Does Fuel Hedging Make Economic Sense? The Case of the Us Airline Industry
Author | : David Carter |
Publisher | : |
Total Pages | : 49 |
Release | : 2004 |
ISBN-10 | : OCLC:1290351754 |
ISBN-13 | : |
Rating | : 4/5 (54 Downloads) |
Download or read book Does Fuel Hedging Make Economic Sense? The Case of the Us Airline Industry written by David Carter and published by . This book was released on 2004 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the fuel hedging behavior of firms in the US airline industry during 1994-2000 to examine whether such hedging is a source of value for these companies. The investment climate in the airline industry conforms well to the theoretic framework of Froot, Scharfstein, and Stein (1993). Specifically, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. The results show that jet fuel hedging is positively related to airline firm value. The coefficients on hedging indicator variables in regression analysis suggest that the hedging premium constitutes approximately a 12-16% increase in firm value. We find that the positive relation between hedging and value increases in capital investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.