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The flexibility and benefits of operating a diverse fleet: an analysis using real options

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  • Stephen D. Treanor

Abstract

Purpose - The purpose of this paper is to develop a simple model illustrating the benefits of operating a diverse fleet of aircraft. Design/methodology/approach - The paper is theoretical. It describes how real options are beneficial to the firm in both capital budgeting and risk management. It illustrates the use of real options in the airline industry, and how real options are used as a risk management tool. Then the model is developed which illustrates how a diverse fleet can provide an airline protection against fuel price risk. Findings - The results of the model show that a diverse fleet is value enhancing to an airline during periods when fuel prices are high or uncertain. Furthermore, this paper shows that a diverse fleet provides an airline with an operational hedge to jet fuel prices. Though the paper focuses on the airline industry, the results are applicable to those industries vulnerable to volatile input costs, and prohibitive abandonment and re‐entry costs. Originality/value - The paper uses real option analysis to show the benefits for an airline deriving from operating a diverse fleet of aircraft.

Suggested Citation

  • Stephen D. Treanor, 2012. "The flexibility and benefits of operating a diverse fleet: an analysis using real options," Management Research Review, Emerald Group Publishing Limited, vol. 35(6), pages 462-472, May.
    • Handle: RePEc:eme:mrrpps:v:35:y:2012:i:6:p:462-472
    DOI: 10.1108/01409171211238244
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    Citations

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    Cited by:

    1. Berghöfer, Britta & Lucey, Brian, 2014. "Fuel hedging, operational hedging and risk exposure — Evidence from the global airline industry," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 124-139.
    2. 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.

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