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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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

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. This report provides comprehensive analysis of the effectiveness of hedging attempts to insulate companies in the airline industry around price volatility of the commodities market. Empirical evidences revealed the high impact of hedging on the domestic and international fuel consumption level of air lines.

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 01: INTRODUCTION1

Background1

Aims and Objectives2

Research Questions2

Structure3

CHAPTER 03: METHODOLOGY4

Research Method4

Justification of the Method4

Data Analysis Method5

Secondary Data5

Quantitative Research6

Search Technique6

Literature Search7

Research Philosophy7

Ethical Considerations8

Stressing Limitations9

CHAPTER 04: RESULTS & DISCUSSION10

Oil & Fuel Prices Volatility10

Analysis of Hedging in Airline Industry12

Hedging in Airlines12

Hedging Trend in Airline Industry15

Hedging Effectiveness in Airline Industry17

CHAPTER 05: CONCLUSION21

REFERENCES23

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 ...