Does Operational and Financial Hedging Reduce Exposure? Evidence from the US Airline Industry

While most research on hedging has focused on foreign currency exposures, analysis of jet fuel price exposure in the airline industry and the effects of both financial and operational hedging on this exposure provides valuable insights into risk management. Exposure and hedging in the airline industry is relatively straightforward compared to foreign exchange hedging by multinationals. We investigate the effects of both financial and operating hedging on jet fuel exposure coefficients in the U.S. airline industry during 1994 2008. Our results suggest that both financial and operational hedging are important tools in reducing airline exposure to jet fuel price risk, but our results suggest that operational hedging strategies are more economically important than are financial hedging strategies in reducing jet fuel price risk. JEL Classification: G30, G31, G32