Does Fuel Hedging Add Value? Quantitative Analysis but Qualitative Conclusion in the Case of the US Airline Industry.

Authors

Robert Trempski

Abstract

This empirical analysis uses daily data sets to study hedging activity of major US airlines during 1996-2005 to examine whether hedging is a value added activity as perceived by the investors. The US airline industry presents a good environment to measure the risk exposure due to changes in jet fuel prices. Fuel price risk is omnipresent across the industry. Given jet fuel price volatility, airlines have an incentive to find value in hedging future prices of jet fuel. The research does not find a reason that would contradict the economic fundamentals of hedging; airline stock returns are negatively related to percentage changes in jet fuel prices, on average. However, looking at daily returns of jet fuel and stock prices, we do not find a significant correlation that can be used to support the theorized sensitivity. This result is consistent with the assertion that the benefit of hedging is of a limited value to the investors who seek a combination of stocks that will reduce the overall risk exposure of the portfolio rather than the risk inherent in this or that individual firm.

Recommended Citation

Trempski, Robert (2009) "Does Fuel Hedging Add Value? Quantitative Analysis but Qualitative Conclusion in the Case of the US Airline Industry.," Undergraduate Economic Review: Vol. 5: Iss. 1, Article 9.
Available at: https://digitalcommons.iwu.edu/uer/vol5/iss1/9