Delta purchases Trainer oil refineryDelta Air Lines recently announced it is taking steps to purchase the ConocoPhillips oil refinery in Trainer, Pennsylvania, for $150 million.

Delta, which is the nation's second-largest commercial airline, is hoping to secure a steady source of discounted jet fuel in an effort to improve spend management and reduce its fuel expenses by $300 million a year, according to the Philadelphia Inquirer.

The airline spent an estimated $11.8 billion on jet fuel in 2011, which was 36 percent of its operating expenses, making a more affordable source of fuel a necessity for the company, the newspaper stated.

“Acquiring the Trainer refinery is an innovative approach to managing our largest expense,” said Richard Anderson, Delta’s CEO.

Anderson added that the refinery price was the equivalent to one wide-body aircraft, the Inquirer noted. The deal was announced following the closing of the stock markets. Delaware County, where the facility is located, has been reeling due to challenges facing the local refining industry, and so officials were pleased to hear of Delta's decision.

According to Delta, more than 160 million passengers fly with the company every year. It was named the domestic Airline of the Year by Travel Weekly magazine.
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  1. Here is my take-away from the Delta decision: the perspective we have on procurement’s role in the organization is limited only by the approaches we are willing to consider in pursuit of our objectives.

    Someone with a narrower mindset on managing the fuel category might have just renegotiated Delta’s existing fuel contracts (while lamenting the new prices), or consolidated with a larger provider to leverage their spend. They might have done an excellent job tying the contracts to indexes to ensure competitive pricing, and putting hedging plans in place to ensure supply availability. The term of the contracts would have been determined based on how favorable the current negotiating environment is and what direction they expect the market to take.

    A reasonable sense of adventure in that person might have caused them to take additional steps, like assessing their storage capacity and considering putting in extra or larger fuel tanks at locations with high traffic so they could take advantage of good market pricing when it was available or stock up against a shortage.

    Instead (or in addition to evaluating all of the above), someone at Delta thought to ask, “What if we just went out and bought our own refinery? We could bring supply in house and guarantee not only pricing but availability. And what do you know, there just happens to be a refinery that Phillips 66 is looking to offload in one of our busiest markets…”

    The move is not without risk. Although owning the refinery will help them control fuel costs, it does nothing to mitigate pricing volatility in the crude oil they will need as an input for the refinery. The jet fuel market could also bottom out, making their investment gamble more of an anchor than a life-preserver. Fuel production is not their core operation; although Delta’s subsidiary Monroe Energy is technically going to purchase and operate the refinery, they are still bringing non-core operations into the fold, and onto their balance sheet.

    The lesson from this move, which Delta’s CEO Richard Anderson described as “an innovative approach to managing our largest expense” is not to automatically consider buying out a supplier in every category we source. The lesson is to consider all options, and to make sure there is room for thought and creativity early in the planning process. The driver in this case was not to renegotiate contracts but to secure an affordable, reliable source of fuel for Delta’s fleet.

    While the evaluation and execution were undoubtedly difficult, someone had to come up with the idea in the first place – and creativity is a quality that is both undervalued and under-rewarded in most companies. Making time to think in a high-pressure environment is no easy task, but this story is proof that it can pay off if the circumstances are right. One thing is for sure, if the fuel category manager at Delta was more focused on getting through his/her list of contracts to manage, supplier phone calls to return and internal fires to put out, no media outlets would have stopped to write articles about the work or the impact it would have on the company’s strategic position in the market.