Why Does Delta Want to Buy an Oil Refinery?

Delta is in talks to buy an oil refinery, reports The Wall Street Journal. You can see the jokes now: Delta posts gasoline at "just $2.95 a gallon," with fine print: "Plus a pumping fee of $0.99 per gallon." The media will have fun with the prospect of an airline buying a refinery.

Actually, the move might make some sense—but not as much as you might think. Here's what we know:

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  • Delta isn't likely able to run a refinery at a lower cost than a giant oil company, and Delta will not retail gasoline to the public.
  • If Delta sells fuel to itself at below-market prices, it's simply shifting the difference from the airline operations' bottom line to the refinery's. So it looks like a zero-sum proposition overall.
  • Delta might find an advantage if it can optimize refinery operations to produce a maximum amount of jet fuel at a lower cost than the price of a refinery that produces a different mix of petroleum products.

Delta should investigate why the refinery is for sale. Are its costs high, or is demand shrinking? That's anybody’s guess right now. But, buy or not, this deal isn't likely to make air travel any better or cheaper. 

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