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Fuel Hedging, Operational Hedging and Risk Exposure– Evidence from the Global Airline Industry

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  • Brian Lucey

    ()
    (Institute for International Integration Studies, Trinity College Dublin)

  • Britta Berghöfer

    ()
    (Institute for International Integration Studies, Trinity College Dublin)

Abstract

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.

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Bibliographic Info

Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp433.

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Length: 30
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:iis:dispap:iiisdp433

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Keywords: Airline; hedging; operational hedging; financial hedging;

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