Just over a month ago, we alerted Supply Chain Matters readers to business media reports that Delta Airlines was in talks to acquire its own oil refinery. Our commentary viewed this development as an interesting play on vertical integration of supply chain. According to media reports, Delta spent $11.7 billion on fuel supplies in 2011 which amounted to 36 percent of its total operating costs.
Last Monday, Delta confirmed that it had reached an agreement with Conoco Phillips to purchase the previous idled Trainer Pennsylvania refinery. The deal calls for Delta to invest $150 million to acquire the complex and invest an additional $100 million to retrofit the refinery to optimize its ability to refine jet fuel. Delta also has plans to enter into marketing and sourcing agreements with both Phillips 66 and BP PLC to exchange gasoline, diesel and other refined products that are additionally produced at this refinery for distribution in other retail markets.
With the acquisition, Delta intends to reduce its annual jet fuel costs by $300 million, along with having the ability to plan on a reliable source of supply for eastern U.S. operational needs. In fact, plans call for the deal to close in the first-half of this year, with production likely to begin in the third quarter, providing Delta an estimated $100 million savings in this year alone. While this timetable seems aggressive, the numbers themselves seem to point toward a healthy return on investment over the long term.
U.S. east coast refinery owners of late have been bailing out of their investments because marketing and refining has become less profitable in the context of a broader business model. Conoco Phillips decided to sell its refinery complex located near Philadelphia in July of last year.
Supply Chain Matters again complements Delta for its bold thinking on the possibilities and outcomes of vertically integrating the biggest component of its supply chain. Process innovation can come from external or internal forces and bold thinking has been the basis of many supply chain capability breakthroughs. Thinking out-of-the-box and turning someone’s perceived problem into a business opportunity is the stuff that motivates business case studies. Perhaps this bold move by Delta is the basis of an industry competitive shift within the airline industry. Then again, it can be another incremental revenue opportunity beyond charging fees for food, luggage and other services fees.
For our part, we will continue to monitor the end-result of this supply chain related initiative.