Reports are emerging that Delta Air Lines is bidding for ConocoPhillips's Trainer refinery in Pennsylvania.
As predicted by this editorial team in Aviation News Online on several occasions, airlines owning refineries makes perfect sense. The reality is that there is not nearly enough new refining capacity coming on line and this will without doubt send aviation fuel ever higher and increase the crack spread. However, it makes sense for an airline alliance to club together to purchase an oil refinery rather than a single airline but Delta has at least recognised the problem. Critics of the move have suggested that should Delta win the bid for the Trainer refinery that it will not achieve the hedge it expects. If Delta loses money in high fuel costs, it should gain it back due to the higher refining margins. However, the two are not related and so Delta could lose in both areas as refining margins are depressed currently. That is not expected to last however as even though demand for oil is increasing at pace, refining capacity has not, so Delta could still win from this move. At the very least it will save on transporting costs.
Delta has not confirmed its interest in the refinery but news reports have stated the airline is offering between $100 million and $150 million for the refinery.
The Trainer refinery, which has the capacity to refine 185,000 barrels of oil per day, has been up for sale since September 2011 and bidding remains open up until the end of May.
Because margins on oil refining are low, US and indeed UK, Swiss and Dutch oil companies are all spinning off their refineries, which opens the door for Delta’s peers to follow its lead although they are likely to see how Delta fares first should it win its bid.
We should not underestimate the logic of a move for an airline to own or part-own a refinery. The use of bio fuel is the goal for all airlines but in the interim the crack spread is likely to get very large indeed heading to 2020 as there just are not enough refineries producing jet fuel. It is conceivable that Delta could supply itself with cheap fuel while charging all other airlines full market rate, fair play if you fork-out the money to pay for the installation.
It is even more logical for airline alliances to go after refineries that are located close to their main bases of operation or indeed for airport operators to get involved. BAA for example, if it bid for the troubled Essex refinery of Coryton that bankrupt Swiss firm Petroplus owns, could provide airlines with fuel at its main UK airports…..far-fetched? Not so, look at the logic on this one, an airport operator is able to supply fuel for a captive market, yes the airlines would still have to have choice but BAA could position itself to be the only logical choice for airlines.
One thing is for sure, airlines need to think about the future and bio fuel is not developing fast enough. Delta, if it moves ahead, is on the right track and others should follow as there may come a moment in the not too distant future, where aircraft are grounded due to not being able to get fuel in the right place at the right time.