Delta buying refinery

Delta Air Lines is buying a refinery in a novel – and some say risky – attempt to slice $300 million a year from its escalating jet fuel bill.

The airline said Monday that it is buying the refinery near Philadelphia for $150 million from Phillips 66, a refining company being spun off from ConocoPhillips. The refinery has struggled to make money, and ConocoPhillips planned to shut it down if it couldn’t find a buyer.

So why is Delta buying it?

Fuel is the largest and most volatile expense for the major airlines. They paid an average of $2.86 a gallon for jet fuel last year, up from $2.09 in 2007, according to statistics from the Bureau of Transportation. Nobody likes to see the price of gas climb, but for airlines consuming billions of gallons a year, it can be downright crippling.

Airlines have been trying to combat the rising fuel cost by purchasing more-fuel-efficient airplanes and experimenting with different types of fuels. But neither is an immediate solution: It can take a decade to modernize an entire fleet, and biofuels, which are made from plants, are not economically feasible. Airlines also try to limit their exposure to big price spikes through a process known as hedging. The catch: If prices fall dramatically, they end up losing a lot of money.

Buying the refinery “is an innovative approach to managing our largest expense,” said Delta CEO Richard Anderson. He said it’s a “modest investment” comparable to buying one new large jet aircraft.

Still, even though fuel has overtaken labor as the industry’s biggest expense during the past decade, no airline has ever bought a refinery.

Refining, the practice of taking crude oil and turning it into fuels, is notorious for boom-and-bust cycles. ConocoPhillips and other oil giants are getting out of the refining business because they haven’t been consistently profitable. Refineries are paying high prices for oil, particularly on the East Coast, where they import a lot of more-expensive oil. At the same time, demand for gasoline has fallen because of the weak economy and because cars and trucks are getting better gas mileage.

As a refinery owner, Delta will still need that more-expensive crude oil to make jet fuel.

“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.”

Ray Neidl, an airline specialist with the Maxim Group, said it’s worth a shot. He notes that for Delta the purchase price is only “about the cost of a widebody aircraft.” Delta could be on the cutting edge.

“If this works, you’re going to see everybody doing it,” he said.

Delta passengers won’t see much if any savings on tickets. The airline took in $33.1 billion in airfares last year. Saving $300 million would lower a $400 ticket by about $3.60.

The deal might benefit drivers more than fliers. If ConocoPhillips had closed the refinery, that would have reduced supplies along the East Coast and possibly led to higher prices at the gas pump.