EFFECT OF FUEL HEDGING ON THE PROFITABILITY OF THE AIRLINE INDUSTRY IN KENYA
Lucy Wanjiru Ndung’u - Masters in Business Administration, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Mouni Geoffrey Gekara - Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
In fuel-intensive industries such as the airline industries, high and volatile fuel prices can have significant impact on the bottom line, not to mention adding to the difficult task of budgeting for future fuel expenditures. If fuel costs are not actively managed, they can lead a company to exceed budget forecasts, or worse, lower profit margins or losses. This study sought to investigate the effect of fuel hedging on the profitability of airlines. The study adopted the descriptive and explanatory research study.The population of the study consisted of 15 registered airlines secondary data was obtained and analyzed quantitatively through the use of descriptive statistics and inferential statistics. The results of both correlation and regression analysis indicated that the usage of futures by the Kenyan Airways has a positive effect on the levels of profitability. Precisely, the results established that futures usage was associated with a positive correlation coefficient of 0.418 and a regression beta of 0.029 which were both established to be significant at 5% significance. The results also found from correlation and regression analysis that the use of forwards has a positive effect on the levels of profitability. In particular, the correlation coefficient was found to be 0.381 while the regression analysis was established to be 3.181, both established to be significant to be significant at 5% level of significance. It was further established that the existed a positive and significant effect of the usage of swaps on the levels of profitability. This was established by a 0.776 and 0.476 correlation and regression coefficient respectively which were further established to be significant at 5% significance level. The relationship between options use as a hedging strategy and profitability established that there existed a positive correlation coefficient of 0.746 while the regression results also indicated that options usage had a positive (β = 0.156) which were both established to be statistically significant at a significant level of 0.05. Fuel hedging is valuable for airline companies as it is a tool to stabilize overall costs and reduce the volatility of profitability. This is supported by the positive relationship established between hedging strategies and profitability. Even though hedging just like any other risk management technique, leads to volatility of profits, it seems to be a bright idea for the organization bearing in mind that fuel costs constitute a higher proportion of the organizations operating costs.