Mercedes Mullins
In 2012, Delta Air Lines' subsidiary Monroe Energy acquired the Trainer Refinery, an oil refinery located in Trainer, Pennsylvania, with the aim of reducing fuel costs by controlling its own supply. The refinery has a daily capacity of 185,000 barrels and produces jet fuel, gasoline, diesel, and home heating oil. Delta's investment in the refinery was intended to increase jet fuel production and provide a sizable amount of Delta's domestic jet fuel needs. However, the decision to purchase the refinery has been controversial, with critics arguing that Delta underestimated the costs of operating an oil refinery. In recent years, Delta has faced challenges with the refinery's economic performance, shifting production away from jet fuel, and seeking joint venture partners to share the burden of the refinery's losses.
| Characteristics | Values |
|---|---|
| Year of acquisition of Trainer Refinery | 2012 |
| Owner of Trainer Refinery | Monroe Energy, LLC, a subsidiary of Delta Air Lines |
| Location of Trainer Refinery | Southeast Pennsylvania, along the banks of the Delaware River, just outside Philadelphia |
| Capacity of Trainer Refinery | 185,000 barrels per day |
| Investment in Trainer Refinery | $150 million |
| Investment to convert existing infrastructure to maximize jet fuel production | $100 million |
| Percentage of jet fuel production prior to Trainer becoming idle | 14% |
| Target percentage of jet fuel production after conversion | 32% |
| Percentage of output that is diesel and gasoline | 80% |
| Percentage of fuel hedge across Delta's network | 40-50% |
| Benefit per gallon of jet fuel from refinery | 20 cents |
| Benefit in the first quarter per gallon of jet fuel consumed | 7 cents |
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What You'll Learn
Delta's subsidiary Monroe Energy's jet fuel production
Delta Air Lines' subsidiary, Monroe Energy, has been supplying a significant amount of jet fuel to the airline since its acquisition of the Trainer Refinery in 2012. The purchase of the refinery was a strategic move by Delta to manage its fuel expenses and secure its supply chain.
Located in Trainer, Pennsylvania, the refinery has a capacity of 185,000 barrels per day and is positioned along the Delaware River, providing access to a network of pipelines and proximity to assets throughout the Northeast. Monroe Energy's primary focus has been on maximizing jet fuel production to meet the needs of Delta Air Lines and its strategic partners.
Initially, Monroe Energy aimed to increase jet fuel production from 14% to 32%, investing around $100 million to convert existing infrastructure to support this shift. The decision to purchase the refinery and increase jet fuel production was driven by the rising demand for jet fuel and the desire to reduce fuel costs by controlling the supply.
However, in 2016, Monroe Energy faced challenges due to a sharp decline in the price of refined fuels. The refinery had to reduce its jet fuel production to about 40% and increase the production of gasoline and diesel fuel, which were more profitable at the time. Despite these challenges, Monroe Energy has provided Delta with fuel savings and acted as a hedge against spikes in fuel prices.
In recent years, with the rising cost of fuel and the impact of the Ukraine war on oil prices, the benefits of Delta's ownership of Monroe Energy have become more pronounced. The refinery's output has helped offset fuel costs, particularly for New York Harbor Jet operations, where Monroe's production provided a 100% offset. Delta has also explored sourcing cheaper crude oil from the Dakotas to further enhance the refinery's contribution to managing fuel expenses.
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Trainer Refinery's purchase by Monroe Energy
Monroe Energy, a subsidiary of Delta Air Lines, purchased the Trainer Refinery in June 2012. The refinery, located in Trainer, Pennsylvania, has a capacity of 185,000 barrels per day and is situated along the banks of the Delaware River, just outside Philadelphia. The purchase was part of Delta's strategy to manage its fuel expenses and gain more control over its supply chain, specifically jet fuel, which is its single largest expense. Monroe Energy aimed to increase jet fuel production from 14% to 32% at the Trainer Refinery, dedicating around $100 million of Delta's $250 million investment in the refinery to converting existing infrastructure to support this.
The acquisition of the Trainer Refinery by Monroe Energy was considered a bold and innovative move by Delta Air Lines. The subsidiary structure allowed Delta to pursue this groundbreaking initiative while maintaining a degree of separation from the risks associated with running an oil refining operation. The purchase of the refinery was part of a larger trend by Delta to pursue initiatives aimed at building a more durable business model following its merger with Northwest Airlines in 2008.
The Trainer Refinery has a long history, dating back to 1900 when the Union Petroleum Company leased land to build a facility near the modern-day site of the refinery. The refinery has changed hands several times over the years, with ownership passing from the Union Petroleum Company to Sinclair Oil Corporation, BP, Tosco Corporation, and Phillips 66 before being acquired by Monroe Energy in 2012.
Since its purchase by Monroe Energy, the Trainer Refinery has focused on producing jet fuel, gasoline, diesel, and home heating oil. The refinery restarted production in September 2012, with Monroe Energy investing around $100 million to transition 40% of production to jet fuel for Delta's commercial fleet. In 2014, the refinery announced a five-year deal with Texas logistics firm Bridger LLC, who would supply one-third of the crude oil refined at Trainer. The Trainer Refinery has also been recognised for its commitment to employee safety and environmental stewardship, receiving the Distinguished Safety Award from AFPM in 2021.
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Delta's fuel costs and savings
Delta Air Lines' decision to purchase an oil refinery in 2012 was a strategic move to manage its fuel expenses and reduce fuel costs by controlling its own supply. The airline formed its subsidiary Monroe Energy LLC to acquire the Trainer Refinery, an 185,000-barrel-per-day oil refinery located in Pennsylvania.
The acquisition of the refinery has provided Delta with significant fuel savings. Monroe Energy supplies a sizable amount of Delta's domestic jet fuel needs, with the refinery's output acting as a fuel hedge. In the first quarter of 2022, the refinery knocked about 7 cents off each gallon of jet fuel Delta consumed, resulting in a benefit of 20 cents per gallon. This has helped Delta manage the rising cost of fuel, which increased by almost 30% year-on-year in the fourth quarter of 2021.
However, Delta's investment in the refinery has also faced challenges. In the early years, Delta struggled with the learning curve of the oil industry, and the refinery incurred losses. In 2016, as the price of refined fuels fell, Monroe Energy had to reduce its production of jet fuel and increase the production of gasoline and diesel fuel, which were more profitable. While the refinery turned profitable in 2014 and reached a high point in 2015, it faced significant losses in 2016 due to an imbalance between the supply and price of crude oil and the price of its finished products.
To improve the refinery's performance, Delta has explored sourcing cheaper crude oil from the Dakotas, which could offer additional savings. The airline has also sought a joint venture partner to buy part of its refinery business and brought in consultants to advise on shifting production towards gasoline and diesel. These moves have helped slow the losses, but the refinery's financial results have remained a concern for Delta's management.
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Monroe Energy's output and performance
Monroe Energy, a subsidiary of Delta Air Lines, was formed in 2012 to purchase the Trainer Refinery, an 185,000-barrel-per-day oil refinery located in Trainer, Pennsylvania, just outside Philadelphia. This strategic acquisition provided Monroe Energy with access to a network of pipelines and proximity to assets throughout the Northeast.
The primary focus of Monroe Energy's output is jet fuel, with the subsidiary aiming to increase jet fuel production from 14% to 32%. Monroe Energy supplies a significant portion of Delta's domestic jet fuel requirements through direct production and exchange agreements. The refinery's output also includes gasoline, diesel, and home heating oil.
In 2014, Monroe Energy entered into a five-year agreement with Texas logistics firm Bridger LLC, which supplied one-third of the crude oil refined at Trainer. This deal contributed to Monroe Energy's overall output and performance.
Monroe Energy's performance has had its ups and downs. The refinery turned profitable in 2014, earning $96 million before taxes, and reached its peak profit of $291 million in 2015. However, in 2016, as the prices of oil and refined fuels declined, Monroe Energy's performance suffered. They had to reduce jet fuel production and increase the output of gasoline and diesel fuel to mitigate losses.
In recent years, with the rising cost of fuel, Monroe Energy has once again proven its worth to Delta. The refinery acts as a hedge against fuel price spikes, providing a benefit of 20 cents per gallon of jet fuel. Monroe Energy's output contributes to a 40-50% fuel hedge across Delta's network.
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Delta's refinery investment
Delta Air Lines' refinery investment has been a controversial one. In 2012, the airline purchased the Trainer Refinery, an oil refinery located in Trainer, Pennsylvania, through its subsidiary Monroe Energy, LLC. The refinery, with a capacity of 185,000 barrels per day, was acquired from Phillips 66 for $150 million. Delta's primary goal was to reduce its fuel costs by controlling its own supply, particularly for jet fuel, which is a significant expense for the airline industry.
The investment in the refinery was intended to give Delta more control over its supply chain and expenses. Monroe Energy aimed to increase jet fuel production from 14% to 32% at the Trainer Refinery, dedicating around $100 million of the overall $250 million investment in the refinery to convert existing infrastructure to support jet fuel production. This shift in focus towards jet fuel was in response to the rising demand for aviation fuel and a decline in gasoline demand due to high gasoline prices and conservation policies.
However, Delta's refinery investment has faced challenges and criticism. Some critics argued that Delta underestimated the costs of running an oil refining operation, and the refinery has made modest profits or losses in different years. The COVID-19 pandemic further impacted the refinery's performance, with reduced demand for air travel affecting the airline and refinery industries.
In recent years, Delta has sought a joint venture partner to share its refinery business, indicating that the investment has not met expectations. Despite initial optimism and strategic intentions, Delta's refinery investment through Monroe Energy has faced difficulties, highlighting the complexities of managing an oil refinery alongside an airline business.
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Frequently asked questions
Monroe Energy supplies Delta with a sizable amount of its domestic jet fuel needs. In 2012, Monroe Energy planned to increase jet fuel production from 14% to 32%.
Monroe Energy acts as a hedge against the spike in fuel prices for Delta. Delta benefits from a 20 cents per gallon benefit on jet fuel from its refinery.
Delta invested in Monroe Energy to reduce its fuel costs by controlling its own supply. Delta also aimed to shield itself from swings in the per-gallon price of jet fuel and kerosene supply shortages that drive big price spikes.
Delta's investment in Monroe Energy has been deemed a mistake by some critics. The refinery operation turned profitable in 2014, reaching its peak in 2015. However, with the fall in refined fuel prices in 2016, Monroe Energy's performance suffered, and it had to shift its production away from jet fuel. Delta has since sought a joint venture partner to share the refinery business.
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