.

It's the first time that an airline has taken such a bold step to control escalating fuel costs. But it doesn't come without risks. Fuel refining is volatile and expensive business.

"If this works, you're going to see everybody doing it," said Ray Neidl, an airline analyst with the Maxim Group.

Delta can't just buy the refinery and pump out nothing but jet fuel. Refining crude oil yields different products - including diesel fuel, gasoline, and jet fuel - at different points in the process.

But Delta did say it plans to spend $100 million to modify the refinery in Trainer, Pa., to maximize the amount of jet fuel it produces. Jet fuel is currently 14 percent of the refinery's output, according to Delta. It plans to boost that to 32 percent.

Here's how it will work: Delta subsidiary Monroe Energy LLC will buy and run the refinery and will get crude oil from BP PLC. The refinery has access to pipelines that can take jet fuel to New York, where Delta has hubs at LaGuardia and John F. Kennedy airports.

The gasoline, diesel fuel and other products the refinery makes will be swapped with BP and the ConocoPhillips division, Phillips 66, for jet fuel to be delivered to Delta elsewhere in the U.S. Delta aims to fill 80 percent of its U.S. fuel needs this way.

Article

When you think about it, becoming more vertically integrated makes sense. You see the same thing with many resource intensive industries (steel being a good example) as they attempt to control their feedstock/input prices. If this works, look for other to follow suit. For an airline, this is out of the box.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.