Internal and External Considerations All three airlines’ internal considerations include is to minimize fire] consumption, firel expenses, and expenditure control.
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Internal and External Considerations All three airlines’ internal considerations include is to minimize fire] consumption, firel expenses, and expenditure control. As one of the main reasons for fire] hedging is to reduce cost operations through procurement of aviation fuel at a lower price despite its increase in price. Being a major operational expense, buying at a lower price will give the airline a competitive advantage as other airlines might increase airfare due to the increase in fuel hence operational costs. Further, an internal consideration of BL is that having its own autonomy is fire] distribution. Decisions will be left to them which gives them more control. External conditions for the procurement of WN and MU is the Iraanraq War which led to the rapid increase in crude oil (Lui & Jones, 2016) while DL considerations are the price fluctuations and uncertainty (Manuela et al., 2016). Effectiveness of Airline’s Approach to Hedging Southwest Airlines, China Eastern Airlines, and Delta Air Lines used long—term hedging contracts to attain better pricing and reduced fire] costs. WN became known for its “proficiency in gaining low fire] prices using file] hedging" (Liu & Jones, 2016). At one point, the airline was paying much less than the market price of fire] with it was at its peak before July 2008 (Liu & Jones, 2016). However, afier July of 2008, there was a rapid decline in oil prices which negatively afl’ected the airline’s cost control strategy. Both WN and MU were very successfirl but that came to an end. Both airlines focused on keeping fuel cost low and stable and was blinded that a contract binds them into an obligation and is subject to market risk. Thus, when fire] prices variated and dropped, it gave them significant losses. DL’s strategy of purchasing an old refinery was criticized for not being a good way of hedging as costs are driven by the price of oil itself and not the margins of the refiners (Manuela et al., 2016). However, investors agreed that the airline’s move was a good strategy in the long term hence outperforming the S&P 500 and the XAL on the 60—trading day after the announcement of its oil re—fmery acquisition (Manuela et al., 2016). DL’s strategy was more likely to succeed in the long run and is the most successful among all three. _I
Logistic Lesson An airline’s most important and one of the most expensive operating costs comes from fuel which accounts for at least 22% to 38% of the total cost. Using fuel-efficient aircraft can cut down costs however fuel hedging can significantly reduce costs. However, implementing strategies should be carefully analyzed. Trends shall be studied together with the current news on the countries that supply the fuel. Oil companies have predicted that prices will increase in the near future. The jet fuel market is expected to increase its market size to USD 120 billion in 2026 from USD 114 billion in 2019 (Mordor Intelligence, n.d.). In addition to that, the ongoing invasion of Russia in Ukraine, which started this year, resulted in an 8.3% increase in crude oil in February (Bartiromo et al., 2022). With this information, I assume that airlines did or will continue fuel hedging.
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