Airline stocks have soared over the past several years, and Delta Air Lines has been one of the leading airlines to reap the benefits. Delta has enjoyed many of the same tailwinds as its peers, including less competition in a consolidating industry, tighter seating capacity, and rising demand among travelers for air travel. Yet alone among its peers, Delta made an innovative strategic decision in 2012 aimed at controlling its exposure to volatile fuel costs: buying a refinery. Although that move was much maligned, the refinery has become a useful source of profits recently. Let’s look more closely at Delta’s refinery acquisition and how it helped profits soar in the airline’s most recent quarter.

Why Delta bought a refinery
In 2012, the U.S. energy boom had created huge price differences between the cost of domestic crude oil and higher global oil prices. Because the U.S. generally doesn’t allow crude-oil exports, those price differences persisted due to large increases in oil production from domestic shale and other new drilling plays. Those lower crude oil prices had no impact on Delta’s fuel costs, though, because the price of refined products such as jet fuel is tied more to the global price of crude. That’s because, unlike crude, U.S. producers are allowed to export refined products, and that keeps U.S. and world-market prices from getting out of sync.

In hopes of taking advantage of cheap U.S. oil, Delta bought a refinery in Pennsylvania. Advocates of the move hoped that by doing so, Delta would effectively benefit from lower domestic oil prices, rather than giving up those savings to a third-party refiner. Skeptics argued that without refinery expertise, Delta would potentially expose itself to a low-margin business with only minimal upside. Indeed, in its first quarter under Delta’s umbrella, the refinery lost $63 million, disrupted by restart costs and the impact of Hurricane Sandy.

Refinery profits were slow in coming…
For a long time, profits from Delta’s refinery operations didn’t play a huge role in the company’s overall results. Even with fuel costs soaring in 2013 and early 2014, demand for travel was sufficient to allow airlines to pass through those higher costs to passengers.

In fact, Delta didn’t see the refinery as a source of huge revenue. Rather, its goal was to keep the operation marginally profitable while allowing it to hedge against the possibility that jet fuel prices would rise much more sharply than the price of crude. This “crack-spread” hedge gives Delta a more predictable cost structure that isn’t as dependent on changing supply and demand dynamics within the U.S. energy market.

…but big when it mattered
In its most recent quarter, Delta demonstrated the wisdom of its refinery strategy, as the operation paid off for investors. Like other airlines, Delta manages the risk of some of its fuel-cost exposure through traditional hedging strategies; when the price of crude oil plunged in the fourth quarter of 2014, those hedging strategies backfired for players in the airline industry. At Delta alone, hedging losses added up to $180 million during the quarter, wiping out a portion of the airline’s anticipated cost savings from cheaper fuel prices.

Yet falling domestic oil prices helped boost the crack spread at Delta’s refinery, and that produced huge profit for the facility. During the quarter, Delta reported a $105 million profit, which itself reversed more than half of Delta’s hedging losses. Moreover, with conditions remaining favorable during early 2015, Delta could continue to see big profits from its refinery operations.

Some still believe that Delta’s refinery remains a distraction from its airline business, and that the company would be better off using regular hedging strategies. Yet that criticism assumes an efficient, open market that simply doesn’t exist under current U.S. regulations. And as long as spreads between domestic and global oil prices persist, Delta will have a chance to take advantage of the situation thanks to its in-house refining operations.

Delta Air Lines has soared largely on the health of the airline industry. Yet its astute move to capture some cost savings has turned out quite well, and as long as the domestic oil market looks like it does now, Delta has a chance to keep profiting nicely throughout 2015.

This $19 trillion industry could destroy the Internet
One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it “transformative”… But you’ll probably just call it “how I made my millions.” Don’t be too late to the party — click here for one stock to own when the Web goes dark.

Dan Caplinger has no position in any stocks mentioned.