At Delta, we are successfully changing fundamental tenets of how we do business. They range from investing $2 billion into our product and operations to improve the traveling experience to, now, purchasing an oil refinery.
We are already deeply involved in the fuel business, with employees and contractors who manage the purchase and transport of more than 3 billion gallons of jet fuel through a complex series of pipelines and more than 60 fuel tank farms across the country. Jet fuel is the single highest expense at Delta, constituting about 40 percent of our costs.
We spent $12 billion on fuel last year. Of that, $2.3 billion came from the markup producers charge to refine a barrel of oil into jet fuel — or what the industry calls the “crack spread.” It’s the fastest-growing cost in the company.
The crack spread on jet fuel is about $16 a barrel — as much as $40 a barrel in some Midwest areas. But actual cost to the refinery to make crude into jet fuel is about $5 per barrel. Although we have successfully hedged to protect ourselves against the rising price of crude oil, there is little we can do to effectively lower crack spreads, particularly in the Northeast where we have a large presence and several refineries have closed. We needed a different approach.
By acquiring the Trainer facility at a rock-bottom price and spending what amounts to the cost of a single wide-bodied aircraft, Delta expects to be able to save $300 million a year by capturing the crack spreads. These fuel savings are equivalent to purchasing 60 new jets at 10 times the total investment we are making in the refinery.
Our subsidiary, Monroe Energy, will work with BP and Phillips 66 to make Trainer work well for us without distracting Delta from running the airline. Our partners will be responsible for buying the crude oil and selling the gasoline and diesel fuel that will come as byproducts of our jet fuel production.
Through our partnership, we’ll swap those byproducts for jet fuel, effectively giving us 80 percent of our U.S. fuel needs. Jeff Warmann, who will lead the management team at Monroe, has turned around refineries before and improved their performance. We’ll keep most of Trainer’s employees to go along with a team of experienced refinery managers.
Innovations such as buying the oil refinery and repaying nearly $5 billion in debt over the past two years underscores how we’re trying to stabilize Delta’s financial performance to make us more resilient. Our changes have paid off already, as we were solidly profitable last year despite a fuel bill that was $3 billion higher than in 2010.
When Delta is stronger and more profitable, our shareholders benefit through a higher stock price, our customers benefit through our ability to reinvest in our product and our 80,000 employees enjoy the benefits of profit sharing and job security.
The refinery project is just one way we are taking a fresh look at how we fly, and there’s plenty more to come this year. We have set out to make Delta thrive no matter what gets put in front of us.
Richard Anderson is chief executive officer of Delta.
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