Abstract
The paper explores the long versus short-term attributes of the airline industry exposure to oil price risk in a macroeconomic framework that emphasizes the interconnections between various risk factors, which is the main contribution to the research in the field. A panel ARDL model and PMG estimator have been applied on monthly data between 2007 and 2020 to investigate the long-term equilibrium relationship between airline companies’ stock prices, oil price risk, financial market volatility, currency risk, inflation, and maturity risk. The negative impact of oil price risk on airlines’ stock prices is significant, robust, and pervasive, and is coupled with a concerning exposure to the US dollar currency risk. As another contribution, the paper analyses the prospects and challenges of the airline industry in dealing with oil price risk in the post-pandemic world. The results point towards the need of the airline industry to rethink its strategic decisions in the more uncertain and unpredictable post-pandemic world, requiring a more comprehensive approach of the complex and dynamic network of risk exposures and a reconsideration of hedging policies.
Highlights
April 20, 2020 was a wild day in financial markets’ history, when WTI futures oil price for May 2020 delivery plunged to a record low of minus $37.63 per barrel and disconnected from its typical long-run equilibrium with Brent and Dubai oil prices (AlMadi & Zhang, 2011; Ji & Fan, 2015)
The Kao test indicated the presence of a cointegrating relationship between the variables considered in the model, regardless of their combination in panel Autoregressive Distributed Lag (ARDL) testing
For what concerns the presence of cointegration between oil prices and macroeconomic variables, the literature abounds in validating it, regardless of country, periods and mix of variables – see, for example, Maghyereh and Al-Kandari (2007), Lardic and Mignon (2008), Rafailidis and Katrakalidis (2014), or Elian and Kisswani (2018)
Summary
April 20, 2020 was a wild day in financial markets’ history, when WTI futures oil price for May 2020 delivery plunged to a record low of minus $37.63 per barrel and disconnected from its typical long-run equilibrium with Brent and Dubai oil prices (AlMadi & Zhang, 2011; Ji & Fan, 2015). It remained positive, the price of Brent oil, the other international oil market benchmark, had fallen almost by 70% from the beginning of 2020 because of the plummeting oil demand caused by the Covid-19 pandemic Airline fuel (or jet fuel) is a petroleum derivate, its cost tracks closely the price of crude oil
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
