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Essay / Research Paper Abstract
This 4 page paper looks at the potential links between hedging fuel in the airline industry and airline profitability. The main papers and approaches that may be used in a larger study are included. The bibliography cites 9 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEairhedgeab.doc
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Unformatted sample text from the term paper:
the use of options. Hedging has the potential to create gains, as well as the well known case of Southwest Airline which has successfully used hedging for many years, more
recently it was hedging that was credited with helping Air China return to profit in 2009 after losses in 2008 (AirGuide Business, 2010). While the traditional view of hedging
is as a toll to reduce risk, Brooks (2010) notes that there are different patterns seen in the airline industry in recent years. For example, according to the 10-Ks Frontier
Airlines did not have any hedging in the financial year which ended March 2009, but by April 2009 they had already hedged 30% of their fuel requirements for 2010 (Brooks,
2010). Alaska Airlines had a different approach, in 2009 they had hedging for 50% of their requirements, but only 33% for 2010 and 11% for 2011 (Brooks, 2010). In the
latter year it may be argued that there was still time for the hedging to increase. Therefore, it appears that there us no uniformity to hedging practices and different airlines
are pursuing different strategies which can have an impact on results due to the high proportional cost of fuel in the aviation industry (Hashim and Shunmugan, 2009), Morrell and Swan
(2006) argue that up to 15% of costs are accounted for by fuel, five years after this study and fuel costs that have increased at a rate above inflation it
may be argued that the costs are risen in terms of their proportional costs. Brooks (2010) along with Carter (et al, 2006)
assert that the practise is one that is positively correlated with airline profitability. There are some parallels with the shipping industry, where similar studies by Samitas and Tsakalos, (2009) where
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