Analysis of the Jet Fuel Price Risk Exposure and Optimal Hedging in the Airline Industry

Abstract

As a classic industry with high competitiveness, the airline companies are constantly exposed to external risks like oil price fluctuations. The volatility of the oil market as well as the global evolving unpredictable situations are putting uncertain adverse pressure on their financial performance and operation. It is without doubt that jet fuel price is remained as always, a hot spot of the insiders’ communication. The nature of the industry, as well as the interactions between various market players and evolving international changes make the risk analysis and management an essential practice. This paper provides an analysis of the airline industry, with emphasis on related counterparties such as the oil market. Risk analysis on jet fuel fluctuations and the perspectives of hedging was discussed as a financial measure for reducing risk exposure and gaining more constant revenues. Examples of hedging adopted by the players in the industry were provided. The results of the study strengthen previous studies that report an impact of fuel hedging mitigates the risks, rather than reinforce the firm value.