Hot off the presses: Delta Airlines agreed to purchase an oil refinery from ConocoPhilips near Philadelphia in an effort to lower fuel costs, its largest expense. The price tag? $150 million, about the same cost as two new Boeing 737s at list price. In addition, Delta will spend $100 million to optimize the plant for jet fuel production.
What caught my eye, however, were the fuel savings: $300 million annually once refurbishments are complete. In fact, Delta predicts that refurbishments will be finalized by the end of the 3rd quarter, and 2012 fuel savings will already be $100 million. Let’s put that into perspective. In 2011, Delta spent $11.8 billion on fuel, and if fuel prices remain the same for 2012 and 2013 (I laughed as I wrote that), that would equate to a 0.83% decrease in fuel costs for 2012, and a 2.5% decrease in fuel costs for 2013. Even if prices fluctuate, that’s still a significant savings.
What does this mean? In these days when airlines are solely concerned about their core business, flying people from point A to point B, this move represents a departure from recent practice. Just when I thought airlines were becoming less and less vertically integrated (see outsourcing of maintenance to third parties and manufacturers), Delta pulled a fast one. It’s a gamble, but if Delta can prove that they can control the manufacturing costs of their own jet fuel, then other airlines will definitely jump on-board. Maybe the airlines are finally getting creative and this represents the beginning of a multifaceted approach to controlling costs, rather than just betting on fuel hedges and geopolitical influences.