Due to recent hedging losses, albeit prolonged volatility relatively low fuel prices and rising costs of financial hedging, many airlines decided to forego or scale-back their financial jet fuel derivatives and instead manage the risk exposure through operational hedging strategies. Based on a sample of 80 global airlines, we evaluate the cost impact of operational hedging and its relationship with financial hedging. Our results suggest that operational hedging can alter airline operating costs and reduce jet fuel risk exposure as well as operating unit cost (CASK). While operational hedging has a significant impact on unit cost, it cannot substitute financial hedging with derivatives. Our main finding is that financial hedging deployed in conjunction with operational hedging can potentially reduce operating costs and increase profitability. Hedging theoretical frameworks therefore need to be extended to incorporate operational hedging strategies.
The relationship between hedging and financial distress hence needs to be revisited in hedging theories.
Collected and summarized from the source below by Minh Pham https://db.vista.gov.vn:2095/science/article/pii/S0967070X18305651