Now that they've had some time to process the news, energy analysts have some advice for executives at Delta Air Lines and their quixotic bid to get into the refining business: Keep your day jobs.

The financial experts were reacting to the revelation, which first went public last week, that the world's busiest carrier by passengers is looking to cut its soaring fuel costs by purchasing a ConocoPhillips refinery near Philadelphia.

The 185,000-barrels-per-day facility in Trainer, Pa., has been offline since late last year. ConocoPhillips is in the midst of a major restructuring and asset sale in which refining, especially on the East Coast, has become less of a priority (EnergyWire, April 10).

Delta Air Lines is said to be considering the purchase of a refinery near Philadelphia to cut its soaring fuel costs. Courtesy of Delta Air Lines.

Enter Delta, which is looking to spend no more than $150 million to acquire the facility, alongside a handful of other bidders. The idea is the airline could lower its annual fuel costs (more than $11 billion last year) at nearby hubs in the Northeast.

The news that Delta is seriously interested was reported by a number of outlets and has been confirmed by analysts close to the industry. The latest, from CNBC, is that JPMorgan Chase & Co. would help finance the deal and handle fuel sales, but the network did not identify its sources and the bank did not return calls seeking comment.

To analysts, the rumored $150 million price tag partly explains why Delta would step outside its core business to look at refining crude for jet fuel. Refineries of similar dimension in the region -- in Delaware City, Del., and Paulsboro, N.J. -- closed for about $220 million and $340 million, respectively, in the second half of 2010.

But experts who track refining say the upfront cost of the facility would be the least of Delta's worries when and if the ink dries. They say running the plant is a much different beast when daily and market mechanics are taken into account.

"There are a lot of people we talk to who say it doesn't make sense," said Denton Cinquegrana, a refining market specialist at Oil Price Information Service. "It's a classic case of round peg in the square hole."

Cinquegrana explained that the Trainer facility has historically produced about 23,000 barrels a day of aviation fuel out of its 185,000-barrel capacity, meaning the rest of the product -- gasoline and diesel -- would have to be sold on the open market.

Delta may be willing to fight that fight and sell those fuels and may hire third parties to handle the day-to-day business, but Brian Youngberg, an energy analyst at Edward Jones, said it adds "significant operating risks" to a company that is already in a tough business. He listed accidents, fires and regulatory pressure as factors Delta should consider before signing a check.

"I am not aware of any others doing it besides maybe hedge funds or other financial investors," Youngberg said. "They could run it if they hire people with experience. However, running it well and making it profitable to Delta are two different things."

Herve Wilczynski, a partner in A.T. Kearney's energy practice, agreed it would be an "unconventional move with a number of challenges." Jet fuel prices tend to be dependent on the cost of crude, for example, so Wilczynski isn't even sure how much fuel-cost protection Delta would net by owning the refinery.

"After a while, it would clearly compete for capital with their core business," he said. "From that standpoint, it is unclear how sustainable this business venture would be."

A host of political issues

Another wrinkle Delta may not have considered is the energy-security angle. Charles Ebinger, a senior fellow at the Brookings Institution, said the move could in the end make the carrier look irresponsible because it would be wading into tricky matters like regional security, environmental compliance and other political issues associated with maintaining energy supplies in a crunch.

"I haven't seen anything from anyone that would suggest this is a good idea," Ebinger said. "I don't think it's anything for anybody who's not historically in the energy business."

Ebinger added that Delta might be better positioned to save on fuel costs by simply hiring better energy traders. He said he would not be surprised if Delta walks away from this deal after taking a hard look.

"Chances are, owning a refinery is not going to give them any more leverage than not buying a refinery," he said.

Wilczynski made a similar observation. An airline or any other fuel-dependent industry might instead look into investing in the exploration and production side as a hedge against volatile fuel costs, he said. Ebinger thought the E&P option would be just as short-sighted because Delta would still have to find a means to process the product into jet fuel as well as transport the resource from the field.

Even so, the persistent rumor is Delta is serious and has been in discussions with ConocoPhillips for months. Cinquegrana said that makes him think some sort of "sweetheart deal" is possible, under which the airline would get preferential tax treatment and possibly concessions from labor unions in exchange for saving jobs.

If the sale does happen, analysts said this will be one real-world experience worth watching.

"It will be very interesting to see if this deal goes through, as it would clearly be an extreme case of vertical integration as an attempt to control energy prices volatility," Wilczynski said.

Neither Delta nor ConocoPhillips would comment on the negotiations.

Sullivan is based in New York.