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Hedging jet fuel price risk: The case of U.S. passenger airlines

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  • Turner, Peter A.
  • Lim, Siew Hoon

Abstract

Jet fuel accounts for a large portion of passenger airlines' operating costs, and airlines' earnings are susceptible to swings in the price of jet fuel. This study uses daily data over the past two decades to determine the minimum variance hedge ratio for airlines wishing to hedge jet fuel price risk with futures, while also establishing the best cross hedging asset. Airlines hedging with futures would create the most effective hedge by using heating oil futures contracts with a 3-month maturity. We also find that beyond the 3-month veil, increased time to maturity makes heating oil less effective as a cross hedge proxy for jet fuel. However, both in-sample analysis and Monte Carlo simulation results with daily data show that none of the 4 cross hedge proxies, including heating oil, can be considered highly effective.

Suggested Citation

  • Turner, Peter A. & Lim, Siew Hoon, 2015. "Hedging jet fuel price risk: The case of U.S. passenger airlines," Journal of Air Transport Management, Elsevier, vol. 44, pages 54-64.
    • Handle: RePEc:eee:jaitra:v:44-45:y:2015:i::p:54-64
    DOI: 10.1016/j.jairtraman.2015.02.007
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    3. Miyoshi, Chikage & Fukui, Hideki, 2018. "Measuring the rebound effects in air transport: The impact of jet fuel prices and air carriers’ fuel efficiency improvement of the European airlines," Transportation Research Part A: Policy and Practice, Elsevier, vol. 112(C), pages 71-84.
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    5. Yaghoub Abdi & Xiaoni Li & Xavier Càmara-Turull, 2023. "Firm value in the airline industry: perspectives on the impact of sustainability and Covid-19," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-24, December.
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    7. Lim, Siew Hoon & Turner, Peter A., 2016. "Airline Fuel Hedging: Do Hedge Horizon and Contract Maturity Matter?," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 55(1), April.
    8. Kristjanpoller, Werner D. & Concha, Diego, 2016. "Impact of fuel price fluctuations on airline stock returns," Applied Energy, Elsevier, vol. 178(C), pages 496-504.
    9. Zhen-Jia-Liu, 2021. "Effect Of Fuel Price Volatility On Real Activities Earnings Management In Airlines Related To Fuel Price Hedging," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 18(1), pages 33-53.
    10. Luděk Benada, 2018. "Comparison of the Impact of Econometric Models on Hedging Performance by Crude Oil and Natural Gas," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 66(2), pages 423-429.
    11. Hu, Rong & Xiao, Yi-bin & Jiang, Changmin, 2018. "Jet fuel hedging, operational fuel efficiency improvement and carbon tax," Transportation Research Part B: Methodological, Elsevier, vol. 116(C), pages 103-123.
    12. Cao, Min & Conlon, Thomas, 2023. "Composite jet fuel cross-hedging," Journal of Commodity Markets, Elsevier, vol. 30(C).
    13. Barbara Gaudenzi & Alessandro Bucciol, 2016. "Jet fuel price variations and market value: a focus on low-cost and regular airline companies," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 17(6), pages 977-991, November.
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    15. Samunderu, E. & Perret, J.K. & Geller, G., 2023. "The economic value rationale of fuel hedging: An empirical perspective from the global airline industry," Journal of Air Transport Management, Elsevier, vol. 106(C).

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