This is an answer posted on Quora by me to the question the title represents.
We all know that we do hedging as an investment to diversify our risks. Like If I have $1000, so I buy a bond of $500 which will surely give a return of $1000 after 2 years and the rest is my investment in shares which is a “RISKY” one. It may tend to throw losses at me but I won’t lose my money. The fact remains that I may lose the value of money after 2 years due to risen inflation but won’t lose the “amount”. Here again civil aviation sector comes into play. Fuel Hedging has drawn due attention in the recent past due to the successful trials by huge aviation companies like SOUTHWEST AIRLINES. Given the fact that hedging is very risky, It’s “SUCCESS STORY” does not make it very plausible to undertake. That is why you don’t see many companies do it often.
Hedging also involves a % of oil being hedged which is a significant part of your risk involvement.Southwest Airlines hedged 120% of their Oil requirement and hence was an improbable risk to be taken by anyone in today’s market. It simply means that Southwest bought its’s requirement of Oil months before the volatility shot in the Middle East. This reaped the company huge benefits of millions of dollars but it’s a marginal success. Normally, Companies with huge Oil requirement hedges it’s 30% – 45% Oil requirement but not whooping 100% to cover for the unfortunate and undesirable loss they may get into if their projections are not met in correct levels.
Civil Aviation sectors in every country involves different domestic regulations (unofficial airline company formulations to cover for the loss they may have to suffer if the ticket prices are not increased) to deflect the rising Oil prices but most of the time it’s inevitable to let it go on the head of the consumer. Airlines have to pay a list of charges to the Airport Authorities and maintenance staffs (everyone included). Also If we include the Airline luxury that is being maintained and being offered does not leave much to the profits of the company. Now If we want to reduce costs for consumers, we have to deeply think of the alternatives in which way prices can be maintained at a low / manageable level given the volatility of Oil prices. A few sectors that require insights are –
- Oil Supply Chain management (Find the link in the supply chain which can be modified to reduce the prices)
- High taxes on Oil at both refiner level and airline consumer level ( It means that when Oil are being refined at the refinery then the first tier of taxes are paid and when airlines buy oil at the airport then another tier of taxes by government is charged)
- Last but definitely not the least, Keeping the management part aside, If we focus more on technology that help us reduce Oil intakes then the cumulative effect of previous 2 points can be realized effectively. e.g. ECOJETS (http://www.easyjet.com/en/news/e… ) – a great initiative by EasyJets – The biggest airliner of Europe generates some hope of change in coming year but Don’t forget Oil Prices on the other side which is gonna haunt us bad due to geopolitical agenda we are in oblivion of what’s gonna happen.