By ISABEL ORDONEZ, SUSAN CAREY and TOM FOWLER
Delta Air Lines, burdened by the soaring cost of jet fuel, is seriously thinking of making some of its own by buying an idled ConocoPhillips refinery near Philadelphia, people familiar with the matter said.
Delta, the world's second-biggest airline by traffic, is in talks with Conoco to acquire its Trainer, Pa., facility at a cost of $100 million to $150 million, one person familiar with the matter said.
Delta would hire an outside firm to run the refinery.
The move could help supply Delta's operations at La Guardia airport and John F. Kennedy International Airport in New York, and save it most of the so-called crack spread, or the difference charged by a refinery between the cost of a barrel of crude and a barrel of jet fuel.
In March, the spread between jet fuel and Brent crude, which is the benchmark that determines the price of most crudes delivered to the East Coast, was $12.85/bbl, according to energy consultancy IHS Purvin & Gertz.
The Trainer refinery, idled since October, has a processing capacity of 185,000 bpd, including 23,000 bpd of aviation fuel, according to the US Energy Information Administration.
As refining jet fuel produces byproducts such as gasoline and diesel fuel, Delta would swap that output with a partner or partners, who would sell it.
In return, Delta would be able to lock in, through those same partners, lower jet fuel rates at other airports where its planes refuel.
Delta's unorthodox bid underscores how the airline business scrambles for innovative ways to lessen the impact of skyrocketing crude oil prices.
Delta spent $11.7 billion last year buying fuel for itself and its regional units - about 36% of its operating cost, and $2.8 billion more than in 2010.
The airline has been the most vociferous industry critic of the role that speculators allegedly play in inflating crude oil prices.
But refining is also a challenging business - as demonstrated by a wave of refinery closures and divestitures in the US East Coast - as refiners pay a premium for crude purchases and face declining demand for automotive fuel.
Some analysts were skeptical about Delta's potential involvement in what is seen as a capital-intensive and declining industry.
"We are a little uncomfortable about the company going outside its core expertise," said Hunter Key, an analyst who covers Delta for Wolfe Trahan & Co. "I can't recall any other airline buying a refinery."
The talks have lasted for months, people familiar with the situation said.
A deal could come together as soon as the end of April, a person said, but things are very fluid and the entire plan could fall apart as there are other bidders for the facility and there are numerous parties who would have to agree to work with the airline.
The person said that acquiring the refinery isn't critical for Delta's strategy, although it has been studying that possibility for about six months.
ConocoPhillips declined to comment, but said that the company is "continuing our efforts to find a buyer for the Trainer Refinery."
The company, which originally had intended to sell the refinery by the end of the first quarter, says the sale continues until May.
On Wednesday, CNBC reported that JP Morgan Chase could partner with Delta on the deal, in which the bank would buy crude oil as well as pay for shipping costs and for conversion into fuel and other products.
Under the plan, Delta then would buy the fuel from JP Morgan at an effective wholesale price with the bank retaining the right to sell other refinery products on the open market, according to the CNBC report.
Dow Jones Newswires