COMMERCIAL AIRLINE FUEL COSTS: HEDGING STRATEGIES AND PERFORMANCE

This thesis examines the fuel hedging strategies and their performance in the airline industry. Hedging allows an airline to establish a semi-fixed cost for fuel prices in the future. Unexpected increases in fuel costs can easily move an airline into bankruptcy while a decrease in fuel prices can create massive profits. With fuel prices that can vary 70% in several months, many airlines hedge fuel costs in order to cap a massive expense for the company. It is extremely difficult for airlines, or anyone, to predict what fuel prices will do next week, yet alone next quarter. This thesis notes there is no advisable portion of fuel that should be hedged for any airline; it is instead a complex set of variables that must be analyzed for each individual firm on an ongoing basis. Hedging is notably advised if a firm can accept the added costs of hedging premiums, the wages of employees to actively manage a hedging portfolio and the additional accounting regulations that must be followed. It can be performed using a variety of hedging instruments and utilizing various commodities. Over time, hedging will have a net effect of zero, therefore adding zero value to the firm. In reality, it is assumed that hedging fuel costs will help stabilize fuel prices and therefore stabilize cash flows and profits. The ideal implication is that the market will respond to increased stability in profits with a higher value of the firms publicly traded stock.