Home / Business and Economy / Delta's Refinery Bet: Fuel Cost Hedge Pays Off
Delta's Refinery Bet: Fuel Cost Hedge Pays Off
25 Mar
Summary
- Delta's refinery ownership provides a hedge against rising jet fuel prices.
- The refinery keeps refining profits within Delta instead of going to suppliers.
- Owning a refinery can mute the impact of fuel price spikes for Delta.
Delta Air Lines' 2012 acquisition of a refinery outside Philadelphia, initially viewed as unusual, is now demonstrating significant strategic value. This refinery processes crude oil into jet fuel and other products, allowing Delta to retain refining profits internally.
As jet fuel prices have recently climbed faster than crude oil, widening the "crack spread" – the difference between crude and refined fuel prices – Delta's refinery ownership acts as a crucial hedge. While Delta still pays market prices for fuel transferred to its airline operations, the internal profit generation mitigates the impact of higher market costs.
In 2022, when refining margins surged, Delta reported its refinery lowered its average fuel price by approximately 23 cents per gallon. This reduction translated to substantial savings, showcasing the refinery's capability to cushion against fuel price volatility. The refinery generated $777 million in operating income in 2022 alone.
Conversely, the refinery can become a financial burden when refining margins narrow, as it did in 2020. Despite regulatory compliance costs, which are projected to rise, Delta's CEO stated the refinery provides a "meaningful hedge" on the refining margin, with profits expected to contribute starting in the second quarter.
