Airline Jet Fuel Hedging: Theory and Practice

Abstract

Most international airlines hedge fuel costs, but the theoretical justification behind this action is weak. The paper explores the nature and extent of airline fuel hedging and asks why airlines hedge. The availability of hedging instruments is first discussed, with the most liquid markets in crude and exchange traded contracts. Aviation fuel contracts are possible, but with counter‐party risk. Most major passenger airlines with sufficient cash and credit now hedge at least part of their future needs. Hedging does protect profits against a sudden upturn in crude prices caused by political and consumer uncertainty leading to slower economic growth. However, if higher oil prices are induced by strong economic growth and oil supply constraints, hedging increases volatility with hedging gains reinforcing improved profits from higher traffic and improved yields. If hedging does not reduce volatility, it may still have an accounting role in moving profits from one time period to another, insure against bankruptcy, and signal the competence of management to investors and other stakeholders.     

One price for all? Price discrimination and market captivity: Evidence from the Italian city-pair markets

This paper tests whether, and to what extent, airlines exploit market captivity by using price discrimination strategies. The Italian passenger market is particularly fit for this purpose, given the high differentials in the degree of the inter-modal competition amongst domestic connections. Results show that, ceteris paribus, airlines adopt a different pricing behaviour depending on the degree of inter-modal market captivity. First, in highly concentrated markets with respect to air competitors, airlines price higher when the inter-modal competition is limited. This proves that inter-modal market captivity strengthens the effect of market power. Second, the inter-temporal price discrimination leads to a J-shaped distribution of fares over time, which is more pronounced when the inter-modal competition is effective. This suggests that airlines need to adopt a pricing technique that allows for a greater market segmentation in order to compete successfully with high-speed rail transport and to extract a larger part of passengers’ surplus. These results are relevant in terms of transport-investment implications and competition policy. The indirect benefits that investments in rail infrastructure would yield through downward pressures on competing airline fares should be embedded in any cost-benefit analysis of high-speed networks investments and in any policy evaluation of measures that aim to reduce the territorial gaps in infrastructure endowment and accessibility.     

Deregulating European aviation — A case study

European international scheduled aviation has been characterised by bans on market entry, price collusion, and capacity sharing. High fares were charged compared to world standards and the fares charged by European charter airlines.In May 1986 new entrants with pricing freedom were permitted on the London-Dublin route which was then the third largest in European scheduled international aviation. Prior to deregulation the route experienced high fare growth. The unrestricted fare ex-London increased 72.6 per cent compared to a Retail Price Index increase of 41.5 per cent. There was a growth in passenger numbers in the years 1980–85 of 2.8 per cent.Since deregulation passenger numbers have risen to 2.3 million compared to 994,000 before deregulation. Fares have declined by an estimated 37 per cent ex-Dublin and 42 per cent ex-London in real terms. There have been four cases of market entry and one of market exit. The estimated share of the new entrants in the second half of 1989 was 28 per cent. The preregulation earnings data of Aer Lingus, the market leader, indicated that protection allowed staff to earn economic rents. A two-tier structure was introduced in response to competition.Remaining barriers to contestability in UK/Ireland aviation include hub airport dominance, ground handling monopolies, and the ability of airlines with routes in both regulated and deregulated markets to engage in geographical price discrimination against airlines with routes in deregulated markets only. A pro-contestability aviation policy in Europe will require measures to prevent the abuse of dominant positions by established airlines over new market entrants and to prevent collusion between established airlines.     

The impact of strategic management and fleet planning on airline efficiency - A random effects Tobit model based on DEA efficiency scores

As a result of the liberalisation of airline markets; the strong growth of low cost carriers; the high volatility in fuel prices; and the recent global financial crisis, the cost pressure that airlines face is very substantial. In order to survive in these very competitive environments, information on what factors impact on costs and efficiency of airlines is crucial in guiding strategic change. To evaluate key determinants of 58 passenger airlines’ efficiency, this paper applies a two-stage Data Envelopment Analysis (DEA) approach, with partially bootstrapped random effects Tobit regressions in the second stage. Our results suggest that the effects of route optimisation, in the sense of average stage length of the fleet, are limited to airline technical efficiency. We show that airline size and key fleet mix characteristics, such as aircraft size and number of different aircraft families in the fleet, are more relevant to successful cost management of airlines since they have significant impacts on all three types of airline efficiency: technical, allocative and, ultimately, cost efficiency. Our results also show that despite the fuel saving benefits of younger aircraft, the age of an airline’s fleet has no significant impact on its technical efficiency, but does have a positive impact on its allocative and cost efficiency.     

The airline perturbation problem: considering disrupted passengers

Abstract

When airlines are faced with some unforeseen short-term events, they have to reconstruct their flight schedules. Although aircraft recovery decisions affect passengers, these disrupted passengers and recovering them have not been explicitly considered in most previous aircraft recovery models. This paper presents an assignment model for airline schedule recovery which recovers both aircraft and disrupted passengers simultaneously, using a rolling horizon time framework. Our model examines possible flight retiming, aircraft swapping, over-flying, ferrying, utilization of reserve aircraft, cancellation and passenger reassignment to generate an efficient schedule recovery plan. The model ensures that the schedule returns to normal within a certain time and the objective is to minimize operational recovery aircraft cost, cancellation and delay cost as well as disrupted passenger cost. The model is tested using a data-set with two disruption scenarios. The computational results show that it is capable of handling the integrated aircraft and passenger recovery problem successfully.     

An empirical assessment of the CO2-sensitive productivity of European airlines from 2000 to 2010

Due to the ongoing increase in the number of commercial flights, greenhouse gas emissions from aviation are expected to rise significantly. Balancing the pursuit of productivity growth with environmental-footprint control policies comprises a long-term regulatory challenge. In this light, the main goals of the present paper are: (i) to measure the CO₂ emissions of European airlines from 2000 to 2010, (ii) to compute airlines’ productivity in developing an environmental-sensitive productivity index, (iii) to compare the obtained results with those resulting from a traditional index, and (iv) to identify the drivers affecting productivity changes. Our results show that on average, airlines’ relative CO₂ emissions have decreased. Although the airlines we studied experienced an average productivity increase—both considering and not considering negative externalities production—environmentally sensible productivity growth is lower than traditional productivity growth. Finally, we find that improvements in load factor as well as a combined increase in stage length and aircraft size affect productivity changes positively, while fuel efficiency is significant only in the case of a CO₂-sensitive measure of productivity.     

Performance based clustering for benchmarking of US airports

Managing service operations is gaining significant attention in both academic and practitioner circles. In this broad area, performance evaluation and process improvement of airlines and air carriers has been the focus of several studies. Although efficient airport operations are critical for improved performance of airlines and air carriers, few studies have focused on airport performance measurement. This study evaluates the operational efficiencies of 44 major US airports across 5 years using multi-criteria non-parametric models. These efficiency scores are treated by a clustering method in identifying benchmarks for improving poorly performing airports. Efficiency measures are based on four resource input measures including airport operational costs, number of airport employees, gates and runways, and five output measures including operational revenue, passenger flow, commercial and general aviation movement, and total cargo transportation. The methodology presented here can be generalized to other industries and institutions.     

The federal republic of Germany: the federal ministry of transport

The continued liberalization of the airline market in the European Community offers the prospect of competition in terms of price, frequency of service and many other attributes. Understanding these factors that influence passenger demand and incorporating them into a demand function poses a substantial theoretical and empirical challenge. A basis for estimating demand functions is the logit model. This paper examines the value of a logit share model in explaining how the share of airlines between airports varies as a function of measured and unmeasured attributes. It shows how demand functions are necessary for understanding a competitive market and evaluates the progress to date in identifying accurate coefficients of the logit function.     

Deregulating direct flights across the Taiwan Strait: The transformation of Eastern Asian air transport market and network

Over the past decades Hong Kong has been successfully playing a role as a gateway to China. Since 1988, it has also been the most important hub between Taiwan and China. Over 5 million passengers travelled between Taipei and Hong Kong in 1997, making the link the busiest in the world's international air links and contributing one-sixth of the passengers to Hong Kong airport, which before 1997 had the most international passengers in Asia. In the foreseeable future Taiwan will possibly start some direct services to China; the air link between Hong Kong and Taipei will then compete with many links across Taiwan Strait. These changes may cause the transformation of the market and network structure in eastern Asia. Niches of specific airlines and airports will disappear. This paper examines the issues of possible changes in eastern Asian air transport market: the current market environment, the problems for direct flights across Taiwan Strait, the possible links between Taiwan and China, the future role of Hong Kong, and the market structure in the future.     

Meta-analysis of the relationships between space syntax measures and pedestrian movement

ABSTRACT

Ample research has been conducted investigating the built environment impacts on pedestrian movement (PM). A clear division is also evident in the literature on this topic: one group tends to use geographic measures (metric distance) of the environment to explain pedestrian behaviour; the other group uses syntactic measures (visual distance). Many review articles have been published on the former. However, relatively little is known about the effect size (ES), directions, and consistency of syntactic measures in explaining PM. This paper fills this gap through a meta-analysis of published and unpublished studies on this topic spanning over 1975–2016, and answers the following five research questions: (a) What are the different measures used in the space syntax literature to explain PM?; (b) What are the magnitudes and directions of associations between space syntax measures and PM?; (c) Which space syntax measure has a more consistent relationship with PM?; (d) To what extent do the explanatory powers of different measures vary between their derivation methods?; and (e) What are the likely causes of variations of the reported results in prior studies? This research examined four syntactic measures (integration, connectivity, choice, and control) in a random effect model with 95% confidence interval (CI). The choice and integration measures were further investigated based on their operational approaches (topological, angular and metric). Results show that integration (ES?=?0.206, 95% CI?=?0.173–0.238, p?<?0.001), choice (ES?=?0.481, 95% CI?=?0.391–0.561, p?<?0.001), and connectivity (ES?=?0.305, 95% CI?=??0.225–0.696, p?=?0.257) measures positively influence PM with choice being the strongest predictor. Both connectivity and control (ES?=??0.001, 95% CI?=??0.117–0.115, p?=?0.990) were found to have a statistically insignificant impact. The choice and integration measures show stronger effects when derived using the angular approach (ES?=?0.493 for choice, and ES?=?0.502 for integration) compared to topological approach (ES?=?0.374 for choice, and ES?=?0.124 for integration). However, the reported results of all measures are highly heterogeneous, perhaps due to the differences in research design. The significance, magnitude, and consistency of integration and choice measures justify their relevance in built environment interventions to promote PM.     

Man and his transport behaviour. Part 2c Planning as a substitute for implementation: a bicycle case study

Abstract

Researchers, planners and politicians alike have emphasized the need for systematic planning prior to the introduction of new transportation measures and schemes. Innovations ranging from the construction of new freeways to the encouragement of mode shift are therefore usually the result of detailed studies and extensive planning.

With unsettling frequency, however, the planning has come to replace implementation. The governing body identifies a problem area and commissions either a government planning department or a consultant to develop a plan which outlines needs and proposes measures which address the problem. The problem usually has two groups of people anxious to solve it; individuals who are being affected in their day‐to‐day living or travel, and longer‐term planners (usually politicians) who see it in terms of both extended community planning and votes.

The plan satisfies both sides temporarily, but becomes an effective planning tool only if implemented. Unrealistic plans and unwilling implementors have left a trail of plans which have been ends in themselves. Examples from bicycle planning in Australia show how the use of plan formulation can be either an essential element leading to the implementation of a planning scheme, or an expensive substitute for positive action.

A feature of plans which have been implemented is an integrated approach which makes extensive use of data collection to ascertain the needs of the population. A feature of the unimplemented plans is their concentration on the feasibility of introducing physical elements into the transport infrastructure without studying the travel demand.

It is concluded that the greater the concentration on individual needs and constraints, the less likely that planning will come to replace the implementation of a scheme.     

Contract Design,Financing Arrangements and Public Ownership—An Assessment of the US Airport Governance Model

Abstract

US airports negotiate legally binding contracts with airlines and finance large investment projects with revenue bonds. Applying insights from transaction cost economics, we argue that the observed variation in contractual and financing arrangements at US airports corresponds to the parties' needs for safeguarding and coordination. The case evidence presented reveals that public owners set the framework for private investments and contracting. We suggest that airline contracts and capital market control result in comparative efficient investments and act as a check on the cost inefficiency typically linked to public ownership.     

A comparative study of aviation safety briefing media: card,video, and video with interactive controls

Passengers’ safety knowledge is a key factor in determining the chance of surviving any life- or injury-threatening situation that could occur in civil aviation. Aviation regulations require airlines to provide safety briefings to inform passengers of safety procedures on board. The safety briefing card and the safety briefing video are the two media that airlines routinely employ on board to this purpose. Unfortunately, research on aviation safety briefing media has cast serious doubts about their efficacy, urging researchers to better understand what makes safety briefing media effective as well as improving their effectiveness. This paper contributes to such goals in two different ways. First, it proposes the introduction of interactive technology into aviation safety briefings for improving their effectiveness. Second, it illustrates a controlled study that compares the effectiveness of three safety briefing media: the two briefing media that airlines currently employ on-board (safety briefing card and safety briefing video) and a safety briefing video extended with basic interactive controls. The results obtained by the study highlight a superior effectiveness of the two video media over the card media for aviation safety briefings. Moreover, the video with interactive controls produced improvements over the card in a larger number of effectiveness measures than the traditional video. The paper includes a discussion of factors that can explain the better results obtained with the video conditions, and in particular the video with interactive controls, and of possible additional extensions to increase the interactivity of aviation safety briefings.     

Role of the Railways in the Future of Air Transport

Abstract

The role of the railways in the air transport industry is usually limited to provision of access to airports. However, the development of high-speed rail networks and the congestion and environmental problems faced by the air transport industry suggest the railways could have a greater role in working with the airlines to provide an integrated transport service for medium-distance journeys (up to 800 km). Many air journeys involve two flights and a transfer at a hub airport. The alternative being investigated here would replace air journeys by a rail journey and a flight, and a transfer between them at the hub airport. Such integration could offer a positive alternative to aircraft on some routes and lead to railway journeys to airports becoming part of air transport services, and not only to provide access to them. Integration could therefore provide a better use of available air capacity rather than duplicating some high-speed rail routes and services.     

Partial productivity measures and total factor productivity in the air transport industry: Limitations and uses

In recent years the measurement of productivity has increasingly focused on measuring total factor productivity or TFP. Additional research has investigated the reasons for differences in TFP between firms. The implicit assumption behind this work is that simpler measures of industry productivity (such as revenue ton-miles per employee) can seriously misstate both the level and growth rate of productivity. As a result, accurate analysis of productivity requires information on TFP. While this argument is not open to debate on a theoretical basis, the extent that simple measures of productivity inaccurately portray TFP has not been investigated in anything but a cursory manner. This paper investigates the relationship between typical industry measures of productivity and TFP using a data set of U.S. and non-U.S. airlines for the period 1970–1983. The paper examines both levels of productivity and growth rates. The results indicate the extent to which industry measures accurately or inaccurately reflect the more comprehensive measure of productivity (TFP). To the extent that industry measures are inaccurate, this paper investigates the possible sources of error in order to determine if slightly altered industry measures might more accurately reflect TFP.     

The Role of Tradable Credit Schemes in Road Traffic Congestion Management

Abstract

Road traffic congestion is not yet reflected in current market prices within the sector and has given rise to a number of instruments to mitigate the resulting negative impacts. The focus of this paper is the tradable credit scheme — an incentive-based economic measure — in order to address traffic congestion. The research questions are (1) whether the state-of-the-art in the literature suggests that tradable credit schemes could be feasibly introduced to mitigate congestion, and (2) whether a tradable credit scheme could have advantages over other instruments. A brief outline of congestion mitigation approaches is provided first to position this type of economic instrument with respect to other measures. The broad issues in the design of a tradable credit scheme are then presented. Most research to date has focused on the use of tradable credits to manage related pollution, but it is clear there is potential to design a scheme for traffic congestion management. To date this is a novel review of tradable credit schemes that has focused specifically on their role in road traffic congestion management.     

Acquisition,efficiency and scale economies: An analysis of the British bus industry

The British Bus industry has undergone considerable transformation since privatization. Five major operators have emerged to dominate the market, a position almost exclusively attained through acquisition. This paper reviews the economies of scale argument commonly cited for this change and gives an overview of the acquisition process. It questions whether this argument gives a complete explanation for this industry development. For 58 individual companies, the level of technical efficiency attributable to firms operating at or near the optimum level of output is examined over 5 years to determine if mergers in practice have resulted in scale economies. Technical efficiency is estimated using data envelopment analysis, under assumptions of constant and variable returns to scale. Efficiency scores are then regressed on a time trend and a merger dummy to test whether acquired firms' efficiency has significantly improved above the average. It was found that over the period, efficiency had improved. This improvement, however, cannot be wholly attributed to the achievement of economies of scale. More specifically, there has been an improvement in the internal efficiency of acquired firms and some scale economies within group companies, the latter of which may have resulted from the eradication of competition.     

Operational efficiency versus financial mobility in the global airline industry: a data envelopment and Tobit analysis

The events of September 11th, 2001 precipitated an almost unprecedented financial crisis for the world airline industry. However, it is not clear that these events represent a discrete, industry disruption or whether, in fact, airlines were already entering a period of economic challenges that would demand new strategic orientations on their part. This study investigates the structural drivers of operational efficiency as well as the financial posture of airlines on the eve of September 11th.A sample of 38 airlines from North America, Europe, Asia and the Middle East was utilized to investigate whether relative operational efficiency implied superior financial mobility (as defined by Donaldson). Data envelopment analysis was utilized to derive efficiency scores for individual airlines. The underlying structural drivers of efficiency were then investigated. It was found that the traditional framework developed in the literature still provided reasonable explanatory power for realized relative operational efficiency. However, the second stage of the analysis found that relative operational efficiency did not inherently imply superior financial mobility. As such, airlines that had chosen relatively efficient operational strategies found themselves in positions of vulnerability with regard to financial mobility and thus suffered the consequences in the post-September 11th environment.     

Differences in air passengers’ buying behaviour: findings from Korean and Australian international passengers

Abstract

This paper investigates how air passengers’ expectations, ticket price, airline service quality, value, passenger satisfaction and airline image determine their buying behaviour. To test the conceptual frameworks, path analysis was applied to data collected from Korean and Australian international passengers to examine differences between these two groups. Further analyses were undertaken on different passenger segments between national and foreign airline passengers. The results of the path analysis reveal that air passengers’ buying behaviour differs significantly between Korean and Australian international passengers. Results also reveal that the determinants of air passengers’ buying behaviour differ by airlines.