Back in 2012, Delta Air Lines bought a creaky Pennsylvania refinery that many in the industry thought was a money pit. As Alison Sider reports in the Wall Street Journal, that unconventional bet is looking pretty smart at the moment. With jet fuel prices roughly doubling since late February because of the Iran war, Delta says the plant that processes crude into fuel will lift its expected second-quarter earnings by about $300 million. The refinery, run as a subsidiary that sells fuel to Delta at market prices, effectively lets the airline keep the refining margin that would normally go to outside suppliers.
"We don't know where fuel is going to go, but to the extent fuel stays elevated, that refinery will continue to help us," CEO Ed Bastian told reporters this week. The 2012 move was meant to blunt the "crack spread," the gap between crude and jet fuel prices that has hit record levels, and Delta argues the asset helps insulate it from both price spikes and supply disruptions. "When crack spreads widen, Delta is essentially paying itself the crack spread for that portion of the fuel," Morningstar analyst Nicolas Owens tells Reuters. "It does mute the impact of the fuel price spike for Delta."
It's not all positive: When refining margins narrow, the refinery can be a drag on the company's bottom line. Critics point out that the facility has required $1.6 billion in capital spending over the years, and it has saddled the company with regulatory and environmental liabilities. For now, though, things are looking up, even if the savings didn't stop Delta from raising checked-bag fees.
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