In 2012, Supply Chain Matters began commentaries concerning Delta Airlines, specifically its bold supply chain vertical integration move in acquiring its own oil refinery to secure more cost-effective supplies of aviation fuel. Delta reached an agreement with Conoco Phillips to purchase a previously idled Trainer Pennsylvania refinery for $150 million and invest an additional $100 million to retrofit the refinery to optimize its ability to refine jet fuel, while securing additional distribution agreements for the gasoline and diesel fuels produced by the refinery.
This was such a dramatic industry move that we decided to keep our readers posted on updates.
Delta recently announced its earnings performance for the December 2013 ending quarter. Those results included an adjusted $558 million in profits, up from $7 million a year earlier. Total revenues increased 6 percent. Operations at the Trainer refinery produced a $46 million loss for the December quarter and a $116 million loss for the full year. Regarding the Trainer refinery, Delta reported: “While lower crack spreads pressured results at the refinery, they also reduced market jet fuel prices and helped lower Delta’s overall fuel expense.” Refinery operations produced a $46 million loss in the quarter and $116 million for the full year but the airline further indicated that the Trainer refinery is expected to turn a “modest profit” for all of 2014.
By our view, the refinery related results are noteworthy and merit continued monitoring. Delta continues target operating margins between 10 and 12 percent which are essentially the same target as 2012, albeit with more revenues. If Delta can indeed turn a profit in refining jet fuel and other products, while controlling its own jet fuel expenses that would be a significant milestone to its bold vertical integration thrust.