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Jet fuel hedging, operational fuel efficiency improvement and carbon tax

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  • Hu, Rong
  • Xiao, Yi-bin
  • Jiang, Changmin

Abstract

To investigate airlines’ incentives in operational fuel efficiency improvement, it might be important to consider financial hedge as its substitute. In this paper, we build a simple theoretical model to compare the implications of fuel financial hedge and operational fuel efficiency improvement on airlines’ expected profit. We find that financial hedge is more efficient in reducing airlines’ profit volatility/risk exposure, while operational improvement will generate a higher expected profit level when its effectiveness is sufficiently high. With market competition, operational improvement will be less prevalent. Furthermore, a fuel/carbon tax makes financial hedge less attractive and operational improvement more attractive.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:transb:v:116:y:2018:i:c:p:103-123
    DOI: 10.1016/j.trb.2018.07.012
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    Cited by:

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    4. Jiang, Changmin & Yang, Hangjun, 2021. "Carbon tax or sustainable aviation fuel quota," Energy Economics, Elsevier, vol. 103(C).
    5. Kang, Yicheng & Liao, Sha & Jiang, Changmin & D’Alfonso, Tiziana, 2022. "Synthetic control methods for policy analysis: Evaluating the effect of the European Emission Trading System on aviation supply," Transportation Research Part A: Policy and Practice, Elsevier, vol. 162(C), pages 236-252.
    6. Eyden Samunderu, 2023. "Jet Fuel Price Risk and Proxy Hedging in Spot Markets: A Two-Tier Model Analysis," Commodities, MDPI, vol. 2(3), pages 1-32, August.
    7. Zheng, Shiyuan & Ge, Ying-En & Fu, Xiaowen & Jiang, Changmin, 2019. "Voluntary carbon offset and airline alliance," Transportation Research Part B: Methodological, Elsevier, vol. 123(C), pages 110-126.
    8. Xu, Fangzhou & Hanaoka, Shinya, 2021. "Effects of airport terminal competition: A vertical structure approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    9. Liao, Weijun & Wang, Chunan, 2021. "Airline emissions charges and airline networks," Journal of Air Transport Management, Elsevier, vol. 92(C).
    10. Jiang, Changmin, 2021. "Aviation tax and railway subsidy: An integrated policy," Transportation Research Part B: Methodological, Elsevier, vol. 146(C), pages 1-13.

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