Delta Airlines (NYSE:DAL) acquired the Trainer crude oil refining complex located near Philadelphia from Phillips 66 in June 2012 for $180 million. The carrier had hoped to address rising refining margins through the acquisition, but the refinery produced a loss of $63 million in 2012.  This loss was caused by Superstorm Sandy which not only damaged Trainer’s supply pipeline infrastructure but also lowered its jet fuel production by impacting production start up.
Looking ahead, in the absence of any natural calamity, what will be the impact of the Trainer refinery on Delta’s profits?
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In the first quarter of 2013, the refinery will likely provide some marginal upside to the carrier’s profits as the production of jet fuel at the refinery has continued to increase. For the full year 2013, the refinery will lower Delta’s fuel expenses by around $300 million.  To provide context, Delta’s operating income in 2012 was a little under $2.2 billion. Thus, fuel cost savings from Trainer refinery operations will significantly expand Delta’s margins in 2013. These savings will also nearly recover the $330 million that Delta has so far invested in the Trainer facility to bring it to production. 
We currently have a stock price estimate of $15.65 for Delta, approximately 5% above its current market price.
Delta aims to address rising refining margins through Trainer refinery operations
Over the past few years, jet fuel refining margins have increased, exacerbating the negative impact of higher crude oil prices on airlines. Refining margin prices have risen to a high of $45 per barrel in May 2008 before declining to $10 per barrel in 2009 and $14 per barrel in 2010 due to the financial crisis. However, they rose again to $33 per barrel in 2011 and $36 per barrel in 2012.  Refining margins also increased as a percentage of total fuel expenses for airlines during this period. For instance, at Alaska Airlines, refining margins increased from 13% of total fuel costs in 2009 to 25% of total fuel costs in 2012.  Delta is trying to address these rising refining margins in jet fuel prices through the operation of its Trainer refinery.
Potential positive impact from Trainer refinery operations in 2013
This refinery can process up to 185,000 barrels of crude oil per day. In comparison, Delta consumed approximately 328,000 barrels of jet fuel per day in 2012.  Currently, the carrier expects to produce around 40,000 barrels of jet fuel per day from the Trainer refinery by the end of 2013.  The remaining production from the refinery consists of gasoline, diesel and other refined products, which the carrier exchanges for jet fuel from Phillips 66 and BP under multi-year exchange agreements. In all, in 2013, Delta expects to save at least $2.20 per barrel of jet fuel it consumes due to savings on refining margins from the refinery operations. 
Additional fuel cost savings can also be achieved if Delta can source crude oil for the Trainer refinery from the Bakken oil field in North Dakota. Currently, the carrier purchases crude oil for this refinery from BP. Delta now also has flexibility in timing its jet fuel purchases in a way that it incurs lower fuel prices. The Trainer refinery has also provided the carrier with greater leverage to purchase jet fuel from the market.Notes: