Fuel Hedging for Delta Airline

Satisfactory Essays
Fuel Hedging for Delta Airlines

Delta Air Lines
• A major United States Airline • Results of operations are impacted by changes in
• Aircraft fuel prices • Interest rates • Foreign currency exchange rates

• Derivative contracts
Derivative Type Hedged Risk Classification of Gains and Losses

Fuel hedge contracts
Interest rate contracts Foreign currency exchange contracts

Increases in jet fuel prices
Increases in interest rates Fluctuations in foreign currency exchange rates

Aircraft fuel and related taxes
Interest expense, net Passenger revenue 2/12

Fuel Cost
• No. 1 cost for Delta Air Lines – 36% of total Operating expenses • Average price per gallon fluctuates ($2.12~3.16) with the price of crude oil
$3.50 40% 35% 30% 25% $2.00 20% $1.50 15% Avg. Price/Gallon % of Total Oper. Exp. $3.00

$2.50

• How to manage the fuel cost becomes the key success factor for airline industry

$1.00

10% 5% 0% 2006 2007 2008 2009 2010 2011

$0.50

$0.00

3/12

Approaches to Fuel Price Volatility
• Increase fuel efficiency
• Short-term: changing operating procedures or tankering policies

• Pass on increases to their customers and cargos • Hedge future fuel requirements using physical and derivative markets

4/12

Crude Oil Prices

5/12

Fuel Hedging
• Fundamental Rational
• Fuel price fluctuation is not consistent with economic activity • Gap between sell tickets, collect money, and buy fuel

• Purpose
• • • • Lock in the future fuel cost Stabilize fuel cost, overall costs, cash flows, and profits Lower fuel risk exposure and cost of equity Alter the timing of profits:
• Mark-to-market adjustments for fuel hedges recorded in periods other than the settlement period

• As a signal of management competence
6/12

Fuel Hedging Instruments
• Jet fuel, gas oil and crude derivatives:
• • • • Forward contracts Future contracts Options and collars Swaps

• Other hedging methods:
• Merges and acquisitions

International Air Transport Association (IATA) Clearing House: is used for

You May Also Find These Documents Helpful

  • Best Essays

    Southwest Airlines Fuel Hedging and Relations to Profitability Abstract In order to stay airborne, a passenger airline has to consistently generate profits. Profits come only from paying passengers, hence all stratagems must be customer oriented. In a scenario where there are many airlines competing with each other, one way of attracting passengers is to keep the cost of flying low, while providing value for money. On the other hand, expenses must tightly controlled to reach and stay at the…

    • 2731 Words
    • 11 Pages
    Best Essays
  • Powerful Essays

    Pack: A Review of Southwest Airlines Innovative Fuel Strategy While many airlines suffer from rising fuel costs, Southwest Airlines continues to emerge victorious in the aeronautical landscape. Other carriers now forced to increase prices to compensate for fuel costs, are now subject to the new mindsets of consumers who are opting for longer bus and car rides, or simply not traveling at all. The woes of the airlines industry have many posing the question if airline travel is fast becoming a travel…

    • 3899 Words
    • 16 Pages
    Powerful Essays
  • Powerful Essays

    Fuel Hedging in the Airline Industry: The Case of Southwest Airlines By Dave Carter a, Dan Rogers b, and Betty Simkins c a College of Business Administration, Oklahoma State University, Stillwater, OK 74078-4011, Phone: (405) 744-5104, Email: dcarter@okstate.edu b School of Business Administration, Portland State University, Portland, OR 97207-0751, Phone: (503) 725-3790, Email: danr@sba.pdx.edu c CONTACT AUTHOR: College of Business Administration, Oklahoma State University, Stillwater…

    • 6247 Words
    • 25 Pages
    Powerful Essays
  • Powerful Essays

    Delta Neuttal Hedging

    • 5837 Words
    • 24 Pages

    Fourth AIMS International Conference on Management December 28-31, 2006 1 Practical Considerations in the Application of Delta Neutral Hedging Paper Reference No: A553 T.V.Venkatarathna, Senior Consultant, Polaris Software Lab Limited, Survey No.203/Part, Manikonda IT Park, Hyderabad – 500 019 venkat.tv@polaris.co.in Many financial institutions hold derivative instruments in their portfolio whose value changes in response to a change in the value of the underlying security. The option-pricing…

    • 5837 Words
    • 24 Pages
    Powerful Essays
  • Good Essays

    Delta Airlines

    • 1639 Words
    • 7 Pages

    entry DA is one of the oldest airlines in the United States, however, there are still threats from new entrants in the market because low-cost carriers (LCC) definitely going to affect the pricing strategy of DA. In contrast, DA has brand loyalty due to its long history of operation. Moreover, the entry barriers are still high due to the operating cost such as aircraft, airport cost, maintenance, route licenses, and taxations. The threat of substitution Since the airline industry is serving passengers…

    • 1639 Words
    • 7 Pages
    Good Essays
  • Best Essays

    Delta Airlines

    • 4528 Words
    • 19 Pages

    management of Delta Airlines, along with an industry analysis of the airline industry. The report uses current and past financial and statistical data for the company along with other up to date material to determine Delta's current market position and future potential. The report finds that Delta Airlines has successfully emerged from its bankruptcy in 2005 to report successful returns in both 2007 and 2008. With its 2008 acquisition of Northwest Airlines Delta became the world's largest airline, further…

    • 4528 Words
    • 19 Pages
    Best Essays
  • Better Essays

    Delta Airlines

    • 1881 Words
    • 8 Pages

    A Marketing Practice for Delta Airways Timothy Duffy BUS 330 Principles of Marketing Benjanette Matthews JUNE 17, 2012 Delta Airways (DELTA) is the US’s largest airlines; it operates both internationally and domestically along with chartering air services for the carriage of passengers, cargo and mail. The airline flies to over 900 destinations globally and is considered to be a leader within the industry with almost 770 aircrafts in service. Starting back in 1924 as a crop dusting company…

    • 1881 Words
    • 8 Pages
    Better Essays
  • Powerful Essays

    Delta Airlines

    • 2352 Words
    • 10 Pages

    Strategy: Delta mainline is a legacy airline and competes utilizing its low price and productivity. DeltaExpress tries to build on Delta’s leading position. DeltaExpress is an integral part of Delta and centrally managed in terms of pricing, flight frequency and routing and all the resources are shared. It benefits from the high levels of productivity amongst flight attendants and ground crew. The relevant strategies for Delta are business level strategies (Cost leadership among Legacy airlines) and…

    • 2352 Words
    • 10 Pages
    Powerful Essays
  • Good Essays

    Delta Airline

    • 766 Words
    • 4 Pages

    Have you ever flown with Delta Air Lines? I can tell you that I have and absolutely enjoy it. Starting from the ticket agent to the gate agent to the onboard crew, this U.S. airline provides outstanding customer service. Delta Air Lines is one of the largest and most well-known airlines in the world. Delta Air Lines began as a small crop dusting company (Huff Daland Masters) in the early 1920’s and transformed into a major transportation American airline (Welcome). The company has been growing year…

    • 766 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Delta Airlines

    • 2028 Words
    • 6 Pages

    particular airline. Delta as we know it today, traces its roots way back to 1924. Huff Daland Dusters was founded as the world's first aerial crop dusting organization. In 1928 the company became Delta Air Service, and the following year Delta carried its first passengers over a route stretching from Dallas, Texas to Jackson, Mississippi with stops in Shreveport and Monroe, Louisiana. In 1941, the company moved its headquarters from Monroe to Atlanta, Georgia. Deregulation of airline industry in…

    • 2028 Words
    • 6 Pages
    Good Essays