Airline fuel hedging and management ownership

Abstract

Purpose

The purpose of this paper is to study the value effects of hedging in the airline industry during a period of high volatility and high fuel costs. The authors also study the determinants of hedging in the airline industry, most importantly whether managerial ownership affects airlines’ tendency to hedge their fuel price risk.

Design/methodology/approach

This study’s research design follows closely previous studies in the area. This allows comparison of the results of this study to those reported earlier, and thus the authors can draw conclusions about the effects of the different market conditions during the sample period.

Findings

The authors find a positive relationship between hedging and firm value, but the relationship is weaker than what is reported in prior studies. The result appears driven by the early part of the sample, whereas in the latter half of the sample, when uncertainty and fuel price are higher, the hedging premium is smaller. The authors also find that hedging premium is larger for firms that follow passive hedging strategies and that managerial ownership increases the firms’ degree of hedging.

Originality/value

This study provides new results on the old question of whether hedging generates value in the airline industry. The recent period of high volatility and high fuel prices makes this an interesting question to re-visit.

Citation

Korkeamäki, T., Liljeblom, E. and Pfister, M. (2016), "Airline fuel hedging and management ownership", Journal of Risk Finance, Vol. 17 No. 5, pp. 492-509. https://doi.org/10.1108/JRF-06-2016-0077