Empirical Studies On Jet Fuel Hedging Performance

Jet fuel cost is the largest cost of airlines and also the main issue of air transportation cost management.Hedging is an indispensable measure for airlines to avoid jet fuel cost fluctuation risk and is widely applied throughout the world.Looking at the global airline industry,major airlines all conduct jet fuel hedging risk management on different scales.Right jet fuel hedging activities is a positive risk management strategy,which can lock jet fuel cost,enhance corporation operations governing structure stability and lower company’s fund raising cost.Looking at the hedging history of domestic airlines,it can be found out that Chinese airlines do not have a long hedging history.During the 2008 financial crisis,the three major airlines of China all went through serious losses and they stopped hedging ever since.As a consequence,this paper hopes to research into jet fuel hedging performance,and brings reference standards and measuring indexes for domestic airlines’ hedging activities.This paper first summarizes the development of hedging theory and relevant researches on hedging performance as well as the jet fuel hedging experiences and lessons of domestic and foreign airlines.Then the author sets up the hedging performance appraisal model based on the perspective of risk maximization and pick up two appraisal indexes including yield variance and yield variance changes.In order to minimize risks,the author deducts optimal hedging ratio.Next,the author picks NYMEX heating oil,whose price is highly relevant to that of jet fuel,to conduct empirical studies.The author applies a series of methods including unit root test,Cointegration test,Heteroskedasticity test,ARCH test,OLS model.B-VAR model,ECM model and GARCH model to calculate optimal hedging ratio and evaluate the hedging performance efficiency.The results show that conducting jet fuel hedging can reduce yield variances prominently of not hedging.The efficiency of dynamic hedging is higher than that of static hedging and long-term hedging is better than short-term hedging.