A few months ago I wrote a feature story that took an in-depth look at the future of aviation biofuel, an area of scientific research that is still very much in its infancy but appears poised for major breakthroughs. In the article, I noted that oil price instability is the chief worry of most every airline CFO around the world, and a big reason why Boeing, Airbus and the Pentagon strongly back biofuel production investment.
One airline has come up with a different way of addressing the problem. Delta Air Lines announced this week that it plans to buy an oil refinery near Philadelphia as a novel approach to reducing its fuel costs. Delta will purchase the Trainer refinery for $150 million from Phillips 66, which was just spun off from ConocoPhillips, in a deal that is expected to be finalized by the end of next month.
"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," Delta CEO Richard Anderson said in a statement. "This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast."
Delta plans to spend around $100 million to convert the refinery's existing infrastructure to maximize jet fuel production. The site offers easy access to New York airports and Delta hubs at LaGuardia and JFK, ensuring ample supplies of relatively cheap fuel for many years to come.
ConocoPhillips shut down the Trainer refinery last fall, which was old and in need of upgrades. Now that the facility is being modernized and converted to jet fuel production, the senior management at Delta will sleep easier knowing that they can control fuel costs and ensure uninterrupted supplies of fuel barring only the worst of worldwide calamities.
The move is a smart one, and if it works out the way Delta anticipates, I wouldn’t be surprised to see other major airlines follow suit by buying aging oil refineries of their own. Eventually, such facilities might even be converted for aviation biofuel production, which would solve the big unanswered question of who will produce biomass-sourced fuel for tomorrow’s airline needs.
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It also makes you wonder about the future possibility of biofuel being produced 'locally' by pilot/owner co-ops or FBOs.
Cost of production and economies of scale will always be important factors, but so will the benefits of locally produced fuel and local control of the resource.
I think Delta made a strategic move that will pay off enormous benefits for them in the long run. Think about it, fuel cost for the airlines (for that matter anybody flying aircraft) has increased at minimum 20% annually for the past 5 years (I know it is not exact but close). You can look at Globalair.com’s national aviation fuel price page and watch it go up week after week (www.globalair.com/airport/region.aspx). If they can decrease their cost for fuel by even 10% it will generate 10's of millions of revenue per year! No brainer here. And if the world starts moving toward bio-fuel it can mean even greater savings. Only problem for GA aircraft is we fly 100LL! Hopefully they will come out with an engine that can burn McDonalds grease!
