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Southwest Airlines Fuel Hedge Program. Why Southwest Hedged Fuel
Pages 6 (1506 words)
Name Professor Module Date Southwest Airlines Fuel Hedge Program: Why Southwest Hedged Fuel Executive Summary The airline industry is highly competitive and dependent on jet fuel prices, forcing industry players to seek fuel price risk management strategies, such as hedging, in order to manage costs.
US Airline Industry Background An overview of the US airline sector reveals an industry setting with numerous considerations where heightened competition and fuel costs are key determinants of performance. Global fuel prices are highly volatile, a trend which has been observed over the last two decades (Carter, Rogers and Simskin 1). Fuel costs greatly impact an airline’s operations since they constitute about 17% of total costs, second to labor costs only. Moreover, ticket prices usually reflect fuel prices, hence, determining profit margins, financial outlooks and forecasts. The competitiveness in the US airline industry translates into a situation where the rising fuel costs cannot be passed to the service consumer. Southwest Airlines, as a major player in the US industry, among other things, specializing in short-haul, provides high-frequency and low fare point-to-point services which in the long run can be largely impacted by such volatilities in the fuel prices (Morrell and Swan 713-714). The inability to pass on fuel costs to consumers forces airlines to consider other strategies for surviving fuel prices fluctuation. Hedging is one of such strategies considered by airlines, such as Southwest, as a solution to the fuel price volatility problem. ...
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