Delta hedges its bet against spike in fuel prices

Delta Air Lines wholly-owned subsidiary, Monroe Energy LLC, has reached agreement with Phillips 66 to acquire the Trainer refinery complex south of Philadelphia.

As part of the transaction, Monroe will enter into strategic sourcing and marketing agreements with BP and Phillips 66.  The acquisition includes pipelines and transportation assets that will provide access to the delivery network for jet fuel reaching Delta’s operations throughout the Northeast, including its hubs at LaGuardia and JFK.

“Acquiring the Trainer refinery is an innovative approach to managing our largest expense,” said Richard Anderson, Delta’s chief executive officer. “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.  This strategy is aligned with the moves we have made to build a stronger airline for our shareholders, employees and customers.”

Derik Andreoli, Ph.D.c. Senior Analyst, with Mercator International LLC, and LM’s energy columnist, noted that Delta will also be a bit sheltered from a price spike should an actual shortage of middle distillates emerge.

“A bad hurricane season could bring on just such a panic. At any rate, Delta will still be paying for oil, but if the price of oil rises more slowly than middle distillates, Delta will make out,” he said. “This is not all that different than playing the spread on the futures market. In both cases Delta benefits from an increase in the price differential between middle distillates and crude.”

After receipt of $30 million in state government assistance for job creation and infrastructure improvement from the Commonwealth of Pennsylvania, Monroe’s investment to acquire the refinery will be $150 million, and Monroe will spend $100 million to convert the existing infrastructure to maximize jet fuel production.  Production at the refinery combined with multi-year agreements to exchange gasoline, diesel, and other refined products from the refinery for jet fuel will provide 80 percent of Delta’s jet fuel needs in the United States.