Selective hedging practices and the airline industry. An optimization model.

Abstract

This work moves over a 50-year period of time crossing the boundaries of continents and nations trying to retrace those events – globalisation, deregulation, and consolidation – that shook up and completely reshaped the airline industry (chapter 1). These events resulted in the creation of an extremely though environment where survival was granted only at those companies able to drastically reduce their expenses. Risk management practices – both financial and operational – started to be widely adopted in those years by companies in a wide array of industries because it looked like a viable way to reduce the unpredictability of future events (chapter 2). Suddenly uncertainty became something to be exploited rather than merely avoided. Despite being widely used, the efficiency of these instruments is still to be proven, especially regarding the practices of financial hedging (chapter 3) that are still misunderstood by a great number of corporations. Throughout this dissertation an optimization model is presented and developed (chapter 4) to evaluate different financial hedging strategies that can be used to reduce the overall uncertainty an airline is subject to. While presenting and discussing the results from this study (chapter 5) the dissertation focuses on the role played by the expectation on future prices. This ‘view’ on future levels of prices plays a pivotal role in choosing that optimal hedging ratio that minimizes the average price paid to purchase jet fuel. This kind of financial hedging can be listed among the market-timing strategies.