Abstract
PurposeThe purpose of this paper is to develop a simple model illustrating the benefits of operating a diverse fleet of aircraft.Design/methodology/approachThe paper is theoretical. It describes how real options are beneficial to the firm in both capital budgeting and risk management. It illustrates the use of real options in the airline industry, and how real options are used as a risk management tool. Then the model is developed which illustrates how a diverse fleet can provide an airline protection against fuel price risk.FindingsThe results of the model show that a diverse fleet is value enhancing to an airline during periods when fuel prices are high or uncertain. Furthermore, this paper shows that a diverse fleet provides an airline with an operational hedge to jet fuel prices. Though the paper focuses on the airline industry, the results are applicable to those industries vulnerable to volatile input costs, and prohibitive abandonment and re‐entry costs.Originality/valueThe paper uses real option analysis to show the benefits for an airline deriving from operating a diverse fleet of aircraft.
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