Tag: jet fuel

OM in the News: Delta’s Vertical Integration Risk Pays Off

Vertical integration is an interesting topic in Chapter 11 of your Heizer/Render/Munson text. There are plusses and minuses, and we warn: “Most organizations are better served by concentrating on their own specialty and leveraging suppliers’ contributions.”

But Delta Air Lines, facing billions of dollars of pain at the fuel pump (because of Iran’s blockage of the Straits of Hormuz) along with all the other carriers, is unique. It happens to own its own gas station, writes The Wall Street Journal (April 10, 2026).

Jet-fuel prices have roughly doubled since late February, pushing up airlines’ costs.

Since 2012, Delta has been the owner of a Pennsylvania refinery that processes crude into fuel. Over the years, the investment has looked like either a stroke of genius or a boondoggle, generally depending on the price of oil. Since the U.S. and Israel began carrying out strikes on Iran, the refinery is set to pay off again for Delta. With it, Delta has an asset that can help it offset some of the recent surge in fuel prices.

Energy experts rolled their eyes when Delta plunked down $150 million for the refinery. If the plant was such a good investment, why was ConocoPhillips, its previous owner, shutting it down? Rival airline executives scoffed that they would benefit from increased jet-fuel output on the East Coast without the headaches of refinery ownership.

Now even United, one of Delta’s top rivals, has acknowledged that the refinery benefits Delta. Its CEO Scott Kirby states: “Right now the crack spread (the gap between the price of jet fuel and the price of crude oil) is much higher…and so they’ll get real benefit from the higher crack spread that will be unique to them.”

Delta has said that the refinery makes an operating profit most years. The airline has said owning the refinery insulates it from supply disruptions in the Northeast and helps mitigate risk from volatile prices—effectively lowering its jet-fuel costs, often by several cents a gallon. In 2022, when fuel prices surged after Russia began its invasion of Ukraine, the refinery helped it save $785 million.

But the airline has had to pour money into the plant, which is more than a century old, to keep it running smoothly, investing $1.6 billion in capital expenditures over the years.

Classroom discussion questions:

  1. Did the purchase make sense for Delta?
  2. Many economists think the refinery was a costly mistake. Why?

OM in the News: United Turns to Farm Waste for Jet Power

Airlines are under growing pressure to reduce carbon emissions and lower costs
Airlines are under growing pressure to reduce carbon emissions and lower costs

“Sometime this summer,” writes The New York Times (June 30, 2015), “a United Airlines flight will take off from Los Angeles for San Francisco using fuel generated from farm waste and oils derived from animal fats.” For passengers, little will be different — the engines will still roar, the seats will still be cramped — but for the airlines and the biofuels industry, the flight will represent a long-awaited milestone: the first time a domestic airline operates regular passenger flights using an alternative jet fuel.

For years, biofuels have been seen as an important part of the solution to reducing greenhouse gas emissions. And airlines, with their concentration around airports and use of the same kind of fuel, have been seen as a promising customer in a biofuels industry. Airlines have every reason to adapt, not only to reduce pollution but also to lower what is usually their biggest cost: jet fuel.

United is announcing a $30 million investment in one of the largest producers of aviation biofuels, Fulcrum BioEnergy. Fulcrum has developed a technology that turns household trash into sustainable aviation fuel that can be blended directly with traditional jet fuels. It is building a biofuel refinery in Nevada, and has plans for 5 more plants around the country. The technology can cut an airline’s carbon emissions by 80% compared with traditional jet fuel.

United’s deal is one of many that airlines are making. Alaska Airlines aims to use biofuels at least at one of its airports by 2020, and Southwest just announced it would purchase 3 million gallons a year of jet fuel made from wood residues. Last year, British Airways joined with Solena Fuels to build a biofuel refinery near Heathrow Airport. The airlines seem to have little choice. Unlike automakers, they cannot turn to other options like electrification.

Classroom discussion questions:

1. Why is sustainability so important to the airlines?

2. What other measures can airlines take to become “greener”?

OM in the News: Airlines Fly on a Sugar High

GOL's flight uses a blend of farnesane and jet fuel
GOL’s flight uses a blend of farnesane and jet fuel

The red-and-white Boeing 737 looked like any other plane on the tarmac here at Orlando International Airport. But 2 months ago, the plane became the first commercial flight powered by a new jet fuel made from sugar cane. The passenger flight, operated by the Brazilian airline GOL, flew from Florida to São Paulo on a 10% blend of a clear liquid called farnesane mixed with regular jet fuel. And last month, Lufthansa flew a passenger plane from Frankfurt to Berlin on farnesane, which can be mixed directly with petroleum jet fuel without any changes to planes, engines or fueling equipment.

Renewable bio-jet fuels like farnesane hold the elusive promise of better energy security, reduced carbon emissions and lower fuel costs — an increasingly pressing concern as international regulators prepare to tighten regulations, reports The New York Times (Oct. 8, 2014). The global aviation industry has also set ambitious goals to reduce its greenhouse gas emissions, including slashing emissions by 50% by 2050 compared with 2005.

Airlines like United, KLM and Alaska Airlines have flown planes powered by oil made from algae, used vegetable cooking oil and plants like camelina and jatropha. In spite of initial excitement, commercial airlines have not widely adopted bio-jet fuels, mainly because of their high cost. But farnesane could be more commercially viable because it is produced in Brazil, which has a robust policy and infrastructure to promote and produce biofuels. (Brazil is the world’s largest producer of sugar cane as well as the second-largest producer of ethanol. A majority of light vehicles on the roads in Brazil can run on ethanol, which is made from domestic sugar cane.) According to rigorous testing by plane makers like Boeing, farnesane and other types of bio-jet fuel actually perform better and burn cleaner than conventional jet fuel.

Classroom discussion questions:

1.Why is this new jet fuel an OM issue?

2. What are the advantages and disadvantages of farnesane?