Selective fuel hedging in aviation based on trend lines and the fast stochastic oscillator
Abstract
Fuel price volatility is a major concern for airlines. An unexpected spike in fuel prices can keep an airline from profiting, and higher fares due to higher fuel prices can diminish customer demand. Airlines that hedge large portions of their future fuel needs at one time risk being fixed in their hedges if spot fuel prices drop. Airlines that do not hedge at all take an even greater risk as there is no 100% assurance to forecast future fuel expenditures. Using market indicators, a model for selective fuel hedging might prove successful in offsetting fuel price volatility. Two models for selective fuel hedging based on trend lines, the fast stochastic oscillator, and two different stop-loss measures showed profitability in each year of a four year historical trading simulation. The simulation resulted with the 2% stop-loss model potentially saving an airline or other aviation fuel users an average of $0.47 per gallon per year (based on a 100,000 gallon per year usage) from October 2007 through September 2011, and the 5% stop-loss model saving an average of $0.65 per gallon per year (based on a 100,000 gallon per year usage) during the same time period. The implementation of either of these models could potentially save an aviation fuel user a great deal of money in the area of fuel costs.
Degree
M.S.
Advisors
Lopp, Purdue University.
Subject Area
Management|Finance|Transportation planning
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