Delta's refinery is paying off - BIG

[WorldTraveler]

When Delta Air Lines announced the refinery purchase in April 2012, it claimed that the deal would reduce its fuel expense by about $300 million annually. These benefits were supposed to start accruing as soon as the fall of that year.

Yet Delta investors suffered a string of disappointments in late 2012 and early 2013, as everything from bad market conditions to bad weather caused the refinery to rack up losses. In total, the refinery posted a $63 million loss in 2012, followed by a $116 million loss in 2013.

However, the refinery got back on track in 2014, turning a $96 million profit that year. More than 100% of that annual profit came in the fourth quarter of 2014, when Delta's refinery segment posted a record quarterly profit of $105 million.


The improved macro environment for refiners should allow Delta to meet, if not exceed, its $300 million annual refinery earnings projection in 2015. This also means that it will have reversed all of its cumulative losses from 2012 and 2013 and earned back nearly its entire initial investment by the end of the year.

Chalk it up as another win for Delta's farsighted management team.

http://www.fool.com/investing/general/2015/08/27/deltas-refinery-bet-is-finally-paying-off.aspx?source=eogyholnk0000001

For oil producers, or the upstream businesses, low oil prices mean lower profits. But for refiners, or the downstream businesses, crude oil is a cost. So, if crude oil prices are falling faster than the prices of refined products like gasoline and jet fuel, refiners could actually see profits surge.

This is all capture in something called the "crack spread," which is the difference between what refiners pay for the crude oil they bring in and the price of the petroleum product as it goes out. This spread, or refining margin, is hitting multiyear highs.

Fernandez and Raymond explain that part of this margin widening is due to the fact that some large companies refine their own oil.

Read more: http://www.businessinsider.com/why-gas-prices-arent-falling-with-oil-prices-2015-8#ixzz3k2dQVzaE






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yep... some of us saw it even though most here did not.

 

[townpete]

Yes we did....
 
And boy don't they look stupid now eh?

 

[metopower]

Yes we did....
 
And boy don't they look stupid now eh?

What an Eagle eyed comment....thats going to leave a mark.

 

[WorldTraveler]

good to see you around, Meto.

specific to the topic, DL's lower fuel costs and the refinery costs also validate that DL's strategy with the refinery would deliver the same fuel savings as buying 60 new aircraft - and DL said that when fuel prices were much higher than they are now.

and of course DL can't begin to legally claim that it has been responsible for driving down the crack spread for jet fuel but that is exactly what happened, esp. in the northeast. and that was worth hundreds of millions of dollars right off the bat.

oh... and DL's refinery profits do count in DL profit sharing payouts.

 

[topDawg]

Its been very clear that most people who talk negatively about the refinery don't know what they are talking about. 
 
Getting control over the crack spread was a very smart move, imo. 

 

[WorldTraveler]

yes, dawg.

the problem is that most people who talk about the refinery don't understand the concept of the crack spread, that the US is closing refineries, or that jet fuel is a small part of the refining process for most refineries so closing a refinery because US consumption of gasoline is flat or diminishing takes more and more jet fuel off the market - which pushes up the crack spread.

As with so many other types of business, the refinery business is strong and refineries are profitable even while crude oil prices are low.

and DL also has said that they expect to be at investment grade levels within 18 months - an extra $300 million in profits per year not only will help get DL to that goal - which DL employees will share in via profit sharing - but it also is one more way to differentiate DL's profitability which other airlines can't touch.

and the refinery's profitability doesn't even consider if DL returns to having a 5-10 cent fuel cost benefit over its competitors which DL had even when the refinery was losing money as a standalone operation.

 

[topDawg]

yes, dawg.

the problem is that most people who talk about the refinery don't understand the concept of the crack spread, that the US is closing refineries, or that jet fuel is a small part of the refining process for most refineries so closing a refinery because US consumption of gasoline is flat or diminishing takes more and more jet fuel off the market - which pushes up the crack spread.

As with so many other types of business, the refinery business is strong and refineries are profitable even while crude oil prices are low.

and DL also has said that they expect to be at investment grade levels within 18 months - an extra $300 million in profits per year not only will help get DL to that goal - which DL employees will share in via profit sharing - but it also is one more way to differentiate DL's profitability which other airlines can't touch.

and the refinery's profitability doesn't even consider if DL returns to having a 5-10 cent fuel cost benefit over its competitors which DL had even when the refinery was losing money as a standalone operation.

which has been the point all along. 
 
Don't get me wrong, profitability is important but its more important that the bottom line is positively effected.
 
One person told me that its like building a hub, sometimes a single route doesn't make money, but is important to the network.   

 

[LD3]

If refineries are closing as WT states, is there anything stopping other airlines from opening their own?

 

[WorldTraveler]

no there is not.

and if other airlines can find suitable refineries, they could do what DL did.

Part of why Trainer worked for DL is because its output of jet fuel fairly closely matches DL's needs in the NE and Trainer came with a set of pipelines that can be connected to fuel depots at the NYC airports.

If other carriers can find a similar setup that can work, they should go after it.

UA supposedly was looking at a refinery on the Texas Gulf Coast but didn't go with it for one reason or the other.

 

[Kev3188]

One person told me that its like building a hub, sometimes a single route doesn't make money, but is important to the network.

That's a pretty good analogy.

 

[topDawg]

If refineries are closing as WT states, is there anything stopping other airlines from opening their own?

not at all. 
I question if it would really be worth it, maybe because every cent off a gallon of fuel is millions of savings 
 
but with Delta owning the refinery they are doing the other airlines a favor also, because it is keeping the crack spread low. 
 

That's a pretty good analogy.

I thought so. 
 
sometimes we have to remember that the total bottom line is what really matters. If one part of the company, network, department, etc is a money loser but saves the company more money or adds more value to the company than it is losing then its not really a bad thing.

 

[WorldTraveler]

except that there are cost savings beyond just the industry wide crack spread.

DL showed lower fuel costs than the rest of the industry that were attributable to the refinery and not fuel hedges, even while the refinery was not profitable.

The refinery did not have to be profitable for DL to have a fuel price advantage and the fuel price advantage is more than just the crack spread.


specific to a network, the more appropriate analogy is that some routes are started as developmental routes but become profitable - and that is what has happened with the refinery.

It does make money on both a standalone accounting basis and for the lower fuel price it provides to DL.

the refinery is just one of DL's non-passenger transportation profit centers.

 

[WorldTraveler]

based on strong margins in the refining industry, DL is running Trainer well above 100% of capacity in order to cash in on strong summer gasoline demand and healthy refining margins.

DL employees gain profit sharing on Trainer profits

 

[700UW]

Who needs a refinery when you have a KC-10?
 

 

[Kev3188]

Nice! What airport is that, and what's it doing at a regular gate?