Last April, in a post titled The Ultimate Airline Fuel Hedge: Buy A Refinery, we highlighted Delta Airlines acquisition of the Trainer refinery from ConocoPhillips. At the time we were rather skeptical about the deal for a long list of reasons.  Perhaps most importanly, if Trainer were a prized asset, ConocoPhillips wouldn't have been inclined to sell it. 

Earlier this week, Delta relased their 4th quarter results and it appears the acquisition of the Trainer refinery stained the quarter with red ink.  Per the press release, Delta's December 2012 quarter average fuel price of $3.24 per gallon reflects the consolidated cost per gallon for mainline and regional operations; the impact of fuel hedge contracts with original maturity dates in the December 2012 quarter; and net refinery results including the impact of self-supply from the production of the Trainer refinery, the impact of refined products exchanged with Phillips 66 and BP.  Settled hedge gains for the quarter were $43 million, or 5 cents per gallon.  On a GAAP basis, fuel price includes $3 million in fuel hedge mark-to-market adjustments recorded in periods other than the settlement period. The net refinery loss for the quarter was $63 million, or 7 cents per gallon.

Which brings us full circle and back to the discussions of last spring. The commercial airline business has always been and is very likely to always be a very challenging business.  As Delta's last quarter showed, the same statement certainly true of the refining business as well.

If we set aside the operational issues caused by Hurricane Sandy, which reportely contributed to a large portion of the refining loss, and the fact that the FCC is offline as of late December (supposedly due to issues caused by running the unit at a low capacity for an extended period of time), there's the issue of the crack spreads (refining profit margins).  While the Brent-NY jet fuel crack spread remains strong (~$23/BBL), if the crack spreads for the light (gasoline) and heavy (fuel oil) ends of the barrel remain weak, they will continue to offset the gains on the middle of the barrel (distillates).  Which means that in order for Delta to reap the rewards of strong distillate crack spreads, they will need to increase Trainer's distillate fuel production to well above the current reported levels of ~20%, a herculean task according to most refinery engineers. 

At the end of the day, if Delta can indeed prove the refining industry wrong, we'll be at the front of the line to offer them our congratulations.  However, as of today, it appears that it will be quite some time before we need to make plans for the party.