Delta Airlines 2012 Annual Report Download - page 9

Our contractual agreements with regional carriers primarily are capacity purchase arrangements, under which we control the scheduling, pricing,
reservations, ticketing and seat inventories for the regional carriers' flights operating under our “DL”
designator code, and we are entitled to all ticket,
cargo, mail and in-flight and ancillary revenues associated with these flights. We pay those airlines an amount, as defined in the applicable
agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those
services. These capacity purchase agreements are long-term agreements, usually with initial terms of at least 10 years, which grant us the option to
extend the initial term. Certain of these agreements provide us the right to terminate the entire agreement, or in some cases remove some of the
aircraft from the scope of the agreement, for convenience at certain future dates.
A portion of the flights operated for us by SkyWest Airlines are structured as revenue proration agreements. These proration agreements establish
a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
Fuel
Our results of operations are significantly impacted by changes in the price and availability of aircraft fuel. The following table shows our aircraft
fuel consumption and costs.
General
Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense. We have historically purchased most of
our aircraft fuel under contracts that establish the price based on various market indices and therefore do not provide material protection against price
increases or assure the availability of our fuel supplies. We also purchase aircraft fuel on the spot market, from off-shore sources and under contracts
that permit the refiners to set the price.
Monroe Energy
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. Our wholly-owned subsidiaries, Monroe
Energy, LLC and MIPC, LLC (collectively, “Monroe”), acquired the Trainer refinery and related assets located near Philadelphia, Pennsylvania in
June 2012 as part of our strategy to mitigate the increasing cost of the refining margin we are paying.
Refinery Acquisition. Monroe invested $180 million to acquire the refinery from Phillips 66. Monroe received a $30 million grant from the
Commonwealth of Pennsylvania. The acquisition includes pipelines and terminal assets that allow the refinery to supply jet fuel to our airline
operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and John F. Kennedy International Airport ("JFK"). Prior to
the transaction, Phillips 66 had shut down operations at the refinery.
Refinery Operations. The facility is capable of refining 185,000 barrels of crude oil per day. In addition to jet fuel, the refinery's production
consists of gasoline, diesel and refined products (“non-jet fuel products”). Production at the refinery restarted in September 2012. 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.
4
Year Gallons Consumed
(1)
(Millions) Cost
(1)(2)
(Millions)
Average Price Per
Gallon
(1)(2)
Percentage of Total Operating Expense
(1)(2)
2012
3,769
$
12,251
$
3.25
36
%
2011
3,856
$
11,783
$
3.06
36
%
2010
3,823
$
8,901
$
2.33
30
%
(1)
Includes the operations of our contract carriers under capacity purchase agreements.
(2)
Includes fuel hedge (losses) gains under our fuel hedging program of $(66) million, $420 million and $(89) million for 2012 , 2011 and 2010
, respectively.