Fuel hedging and airline operating costs

Vertical integration as an input price hedge: The case of Delta Air Lines and trainer refinery

“…One approach to managing input price risk might simply be to adjust output prices, but passenger airlines cannot implement such a strategy. First, intense competition restricts them from raising airfares (Lim & Hong, ; Morrell & Swan, ). Because air travel has largely become a commodity (Button, Costa, Costa, & Cruz, ; Carter, Rogers, & Simkins, ), customers would switch carriers if Delta passed along fuel costs and competitors continued not to.…”

Hedging jet fuel price risk: The case of U.S. passenger airlines

“…Southwest notes that "the correlation between WTI crude oil prices and jet fuel prices during recent periods has not been as strong as in the past, and therefore the Company can no longer demonstrate that derivatives based on WTI crude oil prices will result in effective hedges on a prospective basis" (Southwest Airlines, 2014;page 27). Thus airlines hedging strategies are not necessarily successful (Morrell and Swan, 2006;Mercatus, 2012), and fuel hedging has no statistically significant effect on airline operating costs (Lim and Hong, 2014).…”

“…Those that do hedge often do not have the most effective or successful hedges (Morrell and Swan, 2006). Much of the existing literature in this area addresses why firms hedge (Morrell and Swan, 2006;Halls, 2005), value creation from hedging (Carter et al, 2006), or transportation operations and hedging (Treanor et al, 2014;Lim and Hong, 2014). There is limited research (Adams and Gerner, 2012) that presents the optimal volatility reducing hedge ratio for airlines.…”

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“…As a consequence, airlines might have to operate to a different airspace, additional fuel costs and increased airport fees, all of these factors in addition to compensation also have an impact on airline profitability. (Cook, 2015;Lim, et al, 2014;Castelli, et al, 2013;Bai, 2006) 2. Branda successful and well-known brand adds value to the airline, because it has a long-term bond with the customer, adds extra demand and allows the enterprise to increase the price of the product without losing market share.…”