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Delta Air Lines to buy oil refinery, hopes to cut fuel bill

By JOSHUA FREED Published: May 1, 2012

Delta Air Lines is buying a refinery in a novel — and some say risky — attempt to slice $300 million a year from its escalating jet fuel bill.

The Atlanta airline said Monday that is buying the Trainer, Pennsylvania refinery near Philadelphia for $150 million from Phillips 66, a refining company being spun off from ConocoPhillips. The refinery has struggled to make money, and ConocoPhillips planned to shut it down if it couldn't find a buyer.

So why is Delta buying it?

‘Largest expense'

Fuel has become the largest and most volatile expense for most airlines, including Delta. U.S. airlines paid an average of $2.86 a gallon for jet fuel last year, up from $2.09 in 2007, according to the Bureau of Transportation statistics. Nobody likes to see the price of gas climb, but for airlines consuming billions of gallons a year, it can be downright crippling. Consider this: Delta's planes burned through 3.9 billion gallons of fuel last year, costing the airline $11.8 billion — 36 percent of its operating expenses.

Airlines have been trying to combat the rising fuel cost by purchasing more fuel-efficient airplanes and experimenting with fuels made from plants. But neither is an immediate solution; it can take a decade to modernize an entire fleet and biofuels have yet to be proven economically feasible. Airlines also try to limit their exposure to big price spikes through a process known as hedging. The catch: if prices fall dramatically, they end up losing a lot of money.

Buying the refinery “is an innovative approach to managing our largest expense,” said Delta CEO Richard Anderson. He said it's a “modest investment” comparable to buying one new large jet aircraft.

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