Unlikely a good move. How can an airline make a profit from an unprofitable refinery when the oil company’s business is refining?
Running the supply, operations, maintenance, and distribution of a petroleum refinery in the northeast of the United States is a complex business. Especially if the refinery is 90 years old, already has environmental compliance issues, and faces the unknowable consequences of future greenhouse gas emissions limits. I suspect that ConocoPhillips knows a bit more about refining than Delta Airlines, and that’s why they put the Trainer refinery on the market.
“How can an airline make a profit from an unprofitable refinery when the oil company’s business is refining?”
By in-housing the ‘Crack-Spread’, and middleman profits.
It also takes a critical supply chain out of someone else’s hands, and puts it in yours, at what you know will be your most profitable hubs, after the slot-swaps.
Seems like a smart move to control a vital part of the supply train for your business.
However, I agree it is a bit risky.
“How can an airline make a profit from an unprofitable refinery when the oil company’s business is refining?”
The article states Delta would retain an outside company to run the refinery, so presumably this company knows what it’s doing, and
Conoco is a huge company and there may be economies of scale reasons for abandoning that refinery, even non-oil related reasons.
I’m just guessing but my bet is Delta is well advised on this and will consider all hazards before taking the plunge.
I’m with you. Upstream vertical integration into the fuel business? That’s just nuts. How far from your core competency can you possibly get?
Remember when Ford ran its own ore docks, steel furnaces, coke ovens, rolling mills, glass furnaces and plate-glass rollers? They also had a tire-making plant, stamping plant, engine casting plant, frame and assembly plant, transmission plant, radiator plant, tool and die plant, and, at one time, even a paper mill. A massive power plant produced enough electricity to light a city the size of nearby Detroit, and a soybean conversion plant turned soybeans into plastic auto parts.
There’s a reason Ford doesn’t do that any more.
They’re not closing the refinery because it was making too much money. They’re closing it because there’s no money in operating refineries.
The East Coast is having a major problem getting crude in to refine. All their crude comes from the middle east and Africa and the price is much higher than WTI.
Operating as a break-even without profit may be more economical than letting refinery close and have even higher fuel charges from Jet Fuel barged in while local demand exceeds capacity.
It may not be economical from a refinery operations point of view, but it may be a cost savings to the alternative for fuel purchases.
Delta Said to Seek 10% Fuel Savings With ConocoPhillips Refinery
http://www.businessweek.com/news/2012-04-11/delta-said-to-seek-10-percent-fuel-savings-with-conocophillips-refinery