Delta Air Lines Fights High Gas Prices By Buying Refinery For $150 Million

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(Image: Stock.xchng)
(Image: Stock.xchng)

BUSINESS

  • Delta expects refinery purchase to save $300 million, provide 80% of US fuel needs
  • Questions around if Delta can successfully manage refinery venture
  • Airlines cope by raising ticket prices, cutting jobs, reducing destinations

With rising fuel prices a major factor in rising airfares, airlines need to be get creative to remain profitable; Delta Air Lines has done just that by purchasing an oil refinery in Pennsylvania.

The US-based airline paid $150 million to Conoco Phillips for the 185,000 barrel-per-day-capacity facility in a deal Reuters calls “the most audacious move yet by an airline trying to save money on fuel costs.”

This first-ever airline purchase of a refinery should save $300 million, Delta says. The purchase along with other agreements should provide 80% of the airline’s fuel source in the United States. Delta has a three-year crude oil supply agreement with BP, which in turn will be refined at the plant.

Delta will also sell some of the jet fuel produced there.

Travel experts question Delta being able to put together a team of managers to run a refinery, which is certainly not among its past expertise. Other observers question how Delta will respond to the seemingly endless fluctuations in energy prices and refined product costs.

There is also the question of time, and buying a refinery may not be a quick solution. "It's clearly a very innovative approach, but I think it will be a number of years before we know whether it actually works out," says airline consultant Robert Mann.

Airlines Raising Tickets Prices

Rate hikes are becoming common, but polls show hikes causes both leisure and business travelers to cut back on air travel spending.

Outside of raising prices, perhaps the most common way to meet rising fuel costs is to reduce the number of flights, which is the approach being taken by Cathay Pacific Airways, among others.

“The airline will also reduce both passenger and cargo capacity, deploy more fuel-efficient aircraft on long-haul flights, speed up the retirement of its older Boeing 747-400 aircraft and put a hiring freeze on new or replacement ground staff,” reports Reuters.

Cutting jobs is another way of coping, with Germany’s biggest airline Deutsche Lufthansa in early May announcing plans to cut 3,500 administrative jobs around the world. The airline says about 2,500 of the planned job losses will be in Germany.

Lufthansa has also cut its capacity expansion plans, according to recent industry news.

Some airlines rely on an even more traditional solution: an emphasis on fuel efficiency. “We continue to believe the best tools for managing the impact of fuel expense are operating a fuel-efficient fleet and using efficient operating procedures, such as single engine taxi,” Allison Steinberg, a senior media analyst for JetBlue Airways, told CBSDC.

“In addition, we continue to manage our fuel hedge portfolio as a form of insurance to help mitigate price volatility and protect JetBlue against severe spikes in oil prices.”

Whether that will be enough remains a question still up in the air.

Key Statistics - Global Airlines (source: MarketLine)

  • The worldwide airline industry grew by 12% in 2010 for a total value of more than $500 billion. The volume of passengers that year was almost 2.4 million.
  • The world airline industry by 2015 will have a value of $714 billion for an increase of 42% since 2010.
  • The world’s airline industry will have a volume of almost 3 million passengers by 2015.
  • Domestic passengers is the largest segment of the world airline industry, accounting for 64% of total volume.
  • The Americas represents over 44% of the world global industry.

By David Wilkening for
David Wilkening is a former newspaperman who worked in Chicago, Detroit and Orlando. He now specializes in travel and real-estate business writing.

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