Fuel hedging and airline operating costs

Abstract

Fuel hedging is a common risk management tool used in the airline industry. But past studies have not addressed the question of whether fuel hedging creates any benefit to airline operations. This study is the first work that empirically examines the role of fuel hedging in reducing airlines’ operating costs. Using US airlines data from 2000 through 2012, we find that, after accounting for the presence of cost inefficiency, fuel-hedging airlines had about 9–12% lower operating costs, but this effect is statistically insignificant. Irrespective of the hedging status, US airlines could reduce operating costs by an average of 12–14% per year without reducing output.