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

30 Pages Posted: 13 Aug 2013

See all articles by Britta Berghöfer

Britta Berghöfer

Trinity College (Dublin) - Faculty of Arts, Humanities and Social Sciences

Brian M. Lucey

Trinity Business School, Trinity College Dublin; Jiangxi University of Finance and Economics; Abu Dhabi University - College of Business Administration; Ho Chi Minh City University of Economics and Finance

Date Written: August 2013

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.

Keywords: airline, hedging, operational hedging, financial hedging

JEL Classification: G32, L93

Suggested Citation

Berghöfer, Britta and Lucey, Brian M., Fuel Hedging, Operational Hedging and Risk Exposure – Evidence from the Global Airline Industry (August 2013). Available at SSRN: https://ssrn.com/abstract=2309510 or http://dx.doi.org/10.2139/ssrn.2309510

Britta Berghöfer

Trinity College (Dublin) - Faculty of Arts, Humanities and Social Sciences ( email )

College Green
Dublin 2
Ireland

Brian M. Lucey (Contact Author)

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
Dublin 2
Ireland
+353 1 608 1552 (Phone)
+353 1 679 9503 (Fax)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Abu Dhabi University - College of Business Administration ( email )

PO Box 59911
Abu Dhabi, Abu Dhabi 59911
United Arab Emirates

Ho Chi Minh City University of Economics and Finance ( email )

59C Nguyen Dình Chieu
6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

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