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Fuel Hedging In The Airline Industry
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Book Synopsis Fuel Hedging in the Airline Industry by : David Carter
Download or read book Fuel Hedging in the Airline Industry written by David Carter and published by . This book was released on 2004 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Set in June 2001, the case places the student in the role of Scott Topping, Director of Corporate Finance at Southwest Airlines. Scott is responsible for the airline's fuel hedging program. The case describes the importance of jet fuel hedging in the airline industry, the volatility of jet fuel prices, hedging strategies available to manage jet fuel price risk, and related issues. [Note: The time period of the case allows the instructor to discuss additional issues not specifically addressed in the case such as the impact of September 11th, 2001 terror attacks on the airline's hedging strategy and the collapse of Enron (e.g., counterparty credit risk in hedging).]Southwest Airlines has a business model based on being a low cost provider and has been very successful at offering the lowest airfares in the industry. This business strategy has effectively resulted in a consistently increasing market share over the years. A dominant factor on the expense side of its business is the cost of fuel. Fuel is the second largest expense behind labor. Most recently, fuel costs have reached the highest annual average over the six-year period from 1994 to 2000 at $0.7869 per gallon in 2000. This fact has led to the increased importance of minimizing fuel cost for 2001 and beyond. To mitigate the sensitivity to fuel prices, Southwest has consistently hedged its fuel usage but wants to reevaluate the strategies it employs. As listed in the case, the student is asked to evaluate the following hedging strategies: (1) doing nothing, (2) hedge using plain vanilla swaps, (3) hedge using options, (4) hedge using zero cost collars, and (5) hedge using futures contracts.The case is intended for use in an advanced corporate finance course or risk management at the graduate level. However, the case can also be used in an undergraduate risk management course.
Book Synopsis Is Jet Fuel Hedging in the Airline Industry Valuable? by : Gjest Andreas Breistein
Download or read book Is Jet Fuel Hedging in the Airline Industry Valuable? written by Gjest Andreas Breistein and published by . This book was released on 2009 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt: Negatively, with the level of activity in the commercial aviation industry will have severe effects on the value of jet fuel price hedging. The next part is a brief introduction to the practice of hedging commodity prices with different types of derivatives. This is a concise follow-through of the different aspects one has to consider when hedging commodity prices. Airlines who want to utilize financial commodity markets while minimizing the probability of losses need thorough knowledge about these markets. To end with, the characteristics of the crude oil and jet fuel prices and their implications for the airline industry are examined. This chapter is an extension of the previous one and is supposed to provide additional knowledge about the challenges of jet fuel price hedging. The two last sections give the reader an educated understanding of how some airlines have been able to utilize the commodity markets better than others.
Book Synopsis Fuel Hedging and Risk Management by : Simo M. Dafir
Download or read book Fuel Hedging and Risk Management written by Simo M. Dafir and published by John Wiley & Sons. This book was released on 2016-03-11 with total page 312 pages. Available in PDF, EPUB and Kindle. Book excerpt: A hands-on guide to navigating the new fuel markets Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumers provides a clear and practical understanding of commodity price dynamics, key fuel hedging techniques, and risk management strategies for the corporate fuel consumer. It covers the commodity markets and derivative instruments in a manner accessible to corporate treasurers, financial officers, risk managers, commodity traders, structurers, as well as quantitative professionals dealing in the energy markets. The book includes a wide variety of key topics related to commodities and derivatives markets, financial risk analysis of commodity consumers, hedge program design and implementation, vanilla derivatives and exotic hedging products. The book is unique in providing intuitive guidance on understanding the dynamics of forward curves and volatility term structure for commodities, fuel derivatives valuation and counterparty risk concepts such as CVA, DVA and FVA. Fully up-to-date and relevant, this book includes comprehensive case studies that illustrate the hedging process from conception to execution and monitoring of hedges in diverse situations. This practical guide will help the reader: Gain expert insight into all aspects of fuel hedging, price and volatility drivers and dynamics. Develop a framework for financial risk analysis and hedge programs. Navigate volatile energy markets by employing effective risk management techniques. Manage unwanted risks associated with commodity derivatives by understanding liquidity and credit risk calculations, exposure optimization techniques, credit charges such as CVA, DVA, FVA, etc.
Book Synopsis Fuel Hedging in the Airline Industry by : Mohamed Huzam
Download or read book Fuel Hedging in the Airline Industry written by Mohamed Huzam and published by . This book was released on 2011 with total page 206 pages. Available in PDF, EPUB and Kindle. Book excerpt: The cost of jet fuel is the second largest operating expenditure in the airlines sector. Even a small increase in the fuel price often leads to a significant increase of expenditure on the operating cost of the airlines. Airlines use derivatives as hedging instruments for hedging their fuel requirements. However, derivative contracts on jet fuel, is not often traded in exchanges and the airlines engages themselves in cross hedging. This practice exposes them to another risk known as basis risk, while protecting them from the price risk. The primary objective of this paper is to look into the effectiveness of cross-hedging practiced by the airline industry. It looks into the problem of basis risk attempting to identify its' significance in terms of un hedged exposure it creates which could possibly lead to very significant financial losses. The effectiveness of hedging strategy of Malaysia Airlines was analyzed using secondary data obtained on the proxy commodity used by the airline. The data was analyzed using standard practices of airline industry in designing an optimal hedge. The calculations made attempts to identify the proportion of the price risk volatility that can be hedged and the proportion of the exposure that remains un hedged, when the said proxy is used to hedge jet fuel. The result showed that a significant portion of the price risk volatility remained un-hedged. This finding was in agreement with the established theory that high correlation between commodities does not remove the basis risk. It concludes that along with many other factors, the un-hedged exposure due to basis risk would have contributed to the losses suffered by the airline in their fuel hedge for the year 2011, unless precise measures are taken to hedge the basis risk.
Book Synopsis Fuel Hedging and Risk Management by : Simo M. Dafir
Download or read book Fuel Hedging and Risk Management written by Simo M. Dafir and published by John Wiley & Sons. This book was released on 2016-03-04 with total page 250 pages. Available in PDF, EPUB and Kindle. Book excerpt: A hands-on guide to navigating the new fuel markets Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumers provides a clear and practical understanding of commodity price dynamics, key fuel hedging techniques, and risk management strategies for the corporate fuel consumer. It covers the commodity markets and derivative instruments in a manner accessible to corporate treasurers, financial officers, risk managers, commodity traders, structurers, as well as quantitative professionals dealing in the energy markets. The book includes a wide variety of key topics related to commodities and derivatives markets, financial risk analysis of commodity consumers, hedge program design and implementation, vanilla derivatives and exotic hedging products. The book is unique in providing intuitive guidance on understanding the dynamics of forward curves and volatility term structure for commodities, fuel derivatives valuation and counterparty risk concepts such as CVA, DVA and FVA. Fully up-to-date and relevant, this book includes comprehensive case studies that illustrate the hedging process from conception to execution and monitoring of hedges in diverse situations. This practical guide will help the reader: Gain expert insight into all aspects of fuel hedging, price and volatility drivers and dynamics. Develop a framework for financial risk analysis and hedge programs. Navigate volatile energy markets by employing effective risk management techniques. Manage unwanted risks associated with commodity derivatives by understanding liquidity and credit risk calculations, exposure optimization techniques, credit charges such as CVA, DVA, FVA, etc.
Book Synopsis The Impact of Jet Fuel Hedging Strategies in the African Airline Industry by : Mlibazisi Ngwenya
Download or read book The Impact of Jet Fuel Hedging Strategies in the African Airline Industry written by Mlibazisi Ngwenya and published by . This book was released on 2018 with total page 92 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Fuel Hedging, Operational Hedging and Risk Exposure - Evidence from the Global Airline Industry by : Britta Berghöfer
Download or read book Fuel Hedging, Operational Hedging and Risk Exposure - Evidence from the Global Airline Industry written by Britta Berghöfer and published by . This book was released on 2013 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: The aviation industry is characterized by low profit margins and a constant struggle with skyrocketing fuel costs. Financial and operational hedging strategies serve aviation managers as a tool to counteract high and volatile fuel prices. While most research on fuel hedging has concentrated on the U.S. airline market, this paper is the first study to include airlines from Asia and Europe. We analyze 64 airlines over 10 years and find that Asian carriers are more negatively exposed than European airlines but less exposed than North American airlines. In contrast to Treanor, Simkins, Rogers and Carter (2012), this study finds less significant negative exposure coefficients among U.S. carriers. Using a fixed effects model we reject the hypothesis that financial hedging decreases risk exposure. One possibility is that the decreased volatility in jet fuel prices over the past few years has perhaps made airlines less exposed to fuel prices and hence, financial hedging less effective. However, operational hedging, defined by two proxies for fleet diversity, reduces exposure significantly. A one percent increase in fleet diversity, calculated with a dispersion index using different aircraft types, reduces the risk exposure coefficient by 2.99 percent. On the other hand, fleet diversity, calculated with different aircraft families, reduces exposure by 1.45 percent. Thus, aviation managers have to balance the fleet diversity between operational flexibility and entailed costs.
Book Synopsis Airline Economics by : George W. James
Download or read book Airline Economics written by George W. James and published by Free Press. This book was released on 1982 with total page 370 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Fuel Hedging in the US Airline Industry by : Rachel A. Emrath
Download or read book Fuel Hedging in the US Airline Industry written by Rachel A. Emrath and published by . This book was released on 2007 with total page 12 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Does Hedging Success Matter? by : Brian Hornung
Download or read book Does Hedging Success Matter? written by Brian Hornung and published by . This book was released on 2020 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: Airlines commonly employ hedging as a risk management strategy to protect themselves against sudden, unpredictable increases in the price of jet fuel. In a seminal paper by Carter, Rogers, and Simkins (2006), it is established that jet fuel hedging by airlines increases the firm value of the airline. This dissertation replicates their study using an expanded dataset over a greater period of time. This study finds a smaller "hedging premium" than Carter, Rogers, and Simkins (2006). It is shown that the leasing of aircraft plays an important role in the relationship between the hedging premium and capital expenditures. The measure of jet fuel hedging used in the previous studies, the percentage of next year's fuel requirements hedged, accounts for the amount of hedging done by the airline, but it does not consider the performance of the jet fuel hedges. This dissertation for the first time determines the effect of jet fuel hedging performance, as measured by the realized gains and losses from jet fuel hedging, on the value of the firm. The analyses find that the realized gains and losses have a negative relationship with firm value. However, after identifying outliers (such as the significant hedging losses in 2009 resulting from falling jet fuel prices during the financial crisis) using a simple box plot and removing them from the sample, realized gains and losses show a positive correlation with firm value. Furthermore, successful hedging may induce principal-agent issues such as buying market share behavior. When an airline experiences a run of hedging success, a manager may mistakenly believe that the cost of jet fuel is decreasing. This is not the case, however, as the cost of using jet fuel is the price that can be received selling it on the open market, not the price paid for the jet fuel. A manager may attempt to pass on the "savings" to consumers in the form of lower fares, lowering the price below its profit-maximizing level. This in turn can increase the airline's market share, although it comes at the expense of reduced profit. This dissertation tests the relationship between successful jet fuel hedging and market share. A positive and statistically significant correlation between successful hedging and market share is found for Southwest Airlines and American Airlines, two carriers known for successful hedging, but statistically insignificant results for smaller carriers Alaska Airlines and JetBlue Airways.
Book Synopsis Does Fuel Hedging Make Economic Sense? The Case of the Us Airline Industry by : David Carter
Download or read book Does Fuel Hedging Make Economic Sense? The Case of the Us Airline Industry written by David Carter and published by . This book was released on 2004 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the fuel hedging behavior of firms in the US airline industry during 1994-2000 to examine whether such hedging is a source of value for these companies. The investment climate in the airline industry conforms well to the theoretic framework of Froot, Scharfstein, and Stein (1993). Specifically, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. The results show that jet fuel hedging is positively related to airline firm value. The coefficients on hedging indicator variables in regression analysis suggest that the hedging premium constitutes approximately a 12-16% increase in firm value. We find that the positive relation between hedging and value increases in capital investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.
Book Synopsis Fuel Hedging Practices in the Airline Industry by :
Download or read book Fuel Hedging Practices in the Airline Industry written by and published by . This book was released on 2010 with total page 88 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Flying Off Course by : Rigas Doganis
Download or read book Flying Off Course written by Rigas Doganis and published by Routledge. This book was released on 2013-07-03 with total page 352 pages. Available in PDF, EPUB and Kindle. Book excerpt: First published in 1991. Routledge is an imprint of Taylor & Francis, an informa company.
Book Synopsis How Does Hedging Affect Firm Value {u2013} Evidence from the U.S. Airline Industry by : Mengdong He
Download or read book How Does Hedging Affect Firm Value {u2013} Evidence from the U.S. Airline Industry written by Mengdong He and published by . This book was released on 2015 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: ABSTRACT How Does Hedging Affect Firm Value – Evidence from the U.S. Airline Industry Mengdong He This study examines the relation between jet fuel hedging and firm value using a sample of 36 publicly-traded U.S. airlines over the period 1992 to 2013. We find a positive hedging premium which suggests that jet fuel hedging adds value to airlines. We then focus our analyses on the specific ways in which jet fuel hedging by airlines can affect firm value. Specifically, we investigate the effect of jet fuel hedging on firm value based on different hedging levels, different levels of jet fuel exposures, different hedger types, different operating costs spent on jet fuel, and different levels of jet fuel price volatility. Our results suggest that airlines can maximize their firm value by increasing the hedged proportion of next year's jet fuel requirements hedged, particularly when they are at a medium level (between 11% and 36%). Next, we find evidence which suggests that selective hedging strategies can help increase an airline’s firm value. In addition, our results suggest that airlines can increase their firm value significantly by increasing the amount of jet fuel hedged if the amount of their operating costs spent on jet fuel is high (> 27%). Fourthly, our results show that investors appear to value jet fuel hedging more in periods of high jet fuel price volatility. For different levels of jet fuel exposures, we find no evidence that the effect of jet fuel hedging on firm value will show any significant differences based on different levels of jet fuel exposures.
Book Synopsis Airline Finance by : Peter S. Morrell
Download or read book Airline Finance written by Peter S. Morrell and published by Routledge. This book was released on 2019-09-30 with total page 281 pages. Available in PDF, EPUB and Kindle. Book excerpt: Air transport industry finance, with its complexity and special needs such as route rights, airport slots, aircraft leasing options and frequent flyer programmes, requires specific knowledge. While there are numerous financial management and corporate finance texts available, few of these provide explanations for the singularities of the airline industry with worked examples drawn directly from the industry itself. Revised and updated in its third edition, this internationally renowned and respected book provides the essentials to understanding all areas of airline finance. Designed to address each of the distinct areas of financial management in an air transport industry context, it also shows how these fit together, while each chapter and topic provides a detailed resource which can be also consulted separately. Supported at each stage by practical airline examples, it examines the financial trends and prospects for the airline industry as a whole, contrasting the developments for the major regions and airlines. Important techniques in financial analysis are applied to the airline industry, together with critical discussion of key issues. Thoroughly amended and updated throughout, the third edition reflects the many developments that have affected the industry since 2001. It features several important new topics, including Low Cost Carriers (LCCs), fuel hedging and US Chapter 11 provisions. The sections on financial statements and privatisation have been expanded, and a new chapter has been added on equity finance and IPOs. New case studies have been added, as well as the latest available financial data. The range and perspective is even greater than before, with significant expansion of material specific to the US and Asia. The book is a key resource for students of airline management, and a sophisticated and authoritative guide for analysts in financial institutions and consultancies, executives in airlines and related industries, and civil aviation departments.
Book Synopsis Fuel Cost Hedging in the U.S. Airline Industry by : Kun Lu
Download or read book Fuel Cost Hedging in the U.S. Airline Industry written by Kun Lu and published by . This book was released on 2012 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Foundations of Airline Finance by : Bijan Vasigh
Download or read book Foundations of Airline Finance written by Bijan Vasigh and published by Routledge. This book was released on 2014-11-13 with total page 802 pages. Available in PDF, EPUB and Kindle. Book excerpt: In recent years the airline industry has experienced severe volatility in earnings, with airlines recording periods of substantial profits that are closely followed by periods of financial distress. This trend has continued into the new millennium, with numerous examples of airlines across the globe entering bankruptcy protection or liquidating. The text provides an introduction to both the basics of finance and the particular intricacies of airline finance where there can be significant fluctuations in both revenues and costs. This new edition also includes: capital budgeting management of current assets financial risk analysis fuel hedging aircraft leasing This textbook contains chapters that cover unique aspects of the aviation financial decision-making process. These include a rigorous and structured presentation of the buy versus lease decision that is prevalent in the industry, a valuation process for aviation assets, the recent trend toward privatization and the difficulty inherent in the valuation of a publicly-owned or semi-publicly owned asset. The Foundations of Airline Finance, now in its second edition, is an introductory text that can be used either as a general financial text or in a specialized class that deals with aviation finance in particular.
