Resource Effectiveness

Delta Airlines buys oil refinery

Delta Airlines has agreed to buy an oil refinery in Pennsylvania from ConocoPhillips for $150 million, and will invest another $100 million in infrastructure adjustments. The capacity of the refinery is 185,000 barrels per day, and should cover 80% of Delta's jet fuel needs in the United States. The deal includes multi-year agreements with ConocoPhillips and BP, on supply of crude oil, and exchange of non jet fuel products from the refinery (such as diesel and gasoline) for jet fuel.

The press release mentions an annual saving of $300 million, which would be equal to a 120% return on investment in one year, which is remarkable to say the least. Especially considering the fact that ConocoPhillips would have shut down the facility, had a buyer not been found. Why would Delta be able to run a refinery so much better than an oil company can?

In any case, this is an interesting if puzzling example of a company engaging in backward integration, in an attempt to control and reduce its fuel cost, which represents no less than 36% of its operating cost.