Is Fuel Price Hedging profitable for airline industries Article

Is Fuel Price Hedging profitable for airline industries - Article Example Most airlines today hedge fuel costs. This has not always been the scenario. As recently as 15 years ago, fuel hedging was rare. European flag carriers used currency hedges previously to dilute their risk in fuel volatility In the last 12 years (From 9/11 particularly), unstable oil prices have caused a huge panic situation in the airline industry, a trend which will probably continue for some time. Crude price level rose to nearly $150 per barrel approx, later collapsing to below $40, and recently recovering back to $122 (Wyman) (Oilnergy). The past five years have been very intriguing for global airline industry. The state of the capital markets has not been too rosy itself leaving many corporations without much access to capital let alone cheaper rates In these times of significant modification and instability, it is a need that these airlines employ a feasible risk management program, allowing not only confronting the most challenging of times, but should also lead them to prosper in face of adversities. The question we will try to answer through this case study is that is it worth it in terms of profitability for airline Industry? Previously all airlines hedged their exposure with respect of an oil future. Future implies paying a decided price for an amount of oil on a stated date(s). Consider a company buying a this future of jet fuel at $10 per barrel and jet fuel rises to $18, that commitment protects $10 worth of jet fuel underlying from the consequent 80% increase in price. Airlines typically hedge between 30 to 70% of their expected fuel costs. The recent survey of 24 anonymous international carriers reveals a very important snippet of data (Mercatus Energy) Hedging instruments as we assumed initially only involved fuel hedging used futures contracts. Nowadays, the exposure can be hedged in considerable ways which includes the good old futures, comparatively newer forwards and the latest ones namely options with the limits like covered call and