The economic value rationale of fuel hedging: An empirical perspective from the global airline industry

Abstract

The airline industry continues to face external shocks such as oil spikes which continue to put downward pressure on an airline’s operating model and fuel prices remains the industry’s wild card. Due to the cyclicality nature of the industry, risk of commodity price (oil) exposure significantly impacts the airlines’ performance outcomes.In this study, the traditional literature that underpins airline fuel hedging within a global setting is re-visited. The results from the existing literature are considered when conceptualizing a model that describes the impact of fuel hedging on a carriers’s firm value using two measures, i.e. stock prices and Tobin’s Q. Aside from the primary effects of fuel price hedging the study considers tertiary effects emitted by the origin and type of carrier. Combining these three aspects into a comprehensive study, contrasting legacy and low-costs at the same time as European and US carriers, over a horizon of nine years provides to the existing literature.The results of the study strengthen previous studies that report a limited impact of fuel hedging endeavors on operators’ firm performance, ceteris paribus. These effects are slightly mitigated by the origin and the type of operator (legacy vs. low-cost) as well as tertiary control variables. As a consequence for practitioners, hedging may be seen as a tool of risk mitigation but not as a tool to strengthen an airlines firm value.