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Author: Gjest Andreas Breistein Publisher: ISBN: Category : Languages : en Pages : 73
Book Description
Negatively, with the level of activity in the commercial aviation industry will have severe effects on the value of jet fuel price hedging. The next part is a brief introduction to the practice of hedging commodity prices with different types of derivatives. This is a concise follow-through of the different aspects one has to consider when hedging commodity prices. Airlines who want to utilize financial commodity markets while minimizing the probability of losses need thorough knowledge about these markets. To end with, the characteristics of the crude oil and jet fuel prices and their implications for the airline industry are examined. This chapter is an extension of the previous one and is supposed to provide additional knowledge about the challenges of jet fuel price hedging. The two last sections give the reader an educated understanding of how some airlines have been able to utilize the commodity markets better than others.
Author: Gjest Andreas Breistein Publisher: ISBN: Category : Languages : en Pages : 73
Book Description
Negatively, with the level of activity in the commercial aviation industry will have severe effects on the value of jet fuel price hedging. The next part is a brief introduction to the practice of hedging commodity prices with different types of derivatives. This is a concise follow-through of the different aspects one has to consider when hedging commodity prices. Airlines who want to utilize financial commodity markets while minimizing the probability of losses need thorough knowledge about these markets. To end with, the characteristics of the crude oil and jet fuel prices and their implications for the airline industry are examined. This chapter is an extension of the previous one and is supposed to provide additional knowledge about the challenges of jet fuel price hedging. The two last sections give the reader an educated understanding of how some airlines have been able to utilize the commodity markets better than others.
Author: Brian Hornung Publisher: ISBN: Category : Agency (Law) Languages : en Pages : 120
Book Description
Airlines commonly employ hedging as a risk management strategy to protect themselves against sudden, unpredictable increases in the price of jet fuel. In a seminal paper by Carter, Rogers, and Simkins (2006), it is established that jet fuel hedging by airlines increases the firm value of the airline. This dissertation replicates their study using an expanded dataset over a greater period of time. This study finds a smaller "hedging premium" than Carter, Rogers, and Simkins (2006). It is shown that the leasing of aircraft plays an important role in the relationship between the hedging premium and capital expenditures. The measure of jet fuel hedging used in the previous studies, the percentage of next year's fuel requirements hedged, accounts for the amount of hedging done by the airline, but it does not consider the performance of the jet fuel hedges. This dissertation for the first time determines the effect of jet fuel hedging performance, as measured by the realized gains and losses from jet fuel hedging, on the value of the firm. The analyses find that the realized gains and losses have a negative relationship with firm value. However, after identifying outliers (such as the significant hedging losses in 2009 resulting from falling jet fuel prices during the financial crisis) using a simple box plot and removing them from the sample, realized gains and losses show a positive correlation with firm value. Furthermore, successful hedging may induce principal-agent issues such as buying market share behavior. When an airline experiences a run of hedging success, a manager may mistakenly believe that the cost of jet fuel is decreasing. This is not the case, however, as the cost of using jet fuel is the price that can be received selling it on the open market, not the price paid for the jet fuel. A manager may attempt to pass on the "savings" to consumers in the form of lower fares, lowering the price below its profit-maximizing level. This in turn can increase the airline's market share, although it comes at the expense of reduced profit. This dissertation tests the relationship between successful jet fuel hedging and market share. A positive and statistically significant correlation between successful hedging and market share is found for Southwest Airlines and American Airlines, two carriers known for successful hedging, but statistically insignificant results for smaller carriers Alaska Airlines and JetBlue Airways.
Author: David Carter Publisher: ISBN: Category : Languages : en Pages : 49
Book Description
This paper investigates the fuel hedging behavior of firms in the US airline industry during 1994-2000 to examine whether such hedging is a source of value for these companies. The investment climate in the airline industry conforms well to the theoretic framework of Froot, Scharfstein, and Stein (1993). Specifically, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. The results show that jet fuel hedging is positively related to airline firm value. The coefficients on hedging indicator variables in regression analysis suggest that the hedging premium constitutes approximately a 12-16% increase in firm value. We find that the positive relation between hedging and value increases in capital investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.
Author: Rueyjian Lin Publisher: ISBN: Category : Languages : en Pages : 50
Book Description
This paper examines whether jet fuel hedging increases the market value of airline companies around the world. Using a sample of 69 airline companies from 32 countries over the period 1995 to 2005, we find that jet fuel hedging is positively related to market value. This positive relationship holds in the various sub-samples and is significant for US and non-alliance firms. Moreover, our results show that the risk-taking behavior of executives and the tendency to avoid financial distress are important determinants for the jet fuel hedging activities of non-US and non-alliance airline companies. Alleviating the problem of underinvestment is also an important factor to explain the jet fuel hedging activities of US and non-alliance firms. Our results add support to the growing body of literature which finds that hedging increases firm value for global airline companies.
Author: Mengdong He Publisher: ISBN: Category : Languages : en Pages : 62
Book Description
ABSTRACT How Does Hedging Affect Firm Value – Evidence from the U.S. Airline Industry Mengdong He This study examines the relation between jet fuel hedging and firm value using a sample of 36 publicly-traded U.S. airlines over the period 1992 to 2013. We find a positive hedging premium which suggests that jet fuel hedging adds value to airlines. We then focus our analyses on the specific ways in which jet fuel hedging by airlines can affect firm value. Specifically, we investigate the effect of jet fuel hedging on firm value based on different hedging levels, different levels of jet fuel exposures, different hedger types, different operating costs spent on jet fuel, and different levels of jet fuel price volatility. Our results suggest that airlines can maximize their firm value by increasing the hedged proportion of next year's jet fuel requirements hedged, particularly when they are at a medium level (between 11% and 36%). Next, we find evidence which suggests that selective hedging strategies can help increase an airline’s firm value. In addition, our results suggest that airlines can increase their firm value significantly by increasing the amount of jet fuel hedged if the amount of their operating costs spent on jet fuel is high (> 27%). Fourthly, our results show that investors appear to value jet fuel hedging more in periods of high jet fuel price volatility. For different levels of jet fuel exposures, we find no evidence that the effect of jet fuel hedging on firm value will show any significant differences based on different levels of jet fuel exposures.
Author: David Carter Publisher: ISBN: Category : Languages : en Pages : 33
Book Description
Set in June 2001, the case places the student in the role of Scott Topping, Director of Corporate Finance at Southwest Airlines. Scott is responsible for the airline's fuel hedging program. The case describes the importance of jet fuel hedging in the airline industry, the volatility of jet fuel prices, hedging strategies available to manage jet fuel price risk, and related issues. [Note: The time period of the case allows the instructor to discuss additional issues not specifically addressed in the case such as the impact of September 11th, 2001 terror attacks on the airline's hedging strategy and the collapse of Enron (e.g., counterparty credit risk in hedging).]Southwest Airlines has a business model based on being a low cost provider and has been very successful at offering the lowest airfares in the industry. This business strategy has effectively resulted in a consistently increasing market share over the years. A dominant factor on the expense side of its business is the cost of fuel. Fuel is the second largest expense behind labor. Most recently, fuel costs have reached the highest annual average over the six-year period from 1994 to 2000 at $0.7869 per gallon in 2000. This fact has led to the increased importance of minimizing fuel cost for 2001 and beyond. To mitigate the sensitivity to fuel prices, Southwest has consistently hedged its fuel usage but wants to reevaluate the strategies it employs. As listed in the case, the student is asked to evaluate the following hedging strategies: (1) doing nothing, (2) hedge using plain vanilla swaps, (3) hedge using options, (4) hedge using zero cost collars, and (5) hedge using futures contracts.The case is intended for use in an advanced corporate finance course or risk management at the graduate level. However, the case can also be used in an undergraduate risk management course.
Author: Ahmet Duran Publisher: ISBN: Category : Languages : en Pages :
Book Description
Purpose: Investigation of the relation between firms' values and aviation fuel hedging activities via a dynamic panel data methodology for the major U.S. passenger airlines during the period 2002-2011. Design/methodology/approach: We use data from nine U.S. major passenger airlines representing 77.2 per cent of the U.S. domestic airline industry, in terms of available seat miles. The data is taken from the Securities and Exchange Commission (SEC) 10-K filings, the Bloomberg database and the Bureau of Transportation Statistics. In accordance with the dynamic panel data methodology, we use cross-sectional dependence tests, first generation panel unit root tests, the Durbin-Hausman panel co-integration test, and the panel fully modified ordinary least square estimator, respectively. Findings: The Durbin-Hausman panel co-integration (DHp) test reveals a statistically significant long run relationship between firms' values and aviation fuel hedging activities for the U.S. major passenger airlines. Moreover, the results of the fully modified least square estimation suggest that aviation fuel hedging has positive impact on those firms' values. Additionally, we discuss the U.S. major passenger airlines loss of ten to fifteen per cent of their value in the global financial crisis. Another important finding is that merger agreements results in an almost 10 per cent increase in those firms' values. Research limitations/implications: Clear hedging information was manually searched for in the airlines' annual audited reports. This process was both time consuming, and labour intensive. Originality/value: This is the first study that focuses exclusively on the major U.S. passenger airlines, for the effects of hedging strategies on firm value. Furthermore, we use the DHp test which allows for a co-integration relationship in the case of integrated of different order series.
Author: Simo M. Dafir Publisher: John Wiley & Sons ISBN: 1119026733 Category : Business & Economics Languages : en Pages : 312
Book Description
A hands-on guide to navigating the new fuel markets Fuel Hedging and Risk Management: Strategies for Airlines, Shippers and Other Consumers provides a clear and practical understanding of commodity price dynamics, key fuel hedging techniques, and risk management strategies for the corporate fuel consumer. It covers the commodity markets and derivative instruments in a manner accessible to corporate treasurers, financial officers, risk managers, commodity traders, structurers, as well as quantitative professionals dealing in the energy markets. The book includes a wide variety of key topics related to commodities and derivatives markets, financial risk analysis of commodity consumers, hedge program design and implementation, vanilla derivatives and exotic hedging products. The book is unique in providing intuitive guidance on understanding the dynamics of forward curves and volatility term structure for commodities, fuel derivatives valuation and counterparty risk concepts such as CVA, DVA and FVA. Fully up-to-date and relevant, this book includes comprehensive case studies that illustrate the hedging process from conception to execution and monitoring of hedges in diverse situations. This practical guide will help the reader: Gain expert insight into all aspects of fuel hedging, price and volatility drivers and dynamics. Develop a framework for financial risk analysis and hedge programs. Navigate volatile energy markets by employing effective risk management techniques. Manage unwanted risks associated with commodity derivatives by understanding liquidity and credit risk calculations, exposure optimization techniques, credit charges such as CVA, DVA, FVA, etc.
Author: Gjest Andreas Breistein
Author: Gjest Andreas Breistein
Author: Brian Hornung
Author: David Carter
Author: Rueyjian Lin
Author: Mengdong He
Author: David Carter
Author: Ahmet Duran
Author: Rigas Doganis
Author: Simo M. Dafir
Author: Mlibazisi Ngwenya