Operational Hedging Against Adverse Circumstances

Abstract

This paper investigates operational hedging against severe disruptions to normal operations. It offers a new method to evaluate the extent that operations policy serves as a hedge against adverse circumstances. We apply the proposed method to explore how supply chain characteristics affect the responses of airlines to the acute demand fall off after the September 11 terrorist attacks. Results indicate that operational hedging vehicles (fleet standardization, high fleet utilization, an aircraft ownership policy rather than leasing, and international operations) are more powerful in protecting firms than using financial instruments. The study contributes in guiding managers as to how operations policy can serve as an imperative factor in mitigating exposures to low-end performance levels.

Keywords: Operations policy, Hedging,Airlines, Stochastic dominance

JEL Classification: G32, L29