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Birla Institute of Technology and Science, Pilani.: Financial Engineering Case Study:-2012 Jetblue Airways

The document discusses JetBlue's fuel hedging strategy and options for 2012 given high fuel prices in 2011. It analyzes whether JetBlue should increase, decrease, or maintain its fuel hedge percentage for 2012. It also examines which commodity, WTI crude oil, Brent crude oil, or heating oil, most closely tracked jet fuel prices from 2007 to 2011 based on correlation analysis. Finally, it recommends whether JetBlue should continue using WTI or switch to Brent as its oil benchmark based on the historical correlation data.

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Kartikeya Aditya
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145 views

Birla Institute of Technology and Science, Pilani.: Financial Engineering Case Study:-2012 Jetblue Airways

The document discusses JetBlue's fuel hedging strategy and options for 2012 given high fuel prices in 2011. It analyzes whether JetBlue should increase, decrease, or maintain its fuel hedge percentage for 2012. It also examines which commodity, WTI crude oil, Brent crude oil, or heating oil, most closely tracked jet fuel prices from 2007 to 2011 based on correlation analysis. Finally, it recommends whether JetBlue should continue using WTI or switch to Brent as its oil benchmark based on the historical correlation data.

Uploaded by

Kartikeya Aditya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Birla Institute of Technology and Science,

Pilani.

Financial Engineering Case Study :-


2012 JetBlue Airways

Submitted By Submitted to
Tathagat Saxena (2016A1PS0709P) Dr. Udayan Chanda

Kanav Puri(2016A1PS0541P)

Kamesh Kumar Saini (2016A1PS0473P)

G Shreyas (2016A1PS0697P)

Kartikeya Aditya (2016A1PS0740P)

Arpan Maitra (2016A1PS0726P)

Abhran Anurag (2016A1PS0497P)

Date of Submission: 25/4/2019


Q.1.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 hedge for 2012?

To hedge against a possible rise in jet fuel prices in 2012 by increasing its percentage of hedge as
well as its hedging costs. Or bear the exposure to a possible increase of jet fuel prices in 2012 by
decreasing its percentage of hedge as well as its hedging costs. Therefore, following discussion
can be done to arrive at the appropriate proposal.

JetBlue should look at what its peers are doing to hedge their positions against varying prices.
JetBlue should take advice from a consulting firm regarding the projection of future prices of
fuel. JetBlue should also keep an eye on what is the peer response to the price fluctuations. If
ever JetBlue chooses no hedge at all, it might be able to absorb a slight increase in fuel prices by
increasing the prices of its tickets accordingly. However, this action can lead to a decline in its
market share because the competition may not rise the ticket prices to adjust the fuel costs.
JetBlue should follow its fuel hedging strategy. Exhibit 3 depicts JetBlue’s inclination to adapt
its jet fuel hedging in a counter-cyclical manner. Actually, JetBlue hedged fuel as much as 67%
and 64% in respectively Q1 2007 and Q2 2007, just before the spike in Q2 2008. In this way,
JetBlue protected itself in advance against the forthcoming sharp increase in fuel prices, in an
attempt to maintain the proportion of jet fuel costs constant in its operating expenses (as shown
in Panel A of Exhibit 2). For the whole year of 2009, JetBlue kept its fuel hedging as low as 9%,
which was adequate with the outlook of slow increase in jet fuel prices at that time. Then,
JetBlue continued to adapt her hedging to the evolution of jet fuel prices until Q4 2011.

As of now, our recommendation to JetBlue would be to reduce fuel hedging for 2012, since
we expect jet fuel prices to remain at similar levels or go down during 2012. This would allow
JetBlue to reduce her hedging costs and still benefit from constant jet fuel prices.

Q: 2 Focusing on the 2007 to 2011 period, which commodity (WTI crude oil, Brent crude
oil or heating oil) moved more closely to the price of the Jet fuel?

From the available data for prices of Jet fuel, WTI crude oil, Brent crude oil and heating oil, the
monthly changes in price for each commodity from 2007-2011 were calculated and the results
were tabulated. The correlations between the price changes of Brent crude, WTI crude and
heating oil with the price changes of Jet fuel were calculated and they turned out to be 0.92, 0.89
and 0.87 respectively. Therefore, it can be concluded that the price of Brent crude followed the
price of Jet fuel most closely as it has the highest correlation with Jet fuel. Also, the overall basis
risk averaged out for the past 5 years as shown on Exhibit 6 is the least for Brent crude. Thus,
Brent crude has followed Jet fuel to very high precision and great accuracy.
Q3) Should JetBlue continue using WTI as an oil benchmark for its crude oil hedges or
switch to Brent? Quantify your answer using the 2007 to 2011 historical data provided in
case exhibit 6.

Based on the 2007 to 2011 historical data provided in Exhibit 6, we can use the correlation for
WTI and Brent prices versus jet fuel prices in Table below. The correlation matrix in Table
below shows that, over the same period, Brent prices were more correlated to jet fuel prices than
WTI prices: the correlation coefficient between Brent prices and jet fuel prices is 0.974 whereas
this coefficient is 0.958 between WTI prices and jet fuel prices. This suggests that JetBlue
should switch from WTI prices to Brent prices as a crude oil benchmark.

Table 1

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