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Delta buys oil refinery but travelers still pay high prices

With the average price of gasoline hovering at around $3.80 per gallon nationwide, you could be forgiven for thinking that owning a gas station might net you some pretty good perks.

Apparently, executives at Delta Air Lines are having similar thoughts. On Monday, the carrier announced it had purchased an oil refinery just outside Philadelphia in an effort to better control its fuel costs.

Alas, for those hoping that will translate into lower ticket prices, the short answer is you probably stand a better chance of getting a break at the town pump than at the airport.


Nevertheless, Delta executives believe that buying the Trainer refinery is a reasonable response to the challenge of high and volatile fuel prices. “Fuel price is now the No. 1 expense,” Delta CEO Richard Anderson recently told CNBC’s Kate Kelly. “It’s approaching 40 percent [of operating costs].”

According to Anderson, the $150-million purchase — “the equivalent of the list price of a new widebody aircraft” — will save the company $300 million per year over five years. Last year, Delta spent $12 billion on fuel.

Delta Air Lines confirmed it's buying a ConocoPhillips refinery near Philadelphia. Richard Anderson, CEO of Delta Air Lines, offers insight with CNBC's Kate Kelly.

“It won’t help them save money on a barrel of oil,” said analyst Ray Neidl of Maxim Group LLC. “But the jet fuel market is so volatile, this well help stabilize things. It also gives them some insights into fuel markets.”

But as consultant Robert Mann of R.W. Mann & Co., notes, this isn’t the first time an airline has entered the oil business. In the late 1970s, American Airlines bought a pair of oil exploration and development companies, only to sell them off a decade later.

“By the time they sold the entities, they might have produced enough fuel to power one of their 707s,” said Mann, who worked for the carrier during that time. “It didn’t produce much volume and it wasn’t much of a hedge.”

Still, the Delta deal offers some unique advantages. For one thing, the refinery is located in one the carrier’s most important markets and will be able to provide a steady fuel supply to the company’s operations at JFK, LaGuardia and other East Coast airports. According to Anderson, the combination of the refinery's jet fuel production and fuel acquired through agreements with other producers will provide the company with 80 percent of its domestic fuel needs.

For another, ConocoPhillips, the refinery’s current owner, was in the process of idling the plant and reportedly eager to sell. A $30-million incentive provided by the state of Pennsylvania, no doubt, helped move things along.

As for other airlines pursuing similar deals, Neidl is skeptical: “They’ll take a look but this was a unique situation,” he told msnbc.com. “Delta is big in the East and this refinery just happened to come along. It may not work for other airlines.”

Nor are travelers, who are already feeling the pinch of high airfares, likely to get much relief. On Monday, the Department of Transportation reported that the average domestic airfare in 2011 was a record high $364, up 8.3 percent from the year before, and they’re likely to go higher still, regardless of the amount of jet fuel the Trainer facility produces.

“In theory, the cost pressure might be reduced slightly,” said Mann, “but realistically, no one prices on cost; they price on opportunity. So, no, there’s not much in it for consumers.”

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Rob Lovitt is a longtime travel writer who still believes the journey is as important as the destination. Follow him at Twitter.