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Essay / Research Paper Abstract
A 3 page paper that discusses the strategy of fuel hedging in the airline industry as a way to reduce jet fuel costs and increase profitability. The paper includes research problem statement and a purpose of the study statement. Bibliography lists 9 sources.
Page Count:
3 pages (~225 words per page)
File: ME12_PG698739.doc
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Unformatted sample text from the term paper:
and from Los Angeles to New York, just for fuel. That cost reflects a 48 percent increase over 2010. Fuel reflects the greatest expense in airlines budgets. Just a decade
ago, fuel accounted for 15 percent of an airlines total operating expenses. Five years ago, that increased to 29 percent and today, fuel accounts for 35 percent of all operating
expenses (Mayerowitz, 2011). An airlines operating budget is significantly different than it was ten years ago when salaries and benefits was the largest expense and accounted for 39 percent of
operating costs. Airlines have attempted to offset these increased expenses in a number of ways in order to increase their profitability. Increases in ticket prices and baggage fees are two
of those ways (Mayerowitz, 2011). Airlines have also used various strategies to reduce the cost of fuel. One of those strategies is fuel hedging. Fuel hedging is a complicated
futures contact to buy or sell a commodity at a certain price (Reed, 2008). It is fuel hedging that allowed Southwest Airlines to show a profit over many consecutive years
when other airlines were experiencing losses. This is a tactic that is used across the world as airlines attempted to reduce their fuel costs (Ersenberger, 2008). There are numerous types
of hedging and how the airline will fare will depend partly on the type of instrument they use (Flottau & Wall, 2008). This is a great tactic if the price
goes up but if it goes down, the airline will have to pay the agreed-upon price, which will then be above market price. Reed (2008) commented that of all airlines
in the world, Southwest was the "champion oil price hedger" (p. 01b). For decades, Southwest Airlines locked in its fuel price for months and even years in the future. If
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