Fuel Hedging Outcomes and Ticket Pricing: An Empirical Look at the U.S. Airline Industry

27 Pages Posted: 5 Mar 2020 Last revised: 17 Oct 2020

See all articles by Long Shi

Long Shi

Xi'an Jiaotong University; Xi'an Jiaotong University

Qihong Liu

University of Oklahoma - Department of Economics

Myongjin Kim

University of Oklahoma

Date Written: October 16, 2020

Abstract

Major airlines rely on fuel hedging to manage risk of volatile fuel prices. We show that fuel hedging leads to lump sum gain or loss, which does not affect airlines' purchase cost of fuel (variable cost), but is incorporated into the reported airline fuel costs. Our estimation results suggest that differences in reported fuel costs across airlines (due to heterogeneous fuel hedging outcomes) lead to significant differences in ticket prices. In particular, a 10% reduction in the reported fuel cost (due to hedging gain) leads to a 2.2% reduction in ticket prices. We conduct several robustness checks, and rule out explanations such as intertemporal profit smoothing. Moving beyond pricing, we find that hedging outcomes have no impacts on the number of routes and flights which airlines operate. On the other hand, when enjoying hedging gain, airlines use larger aircrafts and reduce airtime of their flights. These impacts, while statistically significant, are fairly small in magnitude. Our results provide empirical evidence that fixed/sunk costs can affect firms' optimal price decisions and some non-price decisions, and establish a link between the financial market and the product market.

Keywords: Fuel hedging; Fuel cost; Full cost pricing; Airline pricing.

JEL Classification: D43, G32, L13, L93

Suggested Citation

Shi, Long and Liu, Qihong and Kim, Myongjin, Fuel Hedging Outcomes and Ticket Pricing: An Empirical Look at the U.S. Airline Industry (October 16, 2020). Available at SSRN: https://ssrn.com/abstract=3523982 or http://dx.doi.org/10.2139/ssrn.3523982

Long Shi

Xi'an Jiaotong University ( email )

28 West Xianning Road
Beilin District
Xi'an, Shaanxi 710049
China

Xi'an Jiaotong University ( email )

28 West Xianning Road
Beilin District
Xi'an, Shaanxi 710049
China

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Myongjin Kim

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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