Delta Airlines 2012 Annual Report Download - page 69

Manufacturers' Credits
We periodically receive credits in connection with the acquisition of aircraft and engines. These credits are deferred until the aircraft and engines
are delivered, and then applied on a pro rata basis as a reduction to the cost of the related equipment.
Maintenance Costs
We record maintenance costs to aircraft maintenance materials and outside repairs. Maintenance costs are expensed as incurred, except for costs
incurred under power-by-the-hour contracts, which are expensed based on actual hours flown. Power-by-the-hour contracts transfer certain risk to
third party service providers and fix the amount we pay per flight hour to the service provider in exchange for maintenance and repairs under a
predefined maintenance program. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are
capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter.
Advertising Costs
We expense advertising costs as other selling expenses in the year incurred. Advertising expense was $235 million , $214 million and $169
million for the years ended December 31, 2012 , 2011 and 2010 , respectively.
Commissions
Passenger sales commissions are recognized in operating expense when the related revenue is recognized.
NOTE 2 . OIL REFINERY
Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense. Because global demand for jet fuel and
related products is increasing at the same time that jet fuel refining capacity is decreasing in the U.S. (particularly in the Northeast), the refining
margin reflected in the prices we pay for jet fuel has increased. We purchased an oil refinery as part of our strategy to mitigate the increasing cost of
the refining margin we are paying. Production at the refinery commenced in September 2012.
Acquisition
In June 2012 , our wholly-owned subsidiaries, Monroe Energy, LLC and MIPC, LLC (collectively, “Monroe”), acquired the Trainer refinery and
related assets located near Philadelphia, Pennsylvania from Phillips 66, which had shut down operations at the refinery. Monroe invested $180
million to acquire the refinery. Monroe received a $30 million grant from the Commonwealth of Pennsylvania.
The acquisition includes pipelines and
terminal assets that will allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs
at LaGuardia and JFK.
We accounted for the refinery acquisition as a business combination. The refinery, pipelines and terminal assets acquired were recorded at $180
million in property and equipment, net based on their respective fair values on the closing date of the transaction.
Refinery Operations and Strategic Agreements
The facility is capable of refining 185,000 barrels of crude oil per day. BP is the primary supplier of crude oil used by the refinery under a three
year agreement. We are also exploring other sources of crude oil supply, such as bringing supply to the refinery by rail from the Bakken oil field in
North Dakota. We have increased the refinery's jet fuel capacity through capital improvements. The refinery's remaining production consists of
gasoline, diesel and refined products ("non-jet fuel products"). Under a multi-year agreement, we are exchanging a significant portion of the non-jet
fuel products with Phillips 66 for jet fuel to be used in our airline operations. Substantially all of the remaining production of non-jet fuel products is
being sold to BP under a long-term buy/sell agreement effectively exchanging those non-jet fuel products for jet fuel. Our agreement with Phillips 66
requires us to deliver specified quantities of non-jet fuel products and they are required to deliver jet fuel to us. If we or Phillips 66 do not have the
specified quantity and type of product available, the delivering party is required to procure any such shortage to fulfill its obligation under the
agreement. Substantially all of the refinery's expected production of non-jet fuel products is included in these agreements.
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