2006/03/01 by David Carter, David A. Carter, Daniel A. Rogers +1 · 3 citations
Business, Management and Accounting · Engineering · #High Temperature Alloys and Creep #Reliability and Maintenance Optimization #Risk Management in Financial Firms
paper · doi:10.1111/j.1755-053x.2006.tb00131.x
crossref issued 2006/03/01 · crossref published 2006/03/01 · crossref published-print 2006/03/01 · openalex publication_date 2006/03/01 · crossref created 2008/10/27 · crossref deposited 2021/07/06 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/22 · crossref indexed 2026/07/24
Does hedging add value to the firm, and if so, is the source of the added value consistent with hedging theory? We investigate jet fuel hedging behavior of firms in the US airline industry during 1992–2003 to examine whether such hedging is a source of value for these companies. We illustrate that the investment and financing climate in the airline industry conforms well to the theoretical framework of Froot, Scharfstein, and Stein (1993). In general, airline industry investment opportunities correlate positively with jet fuel costs, while higher fuel costs are consistent with lower cash flow. Given that jet fuel costs are hedgeable, airlines with a desire for expansion may find value in hedging future purchases of jet fuel. Our results show that jet fuel hedging is positively related to airline firm value. The coefficients on the hedging variables in our regression analysis suggest that the “hedging premium” is greater than the 5% documented in Allayannis and Weston (2001), and might be as large as 10%. We find that the positive relation between hedging and value increases in capital investment, and that most of the hedging premium is attributable to the interaction of hedging with investment. This result is consistent with the assertion that the principal benefit of jet fuel hedging by airlines comes from reduction of underinvestment costs.