Delta’s Negative Carry Position on Trainer

Recently a flight I boarded was diverted because of hurricane type weather. After we spent 3 hours circling the air, we were sent back to another airport(outside of the major hubs), and then it was difficult to arrange the jet-fuel supply locally to re-fuel and the pilot also announced that we were put on a waiting list, unable to get a landing slot to our final destination. On this weekend, the airline ended-up losing thousands per delayed flight.

It shows how modern aviation depends on the timely supply of critical liquid fuels and yet there is many other variability that can affect an airline operation…

Are we really surprised that management of an airline company can be a also daunting task ? The strangeness of Delta’s strategy in the Jet Market has bedeviled the little Houston energy community for years. 

During Q2-2016, Delta Air Lines has paid an average of$1.37/gal for physical jet fuel from traders. The “all in” Q2 fuel price was $1.97/gal.

Figure 1. Q-2 « All-in Jet-Fuel cost » Delta Air Lines

This “all in” Includes: 

  • 59 cents/gal for to the settlement of mark-to-market hedge
  • 1 cents/gal for refining loss at their 185,000 b/d refinery.


“A Structurally unfavorable position”

Over 1M barrel per day of refining capacity were closed in PADD1 between 2004 and 2009, a move that would become later become beneficial for the European trading houses transporting the products across the North-Atlantic ( like the Vitols for whom the bread and butter is this arbitrage) and the swap dealers(…)

What a trader at Delta has discovered around 2007 is that there are some predators in the market who knows what they want to do in the market before they do it, and are exploiting the knowledge of this situation. He discovered that it is wasn’t just him; it was for anybody who was a jet fuel buyer. On the receiving of this predatory activity, he figured out what they were doing, explained it, exposed and explained it to other people who were preys and went out to destroy the predators.

Delta ultimately purchased the Trainer, PA refinery but only after been confronted to these options:

1: In essence, by hedging its fuel exposure on Brent, the airline could only protect itself against movements in that crude benchmark. [When the jet regional jet spread (NYH-GC) blew out in 2012 by $20-$25/bbl and the hedge basis created losses for the airline].

2: The Airline then look to hedging through swaps but then learned that buying a large quantities of jet “naked”  was also illiquid and very expensive with Wall Street. Delta looked out to a third option to mitigate their U.S North-East jet fuel exposure, bypassing the bank swaps dealers, and venturing into the refining business, cracking oil molecules into jet fuel barrels.

3. The mindset to buy a  Delaware river refinery was to capture an healthy jet crack(at that time $20-$25/bbl)—the difference between New York harbor jet fuel prices and the price of crude, as measured by Brent instead of piping the product from the Houston refiners and paying the regional jet spread (NYH-GC) at $20-$25/bbl.

“From  a structurally unfavorable position to another one.”

Delta Air Lines is short 95000 contracts per year in the market. By purchasing Trainer, PA 185,000 b/d, re-gearing it to maximize the jet fuel they could at least cover 50% of their supply, their traders in Atlanta buying the remaining exposure in the spot market. 

However, there is an untold price tag attached when a top 3 end-user of a commodity owns a refining operation of the main product it consumes. By buying a refinery, Delta has also advertised its position in the market. The problem with Delta is that whenever the swap dealers see them buying a large and odd quantity of jet-fuel in the market, => ­­it means that’s there is a problem at Trainer.

The price of jet fuel being 98% correlated to the NYH market, when the airline has X short consumption days to cover, traders and swap-dealers can easily connect the dots and this equilibrium has serious consequences for Delta’s average fuel cost per U.S gallons.

Back to 2016…

  • The average regional jet fuel spread has collapsed by -96%.
  • Delta could positively benefit from the low-cost deliveries on the colonial pipeline from the U.S Gulf Coast priced in the U.S Atlantic Coast.

                                                              Figure 2- Jet Diff Curve, NYH-GC-CLP

  • According to Platts. Cracking netback margins for Bonny Light are averaging $4.77/b(-84%) 
  • It is in these conditions that the Trainer refining unit has operated at a $10M loss during Q2.

From a trading perspective Delta’s position on Trainer has a negative carry of $3.33M a month,  an unthinkable position that couldn’t be maintained on a trade-floor.


For years now, prominent economists have opined that the whole Trainer deal was insane and non-accretive for Delta. 

This whole deal sounded crazy if one wrongly assumes that the null hypothesis is H0: commodity trading or energy industry = the free market.

Some have said : “What on earth makes Delta think that it can run a refinery more efficiently than someone who’s fighting tooth and nail for business in the free market? If they can really do that, it’s not a failure of Wall Street, it’s a failure of capitalism. This whole deal sounds crazy”.

They are right but only under the idealized assumptions that the market cannot be rigged.

Wall Streeters, (with economic dealings in the commodities…) were also not thrilled by Delta’s idea. While they have vehemently questioned the hedge effectiveness of Delta’s jet fuel strategy, they also made the Delta’s refining subsidiary Monroe Energy, LLC always looking more unfavorable than it should.


  • 92 days of production at 185,000b/d times 75.6% utilization
  • the Q2 $10M refining losses comes down to 1.8c/gal which is in line with the 1c/U.S gallon non-GAAP loss reported by Delta Air Lines.
  • The refining loss represents 1c/gal out of the “all in” Q2 fuel price of $1.97/gal.


Simply, the client became a competitor and they have skewed the comparisons because it was not good for “the book”.


“Under the lesser of two evils principle”

More than anything else, what Delta Air Lines has really realized with Trainer, is trading a structurally unfavorable position for another difficult one (but a somehow less predatory position than the former). 

I love academics but prefer businessmen. They are guided by another perspective. They use their instincts and judgement to analyze a situation and smell an opportunity. With their unique ability to craft a trade, they change the rules of the game that have been written in the books and make the market.

“The Longs meet the Shorts”

Swamping the U.S Eastern seaborne market with previously idled refineries was certainly also not a good deal for commodity traders- whom the primary economics activity depends the purchase of a product and its delivery at an higher price to another location.

Claude Dauphin is a legendary Swiss businessman. These last lines, I hope, will connect the dots. Dauphin was reportedly amused seeing the Americans (his clients) restarting the idled refineries along the Delaware river.

We are at a gathering of  traders,  he approached a well-known trading entity backed by a private-equity; touching the shoulders of the persons who run their trading desk. Dauphin, alluding to the refinery, said “welcome”, whispering “you aren’t going to run these units at a loss aren’t you ?” and closed the conversation with a “nevertheless we wish you good luck”.

What else to expect from traders…

After all, what they ALL defend is positions.


The author has many years of experiences in Commodities Transactions, Financial & Risk Analysis bringing together the know-how of the Dry/Wet Cargoes Transportation and the Commodity Trade Administration.

He consults full-time with hedge, traffic and logistics desks in commodity trading and end-user firms.

Contact Simon Jacques 1 226 348 5610



  © 2016, Navigating the commodities markets with Freight and Spreads


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