Case Study Airline Fuel Hedging at Southwest and Lufthansa (Case Study Sample)
The final reading assignment for this week is Chapter 19 of the Simkins' book, a case on hedging and value in the U.S. airline industry. For those of you who may not have purchased the book, I have reproduced the case here预览文档 since it appears as a journal article available on the PSU library website.
Using the case write up guidelines provided earlier in this lesson, please prepare a two- to three-page (double-spaced) case write-up using the guidelines in the Harvard Case Analysis document. As per those guidelines, please include the following sections:
Proof and action
In the course of your write-up you may want to address all or some of the following discussion questions. Please feel free to provide additional insights from your reading of the case.
Based on research evidence provided in the case, does fuel hedging add value for airlines? If so, how much value (i.e., the hedging premium), on average, is there?
What measure is used to examine the value of airlines in this research? Also, how is fuel hedging activity measured?
How does hedging add value for firms according to the research discussed in the chapter? Please list and describe the ways.describe the ways to do this.
What is the underinvestment hypothesis, and how would hedging add value under this hypothesis? Please give examples for the airline industry.
Please list and describe the hedging instruments considered by Southwest Airlines.
How does Lufthansa Airlines hedge fuel price risk?
Does the hedging premium vary over time? Please explain.
Please explain how the authors examine motives for airline hedging by using multivariate regressions. What do they find?
Case Study – Airline Fuel Hedging at Southwest and Lufthansa
Your Institution of Affiliation
February 19, 2018
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.
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.
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 Sou
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