The effect of fuel hedging activities on European airline companies in the recent oil crisis

Abstract

The aim of this dissertation is to determine the effects of fuel hedging activities on European airlines during the recent oil shocks of 2008 and 2014. A panel regression model is used for a sample of nine European airlines, covering the period from 2007 till 2016, in order to investigate how fuel hedging has effected firm value. Moreover, the determinants of hedging are also investigated in order to get a deeper understanding of why firms decide to hedge. Results from this study imply that firm value, the level of investments made by the firm into its future, and size were statistically significant in explaining why firms decide to hedge fuel price risk, and have a positive relationship with the percentage of next year’s fuel requirements hedged. Moreover, the second model suggests that the percentage of next year’s fuel requirements hedged has positively affected the firm value of the chosen airlines in the past ten years, despite of hedging losses suffered by European airlines as a result of the oil shocks. The average hedged airline had a value premium of 17.63%. When splitting the sample period into shorter periods, in line with the change in volatility and prices in the oil market, only the period from 2009 till 2010 was statistically significant in explaining an increase in firm value as a result of fuel hedging. Thus airline managers should be reminded that fuel hedging is not aimed to generate additional profit. However, it will increase firm value as it assists in managing jet fuel costs and the volatility in the markets, thus helping the company in planning and budgeting their income and expenses, while ensuring a sounder internal funds generating potential in order to secure sufficient funds for future investments.