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Essay / Research Paper Abstract
This is a 4 page paper that provides an overview of how fuel hedging affects airline profitability. The validity of statistical measurements are examined to firmly establish the extent to which the correlation holds. Bibliography lists 10 sources.
Page Count:
4 pages (~225 words per page)
File: MH11_KFfhedge.rtf
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Unformatted sample text from the term paper:
practices are truly effective in keeping ticket prices at the absolute minimum. One of the more controversial, or at least questionable, tactics employed by the airline industry in an effort
to reduce costs is that of fuel hedging. In particular, Southwest Airlines is notorious for hedging the costs of their fuel in an effort to maintain profitability even in times,
such as now, when the cost of fuel is taking its toll on competing airlines. Is it really helping, however? For the most part, the numbers seem to indicate that
it is, but how accurate are these numbers? To get a true assessment of how much airlines are increasing profits by hedging on fuel, one must also examine the external,
internal, and construct validity of the tools used to take such measures in the first place. This paragraph helps the student show what fuel hedging is. In short, fuel hedging
is the practice by which an airline strikes an agreement with an energy provider to provide jet fuel at a fixed rate, rather than a rate determined by market value,
for a predetermined time period. This is similar to certain types of stock options in that it presents a risk to the airlines: they have to buy the fuel at
the agreed upon rate regardless of what happens to the actual market value of fuel. In other words, if the price of fuel rises, then the airline will save money,
but if the price of fuel drops, then the airlines will have to buy it at a fixed rate higher than the actual value, thus losing money (Spinetta, 2006; Morrel
& Swan 2006). The reason airlines engage in the practice, despite the risks, is that fuel does tend to increase in price over time, and hedging allows them to keep
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