Does Operational and Financial Hedging Reduce Exposure? Evidence from the U.S. Airline Industry

24 Pages Posted: 18 Jan 2014

See all articles by Stephen D. Treanor

Stephen D. Treanor

California State University, East Bay

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

Daniel A. Rogers

Portland State University - School of Business Administration

David Carter

Oklahoma State University - Stillwater - Department of Finance

Date Written: February 2014

Abstract

We examine the effects of both financial and operational hedging on jet fuel exposure in the U.S. airline industry. Specifically, we investigate two operational hedging strategies: the extent to which airlines operate different aircraft types and the degree to which airlines operate fuel‐efficient fleets. We find that both financial and operational hedging are important tools in reducing airline exposure to jet fuel price risk. However, operational hedging strategies appear to be more economically important, which suggests that hedging with derivatives is more likely to be used to “fine‐tune” risk exposure, whereas operational choices have a higher order effect on risk exposure.

Keywords: operational hedging, financial hedging, risk management, airline industry

JEL Classification: G30, G31, G32, L93

Suggested Citation

Treanor, Stephen D. and Simkins, Betty J. and Rogers, Daniel A. and Carter, David A., Does Operational and Financial Hedging Reduce Exposure? Evidence from the U.S. Airline Industry (February 2014). Financial Review, Vol. 49, Issue 1, pp. 149-172, 2014. Available at SSRN: https://ssrn.com/abstract=2381026 or http://dx.doi.org/10.1111/fire.12029

Stephen D. Treanor (Contact Author)

California State University, East Bay ( email )

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

Daniel A. Rogers

Portland State University - School of Business Administration ( email )

P.O. Box 751
Portland, OR 97207-0751
United States
503-725-3790 (Phone)
503-725-5850 (Fax)

David A. Carter

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-5104 (Phone)
405-744-5180 (Fax)

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