Content area
Full Text
ABSTRACT
Controlling fuel costs is an operations strategy that can significantly influence and enhance the company 's competitiveness in the airline market. With the implementation of the financial risk management procedures, airline companies have saved billions of dollars in fuel costs through the use hedging programs targeted toward the energy derivatives market. A hedging program is dependent upon purchasing contracts to supply oil at a lower than market price when oil prices increased. However, when the oil market prices decrease rapidly below the hedged price, the hedging cost control approach can easily backfire, especially on those companies which anticipated higher fuel prices. For example, Southwest Airlines (US) and China Eastern Airlines (China) have incurred huge losses when using a fuel-hedging program due to sudden price declines in the oil market. These unanticipated higher costs from hedging contractual agreements have become a financial drain on airline companies which used a fuel hedging strategy. This study compares the strategic and organizational response by Southwest Airlines and China Eastern Airlines to increased fuel costs due to fuel hedging. The responses of the two airlines was remarkable not only due to the ways in which they achieved a successful business partially attributed to fuel hedging to achieve lower fuel costs, but also due to the ways in which they responded differently after the huge losses attributed to the fuel hedging strategy. This investigation is conducted to detect and analyze the realities of fuel hedging comparing two airline companies and their financial results, which reflect the results of biased perspectives on risk management. As a result of this study, a better understanding can be achieved on how biased risk management perspectives affect information processing and decision making.
Introduction
With advanced information technologies, a number of financial derivatives products are available in the futures channel with timely services. Advance purchases of commodities via derivatives or entering into paper contracts for commodities at a fixed price for future delivery to protect against the shock of anticipated rises in price becomes a special means for corporate strategies. Consequently, many corporations effectively use financial derivatives products and step into the futures market to reduce the companies' expenses and optimize their profit. For example, with the strong competition in the aviation industry, airline executives...