Airline jet fuel hedging: Theory and practice

  • Morrell P
  • Swan W
  • 86

    Readers

    Mendeley users who have this article in their library.
  • 24

    Citations

    Citations of this article.

Abstract

Hedging fuel costs is widely practiced by most international airlines but its theoretical justification is weak. This paper explores the nature and extent of airline fuel hedging and asks why airlines hedge. A policy of permanent hedging of fuel costs should leave expected long-run profits unchanged. If it damps out profit volatility, it should do so in a way that the market would not value. However, it may not damp out volatility, after all. Oil prices and air travel demand cycles are linked when oil supply reductions drive GDP declines. But oil and travel are negatively correlated when GDP demand surges drive oil price increases. So oil prices can either increase or decrease airline profit cycles, depending on the time period sampled. A fuel price hedge would create exceptional value when an airline is on the edge of bankruptcy. However, when on the verge of bankruptcy, an airline does not have the liquidity to buy oil futures. And variable levels of hedging can be useful in transferring profits from one quarter to another. Finally, hedging may be a zero-cost signal to investors that management is technically alert. Perhaps this is the most compelling argument for airline hedging. However, it lies more in the realm of the psychology of markets than the mathematics.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Authors

  • Peter Morrell

  • William Swan

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free