Case Study Airline Fuel Hedging at Southwest and Lufthansa

Case Study – Airline Fuel Hedging at Southwest and Lufthansa
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February 19, 2018
Situation
Hedging of jet fuels is commonplace in the airline industry. Mainly, hedging refers to the “risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities” (BusinessDictionary.com, n.d.). In the case of airlines, this risk management strategy is done in order to protect them from rising fuel costs, which could potentially affect cash flow negatively. In the succeeding sections of this article, these relationships would be discussed in detail. Specifically, the case study done Carter, Rogers, and Simkins (2006), entitled Hedging and Value in the U.S. Airline Industry, would be analyzed thoroughly.
Question
One of the questions posed by Carter, Rogers, and Simkins (2006) are; (1) whether airline companies should or should not safeguard the price exposure of their jet fuel, and (2) how does fuel hedging relate to this? Throughout the study, the authors provided an overview of existing practices in the industry, how each of these adds (or does not) value to the company, as well as other alternatives to further improve value-adding activities.
Hypothesis
To provide a better understanding of the matter, the authors discussed the theory of financial hedging in order to show how it provides value for the airlines by cushioning it from unexpected changes in related industries, as well as how recurring industry effects relate to its value. To prove this point, the author cited South West Airlines and Deutsche Lufthansa, which are two airline companies whose data (operational, financial, and risk management activities) were provided. This was then utilized to be able ...