(CBS/AP) — Delta Air Lines Inc. (DAL) said on Monday that it will buy a refinery near Philadelphia in the hope of slicing $300 million a year from its jet fuel bill.
Delta said a subsidiary will buy the Trainer, Pa. refinery from Phillips 66, a refining company being spun off from ConocoPhillips (COP). Delta is paying $150 million, including $30 million in job-creation assistance it expects to get from the state of Pennsylvania.
Delta estimates the deal will cut its fuel bill by $300 million a year.
Delta's Monroe Energy LLC subsidiary will spend $100 million to make changes to the refinery to maximize the production of jet fuel. Even though Delta will make as much jet fuel as possible at the refinery, the oil refining process still produces other products such as gasoline and diesel fuel. Delta said it will exchange those other products for jet fuel, so in effect the Trainer refinery would cover about 80 percent of its U.S. jet fuel needs.
Delta Air Lines Inc. burned almost 3.9 billion gallons of jet fuel last year at a cost of $11.78 billion. Fuel was 36 percent of its operating expense - its biggest single expense. Most other airlines also have fuel as their biggest bill.
Buying the refinery "is an innovative approach to managing our largest expense," said Delta CEO Richard Anderson. He said it's a "modest investment" comparable to buying one new large jet aircraft.
ConocoPhillips and other oil giants are getting out of the refining business by spinning off or shutting down refineries because they haven't been consistently profitable. Refineries are paying higher crude prices, but demand for gasoline has been low because of the weak economy and cars getting more miles per gallon.
Right now, Delta suffers when higher crude prices drive up the cost of jet fuel. As a refinery owner, Delta will still need that more-expensive crude oil to make jet fuel.
Delta said it has sourcing and marketing agreements with BP PLC and Phillips 66. It also said the deal includes pipelines that will help move the jet fuel to its operations in the Northeast, including its hubs at LaGuardia and JFK airports in New York.
Delta said it expects the deal to close by the end of June, with jet fuel production beginning during the third quarter. Changes to expand jet fuel production should be done by the end of the third quarter. Delta said it expects the refinery to pay for itself by the end of the first year of operation.