Delta Air Lines Proves Desperate Times Require Desperate Measures

Delta Air Lines (NYSE:DAL), adopting a novel strategy to counter volatile prices for jet fuel, has bought itself an oil refinery for $150 million.

Delta announced Monday that its subsidiary, Monroe Energy LLC, will buy the currently moth-balled refinery, located in Trainer, Pennsylvania, from ConocoPhillips (NYSE:COP) and modify it to produce more jet fuel. The modification will cost $100 million and increase the percentage of jet fuel in the refinery’s production from 14 percent to 32 percent.

The crude oil for the refinery would be purchased from BP Plc (NYSE:BP). Refinery products other than jet fuel would be sold back to BP or Conoco, while the jet fuel would be piped out to New York airports LaGuardia and John F Kennedy. Conoco would supply jet fuel in other parts of the country in return for Monroe’s non-jet fuel products.

But Delta may be just swapping its jet fuel price risk with the business risk inherent in refinery operations – known to suffer vicious boom and bust periods. “This business is not without risk,” said Ben Brockwell, pricing director at the Oil Price Information Service. “But they thought this is a risk they’re willing to take.”

However, Delta CEO Richard Andersen had another take on the risk: “I actually think this is a lot less risky than buying 50 new airplanes and spending $2.5 billion in new capital” to expand the fleet, he said.

He may be right. Andersen estimates that the value of the refinery asset may be as much as $1 billion. The icing on the cake is the payback period — Delta estimates it has until the end of the first year of operation.