* Delta seen looking to bid on oil refinery to hedge costs
* Delta is the largest commercial buyer of jet fuel
By Janet McGurty
NEW YORK, April 4 Delta Airlines,
struggling with high fuel costs, is considering a bid for
ConocoPhillips' idled 185,000 barrel per day refinery in
Trainer, Pennsylvania, according to a source familiar with the
The board of Delta, the second largest U.S. air carrier, has
met twice to discuss a potential bid. It would be an audacious
and unprecedented effort to hedge fuel costs for Delta, the
world's largest commercial buyer of jet fuel, by taking control
of a complex industrial operation in an industry that some major
oil companies are abandoning.
It was not clear how or when a bid could be made, but Conoco
last week extended its deadline for selling the plant by two
months, until the end of May. CNBC reported that Delta could bid
as much as $100 million for the plant, which was idled last
September due to depressed margins and weak demand.
A spokesperson for Delta declined to comment on a possible
bid. A spokesman for ConocoPhillips said the company does not
comment on market rumors or speculation.
"I can tell you that we are continuing efforts to seek a
buyer for the Trainer Refinery," said Rich Johnson, a spokesman
for the company.
In some respects Trainer would be a valuable asset. It is
configured to produce a much higher yield of jet fuel than other
plants, and accounts for a third of the total jet-kerosene
capacity on the East Coast, according to government data. Delta
is the largest international carrier at nearby JFK airport in
New York, and jet fuel is nearly a third of an airline's
But the refinery is also one of three in a 12-mile area near
Philadelphia that have been pushed to the brink of closure by
the high cost of imported crude feedstock and waning demand for
gasoline and heating fuel, their main products. One of those,
Sunoco's Philadelphia plant, will shut in July unless it
finds a buyer; several bidders emerged this week.
Some analysts questioned why a company from a financially
strapped sector would want to enter another precarious industry,
one far from Delta's core operations.
"Even integrated oil companies have moved away from the
downstream," said John Auers, of refinery consultantcy Turner
Mason, listing companies like Marathon, Hess Corp.
, Murphy Oil and ConocoPhillips itself who have
spun off or moved out of refining operations.
"Refining is a volatile business, a capital intensive
business with a lot of uncertainty."
JET FUEL PRODUCERS
Delta spent $12 billion on jet fuel last year, with its
average pricing rising by 31 percent to $3.06 a gallon. Last
year, the company's aircraft consumed 3.86 billion gallons or
just over 250,000 barrels per day (bpd) of jet fuel.
While many airlines use derivatives or even long-term
physical deals in an effort to control their future jet fuel
costs, buying a whole refinery would mark an extraordinary step
to ease the pain of rising prices.
"It sounds like it's the ultimate hedge," said Ray Neidl, an
analyst at Maxim Group.
Fuel is the largest expenditure for an airline at 30.7
percent of operating expenses. According to IATA, an industry
website, jet fuel prices were $3.32 a gallon or $139.30 a barrel
at the end of March, up 2.9 percent from a year ago.
While simply owning a refinery would not protect Delta from
rising crude oil prices, it could in theory allow it more
control over its margins and supply chain.
"DAL is the world's largest commercial buyer of jet fuel,
crack spreads are hard to hedge, and even if DAL can obtain a
consistent $0.05/gal cost advantage over the long run, it's
worth the risk," said Hunter Keay, an airline analyst with Wolfe
Trainer has the capacity to produce over 23,300 bpd of jet
kero fuel, nearly a third of the east coast's total capacity of
73,300 bpd, according to data from Energy Information
Administration, the information arm of the Department of Energy.
Regional supplies have been tight since Trainer shut down at
the end of September 2011. Data on Wednesday showed that
production of jet kero in the Northeast region, known as PADD 1,
stood at 49,000 bpd last week, down from 72,000 bpd last year
before Trainer was idled.
Ratings agency Fitch said that an onset of renewed industry
margin pressure could ensue as jet fuels costs stay high and the
air ravel demand outlook remains uncertain.
"Fitch Ratings sees persistently high fuel prices and
potential difficulties in passing on rising costs through more
fare hikes as the primary risks facing U.S. carriers moving into
the peak spring and summer demand period," the ratings agency
said in a note.
(Additional reporting by Karen Jacobs in Atlanta)
(Reporting By Janet McGurty)