Risk Management Fuel Prices Are a Major Essay

Open, View, and/or
Download this Document

Total Length: 623 words ( 2 double-spaced pages)

Total Sources: 1

Page 1 of 2

Risk Management

Fuel prices are a major contributor to the profitability of an airline, as they tend to be more volatile than ticket prices. In response to this variability, airlines typically engaging in fuel price hedging strategies. On the operational level, many airlines rely on a focus on shorter average flight distances. This keeps the fuel cost down relative to passenger revenue. However, the most common method of dealing with fuel price volatility is to utilize a financial hedge, typically a series of either futures or forwards to lock in the price of fuel.

The first thing to realize is that the company cannot perfectly hedge the top end of the fuel price range. At some point, the price paid is going to have to be lower than the top price or the airline will lose a lot of money when the price drops again. During a major run-up, like occurred in the first half of 2008, it can be difficult to know where the top of the market is. By the same token, leaving too much of the airline's fuel needs unhedged is just as risky.

Stuck Writing Your "Risk Management Fuel Prices Are a Major" Essay?

View All Our Example Risk Management Fuel Prices Are a Major Essay

Have A Custom Example Essay Written



Optimally, the airline would be able to determine the fuel price level at which it can be profitable at current ticket prices, and set its hedges there. This would guarantee a level of profit. This requires the airline to take a proactive approach, and have a strategy for the level of hedging that it wants to do at each price level. Waiting until a price spike to undertake a hedging strategy is likely to leave the airline with a choice of locking in prices at a loss or facing even more massive losses on the open market. The latter scenario unfolded in 2008 and that year saw most airlines lose money. Airline hedging strategies are simply unable to deal with volatility, because airlines do….....

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Risk Management Fuel Prices Are A Major" (2012, January 20) Retrieved June 2, 2025, from
https://www.aceyourpaper.com/essays/risk-management-fuel-prices-major-53687
   

Open, View, and/or
Download this Document
order custom essay example