Development of a fuel hedging policy

A major commercial airline was facing increasingly volatile fuel and foreign exchange markets. Having recently been forced to write down over $100 million in hedging losses, management was questioning the effectiveness of the financial risk management policy and analysis used to make hedge strategy decisions. As a result, they decided to partner with Oliver Wyman to develop three analytical tools (a price projector, an exposure calculator and a hedge optimizer). Many insightful findings and advancements were made possible from building these models. First, they enabled the company to more closely align the treasury, procurement and forecasting groups (e.g. more streamlined data flow and formation of an agreed view of fuel and foreign exchange markets). Second, it clarified the value derived from hedging activities, both in terms of the current book and prospective hedges. Third, it aligned tactical and strategic decisions between the treasury group, the executive committee and the board. Fourth, it formalized a process for making well informed hedge strategy decisions including a structure for consistent and insightful reports for tracking hedge performance over time. Finally, it served as a catalyst for making financial risk management policy recommendations.