Delta Air Lines Inc. (DAL), whose daily 2011 fuel bill was $32 million, may buy a ConocoPhillips (COP) refinery to help save 10 percent on a significant portion of its fuel needs, a person familiar with the matter said.
Talks are under way about an idled ConocoPhillips facility in Trainer, Pennsylvania, said two people who declined to be identified because the discussions are private. Delta would get fuel from Trainer and from other refiners in exchange for products made there that Delta doesn’t use, one person said.
ConocoPhillips plans to shut the Trainer operation unless it can find a buyer by the end of May as tighter profit margins squeeze East Coast refineries. For Atlanta-based Delta, a deal would help shave annual fuel costs that reached $11.8 billion last year for its main jet operations and regional partners, or 36 percent of all spending.
“The question is whether the stress and costs of running a refinery is outweighed by having your own boutique jet-fuel provider,” said Sander Cohan, a global transportation fuels analyst and principal with Energy Security Analysis Inc. in Wakefield, Massachusetts.
Delta seeks to save 10 percent on fuel tied to the Trainer deal, according to the person familiar with the airline’s strategy. Fuel from that refinery and others linked to the agreement would cover some though not all of the needs at the world’s second-largest carrier, said the person, who didn’t have specifics.
“If Delta can get it for a good price and figure out how to use the rest to lower its costs on a certain number of gallons of fuel, then it’s a good idea,” said Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut.
JPMorgan Chase & Co. would help finance the fuel and handle sales of the other products, CNBC reported yesterday, without naming its sources.
“The sales process for the Trainer refinery is confidential and I’m not able to discuss any of the details,” Johnson said in a telephone interview. “We are still in the process of seeking a buyer for the refinery.”
Johnson reiterated Houston-based ConocoPhillips’s intent to reach a deal for the Trainer refinery by the end of next month.
The Trainer facility, in suburban Philadelphia, has the capacity to refine 185,000 barrels of crude per day, according to ConocoPhillips. Gasoline accounted for more than half of the plant’s production capacity as of last year, the company said.
Delta uses about 3.9 billion gallons of jet fuel a year, which translates to about 254,000 barrels a day. A 1-cent a gallon price increase equals $40 million more in costs on an annualized basis. Jet fuel for immediate delivery in New York Harbor has averaged $3.12 a gallon in the past 12 months before today. Five years ago from yesterday, the trailing 12-month average was $1.94.
Buying the plant may help insulate Delta as ConocoPhillips, Sunoco Inc. (SUN), Valero Energy Corp. (VLO), PetroPlus AG (PPHN) and Hess Corp. (HES) close or plan to sell refineries along the U.S. East Coast, in Europe and the U.S. Virgin Islands in response to rising crude prices and waning demand.
The plants are disadvantaged because they pay more for imported crude than other U.S. refiners with better access to growing supplies of oil from shale fields in North Dakota and Texas. Profitability at East Coast refineries fell in 2011 to the lowest point in nine years, according to data compiled by Bloomberg.
Closing all the refineries under pressure in the region would erase more than 51 percent of U.S. East Coast refining capacity, according to data compiled by Bloomberg.