Hedging, exposure and rm value: A study of European and U.S. Airlines

Abstract

For several reasons, the airline industry is a reasonable industry to analyze the relation between corporate risk exposure, hedging policy, and rm value. We ex- plore the relationship between hedging, exposure, and rm value among European and U.S. airlines. More speci cally, how di erences in strategy between Low-Cost Carriers and Full-Service Airlines a ects this relationship, during the period Jan 1, 2010 { Dec 31, 2017. We analyze the relation between airlines fuel exposure coe cients and the percentage of next year's fuel requirement hedged. We nd evidence that hedging reduces exposure to fuel prices. Further, investgating the relationship between hedging and rm value, we nd that hedging is associated with higher rm value. However, we discover that di erences in strategy a ects the hedging premium. Our results con rms that increased hedging activity in periods of high exposure is not associated with higher rm value. Lastly, we nd that alleviating the underinvestment problem appear not to be important in explaining airlines hedging behavior.