A Crude Awakening: Hedging Exposure in the Global Airline Industry

Abstract: The fear of high prices and volatility in the price of jet fuel, provides strong justification for airlines to hedge their risk as a means of migrating their exposure to price fluctuations. We determine the effectiveness of financial and operational hedging among European and U.S. airlines. More specifically, how low-cost carriers and full-service carriers reduce their exposure to jet fuel prices through hedging programs, and how effective they are in reducing stock price volatility, during the period Jan 1, 2011 - Dec 31, 2015. In contrast to Treanor, et al. (2014), we find no evidence that supports the theory that operating a diversified fleet is beneficial in reducing exposure. Rather, our paper is the first to expose a trade-off where operating a uniform fleet provides benefits in terms of cost and is positively related to operational efficiency. Results confirm the effectiveness of financial and operational hedging, where airlines use financial hedging to fine tune exposure, but that operational efficiency in terms of fuel efficiency and seating density is superior in explaining variation in exposure.