tag:blogger.com,1999:blog-17206839.post8923521570565229466..comments2023-09-09T09:26:22.175-04:00Comments on Andrew Samwick's Blog: Should Airlines Hedge Fuel Costs?Andrewhttp://www.blogger.com/profile/13514024573333057559noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-17206839.post-33445207918387416352005-09-10T02:02:00.000-04:002005-09-10T02:02:00.000-04:00The Cost of Financial Distress (CFD) argument is a...The Cost of Financial Distress (CFD) argument is appealing to me. There are probably a lot of intangible CFD in addition to higher borrowing cost and transaction fees. These costs strike me as possibly non-linear --> they can start increasing quickly as a company gets in financial trouble.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17206839.post-68561434992653200262005-09-10T09:25:00.000-04:002005-09-10T09:25:00.000-04:00The financial distress argument has merit, but I s...The financial distress argument has merit, but I see what's going on in another (somewhat related) way. The airline industry is definitely nowhere near perfectly competitive. So, hedging allows the hedger competitive advantage during times like this -- they have cash when non-hedging competitors don't. <br><br>In case you (or your readers)are interested, Adams, Dasgupta, and Titman have a paper on the SSRN (Financial Constraints, Competition, and Hedging In Industry Equilibrium) and that looks at this issue (caution - it's got a fair bit of mathematical modeling, so "non-nerds" might find it a bit of rough sledding.The Unknown Professorhttp://www.blogger.com/profile/06915963335561704298noreply@blogger.comtag:blogger.com,1999:blog-17206839.post-2316014073794413642005-09-10T10:48:00.000-04:002005-09-10T10:48:00.000-04:00I believe the answer is more likely that the other...I believe the answer is more likely that the other airlines aren't managed particularly well.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17206839.post-12636722490598855532005-09-10T11:27:00.000-04:002005-09-10T11:27:00.000-04:00The Unknown Professor writes:"they have cash ...The Unknown Professor writes:<br><br>"they have cash when non-hedging competitors don't."<br><br>this might be an intangible cost of CFD - competitors "shark" on a bleeding company. they sense blood and move in foor a kill.<br><br>other intangible costs are adverse selection with employees and customers (people avoid companies that lack cash and may be at a higher risk to go under), damage to brand (company loses its "position" in customer minds) -prevention (hedging) costs less than fixing the brand after the CFDAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17206839.post-23190854536049916842005-09-10T18:22:00.000-04:002005-09-10T18:22:00.000-04:00Why should hedging, like any other form of leverag...Why should hedging, like any other form of leverage, make any difference to firm value? Cann't investors perform the same hedges and save the company the trouble and trading costs?Fat Manhttp://www.blogger.com/profile/05131003998982897093noreply@blogger.comtag:blogger.com,1999:blog-17206839.post-82731970761333665642005-09-11T12:40:00.000-04:002005-09-11T12:40:00.000-04:00i've been at cash-starved companies that even ...i've been at cash-starved companies that even fed ex starts to cut-off. is the inability to ship things via fed ex a CFD? seriously, what reasonable person with other options wants to work under such conditions. companies start to lose employees when they have no cash and have to borrow money at junk bond and usurous rates.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17206839.post-56603293485256591002008-05-22T06:40:00.000-04:002008-05-22T06:40:00.000-04:00One question: why would hedging be irrelevant unde...One question: why would hedging be irrelevant under zero transaction cost markets? One would also have to assume that shareholders outside the firm would have the same information as the insiders with regards to the airline's fuel consumption. In all practicality, outsiders would not have this information in the timely manner required for say dynamic hedging in a volatile asset. Also I can't see typical mutual funds getting into buying airlines and hedging the fuel risk (even though probably most of the equity vol comes from fuel cost vol).<br><br>Another idea: there are not only Bankruptcy costs to consider (while going without a hedge) but there is a 'utility' of staying in business. Why mess around, when you can focus on what you're good at? Being short something with 60 vol is a major distraction to the core business and it's hard to plan around this volatility.<br><br>Second order reason, given that fuel cost vol is just so large vs other business risk, financing should be a lot cheaper than if you did not hedge. Even if you were a financially weaker airline I think your financing cost should still be lower in lieu with a hedge than without. Fuel cost vol seems to be a large determinant of credit worthiness. (Nothing to back this claim but intuition.)hedging rulesnoreply@blogger.comtag:blogger.com,1999:blog-17206839.post-68638245733701657962008-12-13T09:57:00.000-05:002008-12-13T09:57:00.000-05:00All very interesting, does anybody know any good p...All very interesting, does anybody know any good papers written on this subject. I am currently writing my dissertation on airline companies fuel hedging strategies an how it impacts their financial performance. ThanksToonhttp://www.blogger.com/profile/10672748276545752427noreply@blogger.com