BFC5130 Case motivation
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BFC5130
Case motivation
2012 Fuel hedging at JetBlue Airways
Learning objectives
● Understand why companies should hedge and when it is appropriate to do so.
● Explain what is meant by imperfect hedging and the risks that stem from this.
● Understand the concept of cross-hedging using derivatives contracts on an
underlying that is imperfectly correlated with the asset being hedged.
Synopsis
The airline industry has high demand for jet fuel and so hedging the price using derivatives contracts is common practice. The important issues to consider are: to evaluate whether JetBlue should hedge its fuel costs for 2012 (and at what percentage), to analyse the prior years hedges to determine the best commodity to use as the underlying asset, and to
discuss the risks being hedged and those still left unhedged.
This case requires students, taking the role of a research analyst, to examine the jet fuel hedging strategy of JetBlue Airways.
Motivation questions to help analyse the case
Some starting thoughts to identify the problems, explore their causes and consequences, and evaluate potential solutions or alternatives.
What has JetBlue’s historical hedging strategy been? How successful do you think it has been?
Given the high price of jet fuel at the end of 2011, should JetBlue hedge its fuel costs for 2012? And, if so, should it increase or decrease the percentage hedged for 2012?
What is the most appropriate hedging commodity for JetBlue going forward? Support your answer using the 2007 to 2011 historical data provided in case Exhibit 6.
Helena Morales wants to backtest a WTI hedge versus a Brent hedge. She takes a monthly hedge position of 20 million gallons for 2012. This corresponds to a hedge totalling 240
million gallons, which is about 45.7% hedge ratio if the annual gallons consumed stays flat at 525 million gallons. Assume (unrealistically) that JetBlue would use a simple futures hedge (note: the WTI and Brent exchange-traded futures contracts are for 1,000 barrels = 42,000 gallons). Now use the 60 months of the 2007 to 2011 historical prices on jet fuel, WTI, and Brent to simulate what would have been the monthly jet fuel costs under three scenarios: (1) without a hedge; (2) with a WTI hedge; and (3) with a Brent hedge. Would any hedge have helped reduce fuel cost volatility?
What risks are being hedged, and what risks are left unhedged?
If you are submitting a briefing report for this case …
Due Sunday 11.55pm
You may discuss the case in groups but must write and submit individually.
Suggested report structure:
● Executive summary
● Key points: what are the problems and key issues that arise
● Analysis: address the given discussion points or questions
● Conclusion and recommendations
● References
● Appendix: show calculations and results.
You must:
● Document the assumptions you have made (if any) that are not in the case.
● Show calculations and results as an appendix (not always required).
● Independently research the company and issues beyond the provided information.
Context: Business briefing report (NOT Q&A answer format)
Format: 1.5 spacing and 12 point font.
Length: 1,200 words, excluding executive summary and appendix. (approx. 3 pages)
Penalties apply for collusion, high commonality with regards Turnit In text matching and if you exceed the required word count by more than 10%.
Refer to Moodle Assessment for full instructions and marking criteria.
If your group is presenting and leading the class for this case …
Your group’s task is to present your analysis as if to a business meeting.
Suggested structure:
● Purpose, scope and clear position statement.
● Analysis of the key issues, including any assumptions.
● Recommendations
● References
You must:
● Present as a coordinated group to communicate a clear position.
● Use supporting audio visual materials
● Interact with your peers and stimulate discussion.
Structure: Business meeting presentation
Format: Oral and audio-visual presentation. Everyone in the group must speak. Length: 20 minutes.
Refer to Moodle Assessment for full instructions and marking criteria.
2023-08-24
2012 Fuel hedging at JetBlue Airways