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January 24, 2013 8:36 am
Delta Air Lines’ oil refining venture is wobbling on take-off.
The US carrier last year bought a mothballed refinery in a novel attempt to slash jet fuel costs by $300m a year.
But in the first full quarter back in operation, losses at the Trainer, Pennsylvania refinery added $63m to Delta’s fuel bill instead.
The results are in stark contrast to the rest of the US refining sector and will bolster sceptics who say an airline should stick to flying. The poor results came at a time of relatively steady crude oil prices, not the kind of hair-raising volatility that pushed refineries including Trainer to the brink in 2011.
Fuel is Delta’s largest expense, totalling $12.3bn in 2012. The airline justified its $250m refinery investment not so much as a way to hedge crude oil prices – it can do that by purchasing futures – but to better manage the volatile premium which jet fuel maintains over the cost of crude.
This premium, known as the crack spread, has been great for US refineries. Thanks to rebounding domestic crude production, less competition and robust exports of distillates – a fuel type which includes jet fuel – their profits are improving.
This is even true at US east coast refineries that until recently depended on expensive imported crude. The region’s diesel (another distillate) crack spread averaged about $17 a barrel last year, the highest since 2008, Macquarie estimates.
Airlines are generally on the losing end of this equation. The jet fuel crack spread has increased much faster than crude in recent years, and it cannot be economically hedged. Delta sought to capture the crack windfall instead of suffer from it. “Refinery profits will net into fuel expense,” it told investors last spring.
As is now evident, however, refinery losses also add to fuel expense.
Delta this week blamed the loss on superstorm Sandy, which knocked out east coast pipelines and tank terminals and crimped Trainer’s output. This current quarter Delta believes its new refinery will be “modestly” profitable. “We have become more certain of how prudent that investment is for our company,” Richard Anderson, chief executive, said this week.
But in the glitch-prone US refining sector, surprises like Sandy are the rule, not the exception. Delta’s venture had another unexpected development when Jon Ruggles, a senior fuel executive who Platts said “drove the Trainer acquisition”, left the company about two months after the refinery reopened. The oil world will be on the lookout for more turbulence.
The Commodities Note is a daily online commentary on the industry from the Financial Times.
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