An Analysis of the Effectiveness of Hedging Attempts to Insulate Companies in the Airline Industry around Price Volatility of the Commodities Market

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ABSTRACT

Through quantitative mood of enquiry, this study aim at analysing the effectiveness of hedging attempts to insulate companies in the airline industry around price volatility of the commodities market. In today's highly competitive and rapidly advancing business environment, every industry is trying to gain competitive edge through various means. Similarly, airlines in aviation industry are also inclining towards means that can provide them more earnings and protect them from losses. Where, hedging is one of the effective techniques that can secure airlines' profits and save them from potential losses. High fuel prices as well as high volatility in oil prices have made airlines to go for hedging in order to secure themselves from high volatility in the commodity market. Many financial and economical instruments are involved in hedging that include exchange-traded funds, stocks, insurance, contracts and many others that are derived from these elements, which are used in order to reduce or prevent potential any losses that take place because of companion investment. Thus, airlines employ hedging in their financial management of the company in order to secure themselves from future risk of losses. The concept of fuel hedging has been a pre-dominant one throughout the last decade, as the airline companies with the best fuel hedging position are the ones that have produced adequate economical return. Results of this study showed that as the effect of oil prices is found to be significant on the ticket prices, hedging becomes necessary. To succeed and survive in the market, airline companies need to consider hedging.

ABSTRACTII

CHAPTER 01: INTRODUCTION4

Background4

Research Questions5

Purpose of the Study5

Research Outline6

CHAPTER02: AN OVERVIEW OF HEDGING AND OIL & FUEL PRICES VOLATILITY7

Analysis of Hedging in Airline Industry9

Hedging in Airlines9

Hedging Trend in Airline Industry11

Hedging Effectiveness in Airline Industry13

CHAPTER 03: METHODOLOGY16

Research Design16

Data Collection16

Hypotheses16

Variability-Reduction Method17

Regression Method17

Research Philosophy18

Ethical Considerations19

Stressing Limitations20

CHAPTER 04: RESULTS21

CHAPTER 05: CONCLUSION24

REFERENCE26

CHAPTER 01: INTRODUCTION

Background

Hedging is a technique that is employed in order to minimise or eliminate possible losses or gains that occur due to a companion investment. In its simplest form, hedging involves the transferring of risks without any need for buying insurance policies (Smith & Stulz, 2011). Many financial and economical instruments are involved in hedging that include exchange-traded funds, stocks, insurance, contracts and many others that are derived from these elements.

The higher fuel prices of airlines impact directly on the ticket prices. Airline management has realised the fact that rising ticket prices is not a viable solution in order to counter the rising fuel prices (Tokic, 2012). Only this move can help the airline industry to sustain the competitive environment of the industry. The concept of hedging is adopted by those airline companies which aim to avoid massive variation in bottom line profitability and operating expenses for hedging the fuel prices. The concept of fuel hedging has been a pre-dominant one throughout the last decade. In the view of Neidl and Chiprich (2001), the airline companies with the best ...