* Delta's refinery ownership mitigates rising jet fuel

costs

* Jet fuel prices rise faster than crude oil

* Other airlines face higher costs, explore different

fuel options

By Rajesh Kumar Singh

CHICAGO, March 25 (Reuters) - When Delta Air Lines

bought an aging refinery outside Philadelphia in 2012,

the move looked unusual.

Most carriers buy jet fuel from suppliers. Delta instead

bought a refinery that processes crude oil into jet fuel and

other products.

The deal was meant to lower fuel costs, but also drew

scrutiny as airlines faced growing pressure to curb emissions.

Now, as jet fuel prices rise faster than crude oil during the

Iran war, widening the refining margin embedded in airline fuel

bills, that bet is starting to look more consequential.

For most airlines, a wider gap between crude and jet fuel

means higher fuel costs. Delta still pays market prices for fuel

transferred from its Monroe refinery to its airline operations.

But owning the refinery means the profit from refining fuel

stays within the company instead of going to outside suppliers,

Delta told Reuters.

THE MATH BEHIND THE SQUEEZE

Jet fuel prices have climbed sharply in recent weeks,

widening what refiners call the crack spread - the difference

between the price of crude oil and the fuels produced from it.

In the week of March 20, North American jet fuel averaged

about $179 a barrel, compared with roughly $110 for Brent crude,

according to data compiled by the International Air Transport

Association. U.S. spot jet fuel prices were higher still, about

$4.56 a gallon on March 20, or roughly $192 a barrel, according

to trade group Airlines for America.

For airlines buying fuel on the open market, that spread is

embedded in the price they pay. When the gap widens, airline

fuel bills can rise quickly even if crude prices move less

sharply.

Alaska Air Group ( ALK ) CEO Benito Minicucci said last week

the airline burns about 100 million gallons of fuel a month,

meaning a $1 increase in jet fuel prices adds roughly $100

million in monthly cost.

REFINERY OFFSET

Delta did not say how much of the current spike Monroe could

offset, but its filings show it has contained its fuel costs

materially in periods when refining margins widened.

Delta reported Monroe lowered its average fuel price by

about 23 cents per gallon in 2022, 10 cents in 2023, one cent in

2024 and four cents in 2025. Based on its disclosed fuel

consumption, those reductions equate to roughly $785 million,

$393 million, $41 million and $171 million, respectively.

Monroe generated $777 million in operating income in 2022, when

refining margins surged after Russia's invasion of Ukraine

disrupted global fuel markets.

Historically, the benefit to Delta's fuel costs increased

when refining margins widened and shrank when they narrowed.

Morningstar analyst Nicolas Owens said the structure can

soften the impact of spikes in refining margins.

"When crack spreads widen, Delta is essentially paying

itself the crack spread for that portion of the fuel," said

Owens. "It does mute the impact of the fuel price spike for

Delta."

Conversely, the refinery can become a drag when refining

margins narrow. Delta's filings show Monroe posted a $216

million operating loss in 2020, when the pandemic crushed jet

fuel demand and disrupted refined-products markets.

HOW IT COMPARED

The difference was visible during the last major fuel price

spike.

Delta's average fuel cost rose to $3.36 a gallon in 2022

from $2.02 in 2021, lifting its annual fuel bill to about $11.5

billion, or 24% of total operating expense, from 20% in 2021.

United Airlines, by comparison, paid an average of $3.63

a gallon in 2022, up from $2.11 in 2021, pushing its fuel bill

to roughly $13.1 billion, or 31% of total operating expense,

from 22% in 2021.

Fleet mix, route networks and other factors also affect what

airlines pay per gallon.

RIVALS FEEL THE SQUEEZE

Minicucci said Alaska has been shifting fuel supply away

from the U.S. West Coast - including tankering fuel from

Singapore to Seattle - because refinery margins there have

pushed jet fuel prices about 20 cents per gallon higher.

American Airlines ( AAL ) has said higher fuel prices added

about $400 million to its first-quarter fuel bill since its last

update in late January.

United CEO Scott Kirby warned employees last week that jet fuel

prices had more than doubled in three weeks and, if sustained,

could add about $11 billion to United's annual fuel bill - more

than twice the airline's best-ever yearly profit.

"At the moment owning a refinery is almost like a hedge,"

said Denton Cinquegrana, chief oil analyst at Oil Price

Information Service.

COSTS AND LIMITS

The refinery does not eliminate Delta's exposure to higher

fuel prices. Refining profits can fluctuate with market

conditions.

The refinery also carries regulatory costs. Delta said its

expense for complying with the U.S. Renewable Fuel Standard rose

to $312 million in 2025 from $203 million in 2024.

In years when refining margins are narrow, those compliance

costs can eat into the financial benefit Monroe provides.

DELTA'S EDGE

Delta CEO Ed Bastian said last week rising jet fuel prices

had added about $400 million to the airline's fuel bill in

March.

But he said the refinery provides a "meaningful hedge" on

the refining margin between crude oil and jet fuel.

"It's not going to cover the crack entirely," he said. "But (it)

gives us a fairly significant hedge."

Bastian said Monroe's profits should begin contributing

starting in the second quarter.