Question

Project's Submission Cherist Delure your di SUUNISSIUN. Discussion - Airline Industry and Fuel Derivatives Discussion Topic Some airlines, like Southwest Airlines, manage their future costs by implementing very active hedging strategy (fuel derivatives, options to buy aircraft), while others don't. Why do firms like Southwest hedge? What are the costs and benefits of hedging? Please be aware that when oil prices go down, this strategy become very costly, as Southwest saw in 2009 (Forbes article) and i late 2014 (Reuters). Please read this article (Fuel Hedging by Carter, Rogers, Simkins, Financial Management 2006) fe some interesting thoughts on the topic. Discussion - Flexibility and Venture Capital Discussion Topic There are several academic studies of how Venture Capitalists add value to their portfolio companies

Answer 1

The main reason for firms to do active hedging is to protect themselves from risk arising out of price increase. Hedging has to be done judiciously as it can increase costs in case price decreases. However, a firm like SouthWest first has to see whether the price of fuel is a very big part of cost or not and what are the risks of fuel price increase to its profitability and survival etc and then accordingly take a decision to hedge, In case of SouthWest or other Airlines, fuel is a big cost and increase in fuel cost can severely impact the profitability and survival of airlines might be at stake. Thus, hedging is better.