View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by OTHES DIPLOMARBEIT Titel der Diplomarbeit „Jet Fuel Hedging“ Verfasser Guang Sheng Mai Angestrebter akademischer Grad Magister der Sozial- und Wirtschaftswissenschaften (Mag. rer. soc. oec.) Wien, im September 2012 Studienkennzahl lt. Studienblatt: A 157 Studienrichtung lt. Studienblatt: Diplomstudium Internationale Betriebswirtschaft Betreuer/Betreuerin: o.Univ.-Prof. Dr. Jörg Finsinger Table of Contents Table of Contents ................................................................................................ I Preface – A Century of Flight ............................................................................. V Introduction ................................................................................................. 1 The Aviation Industry .................................................................................. 2 2.1 Deregulation .......................................................................................... 3 2.1.1 United States .................................................................................. 3 2.1.2 Europe ............................................................................................ 5 2.1.3 Asia-Pacific ..................................................................................... 5 2.1.4 Low-Cost Airlines............................................................................ 6 2.2 Oil Crises .............................................................................................. 6 2.3 Terrorism ............................................................................................... 8 Crude Oil ................................................................................................... 10 3.1 Crude Oil Benchmarks ........................................................................ 11 3.1.1 West Texas Intermediate (WTI) .................................................... 12 3.1.2 Brent Blend ................................................................................... 12 3.1.3 Dubai-Oman ................................................................................. 13 3.1.4 OPEC Reference Basket .............................................................. 13 3.1.5 West Texas Intermediate vs. Brent............................................... 14 3.2 The Oil Market .................................................................................... 15 3.2.1 Non-OPEC Supply........................................................................ 16 3.2.2 OPEC Supply ............................................................................... 18 3.2.3 Supply and Demand Balance ....................................................... 19 3.2.4 Spot Prices ................................................................................... 20 I 3.2.5 Financial Markets .......................................................................... 22 3.2.6 Non-OECD Demand ..................................................................... 25 3.2.7 OECD Demand ............................................................................. 26 3.3 Oil Price Volatility ................................................................................. 28 3.3.1 Deregulation .................................................................................. 29 3.3.2 OPEC ............................................................................................ 29 3.3.3 Speculators ................................................................................... 30 Jet Fuel ...................................................................................................... 32 4.1 Jet Fuel in Flight Operations ................................................................ 33 4.2 Jet Fuel Price....................................................................................... 35 4.2.1 Crack Spread ................................................................................ 36 4.3 Airlines and Jet Fuel Cost .................................................................... 39 Solutions to high Fuel Cost ........................................................................ 42 5.1.1 Reduce Fuel Consumption............................................................ 42 5.1.2 Passenger has to pay ................................................................... 44 5.1.3 Fuel Hedging ................................................................................. 45 5.1.4 Bio Jet Fuel ................................................................................... 45 Hedging Instruments ................................................................................. 48 6.1 Options ................................................................................................ 49 6.1.1 Call Options .................................................................................. 50 6.1.2 Put Options ................................................................................... 52 6.2 Forward Contracts ............................................................................... 53 6.3 Futures Contracts ................................................................................ 54 6.3.1 Futures Marketplace ..................................................................... 55 6.3.2 Trading with Futures ..................................................................... 56 Airlines and Hedging Strategies ................................................................ 59 7.1 Hedging with Swaps ............................................................................ 59 7.2 Hedging with Call Options ................................................................... 61 II 7.3 Hedging with Collars ........................................................................... 62 7.3.1 Zero-Cost-Collar ........................................................................... 63 7.4 Hedging with Futures .......................................................................... 64 7.5 Airlines and Foreign Currency Risk ..................................................... 66 7.6 Hedging Strategies.............................................................................. 67 7.6.1 Over-the-Counter vs. Exchange-Traded Instruments ................... 67 7.6.2 Hedging vs. No Hedging ............................................................... 68 Southwest Airlines .................................................................................... 72 8.1 Corporate Risk Management .............................................................. 73 8.1.1 Counter-party Risk........................................................................ 74 8.1.2 Derivatives .................................................................................... 74 8.1.3 Commodities ................................................................................ 75 8.1.4 Hedge Ratio ................................................................................. 75 8.2 Southwest Airlines’ Hedging Program ................................................. 76 Conclusion - Does It Make Sense To Hedge? .......................................... 81 References ....................................................................................................... 84 List of Figures................................................................................................... 87 List of Tables .................................................................................................... 88 Appendix A – Curriculum Vitae ........................................................................ 89 Appendix B – Abstract (English)....................................................................... 90 Appendix C – Abstract (German) ..................................................................... 91 III IV Preface – A Century of Flight For many centuries, men have dreamed of flight. More than 500 years ago, Leonardo da Vinci imagined machines, which imitated the physics of birds. He drew plans and built models, but none of his creations actually flew. They remain as a reminder of his ingenious imagination. A lot of others tried different approaches thereafter. Most failed and some even paid with their life while trying their flying machines. Inspiration, little knowledge and mainly bravery were the main contributors in the advancement of the science of flight. December 17, 1903 marked the cornerstone of modern aviation. The Wright Brothers became the first to fly an engine-powered, heavier-than-air machine achieving both controlled and sustained flight. From there on, it took 16 years for the first non-stop flight across the Atlantic1, and another 28 years for the first man and airplane to break the sound barrier2. In the 1930s, the American propeller- driven Douglas DC-3 became the first aircraft that was profitable enough to carry passengers exclusively. Previous fixed-wing aircrafts mainly transported cargo, while airships were the only transport to carry passengers over great distances. In 1949 the first jet airliner, the de Havilland Comet, was build and entered service three years later. Sud Aviation, Tupolev, Boeing, Douglas and Convair followed shortly with their own jets. The year 1969 saw the first flight of two very distinctive iconic aircrafts. On the one hand, the Concorde3, the only supersonic commercial airliner that ever went into commercial passenger service. It remained in the skies for 27 years.