Assignment

Assume that you were approached by the CFO of USC Airlines, an established mid-sized hypothetical US airline operating interstate charter flights and providing maintenance services for small aircrafts.

The CFO is debating the effectiveness of hedging transactions, including hedging jet fuel. Her opinion is mainly driven by an international report that shows that not all airlines hedge jet fuel. An extract of the report is provided in the graph below provided by the International Air Transport Association:

USC consumes on average $100 million of jet fuel per year.

In your capacity as a prospective analyst who is familiar with Derivatives products, please answer the following questions which will help you form a view that would aid you to advise the CFO.

1- Discuss the effects of hedging costs on the decision to hedge and its potential outcomes for a mid-sized firm such as USC? (Discuss about advantages and disadvantages)

% of fuel consumption hedged for H1 2019 Ryanair 90% Lufthansa 77% Southwest Airlines 64% Qantas 64% Easyjet 61% Air France-KLM 58% IAG 57% GOL Airlines 50% Turkish Airlines 46% Wizz Air 41% LATAM 40% Azul Brazilian Airl 30% Norwegian 15% Europe Japan Airlines 10% North America United Airlines 0% South America Delta Air Lines 10% Middle-East American Airlines 10% Asia-Pacific Africa Emirates 0% Aeroflot 10% China Southern Airl. 0% South African Airl. 0% *some airlines information includes also the period Jul - Sept 2019 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: IATA based on industrial airline reports and industry commentary 0% % of fuel consumption hedged for H1 2019 Ryanair 90% Lufthansa 77% Southwest Airlines 64% Qantas 64% Easyjet 61% Air France-KLM 58% IAG 57% GOL Airlines 50% Turkish Airlines 46% Wizz Air 41% LATAM 40% Azul Brazilian Airl 30% Norwegian 15% Europe Japan Airlines 10% North America United Airlines 0% South America Delta Air Lines 10% Middle-East American Airlines 10% Asia-Pacific Africa Emirates 0% Aeroflot 10% China Southern Airl. 0% South African Airl. 0% *some airlines information includes also the period Jul - Sept 2019 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: IATA based on industrial airline reports and industry commentary 0%