Jet fuel hedging, operational fuel efficiency improvement and carbon tax

To investigate airlines' incentives in operational fuel efficiency improvement, it might be important to consider financial hedge as its substitute. In this paper, we build a simple theoretical model to compare the implications of fuel financial hedge and operational fuel efficiency improvement on airlines' expected profit. We find that financial hedge is more efficient in reducing airlines' profit volatility/risk exposure, while operational improvement will generate a higher expected profit level when its effectiveness is sufficiently high. With market competition, operational improvement will be less prevalent. Furthermore, a fuel/carbon tax makes financial hedge less attractive and operational improvement more attractive.