The airline industry's global fuel bill was approximately $181 billion in 2015 and is expected to decrease to $127 billion in 2016 (accounting for 27% and 27%, respectively). 20% of operating expenses). However, these figures are more than 4 times the $44 million fuel bill from 2003 and represent only 14% of operating expenses. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Fuel prices are very volatile. The hedge allows airlines to fix or cap their fuel prices, protecting them from a sudden rise in fuel prices and thus enjoying a more stable profit stream over the years. In 2008, high fuel prices led to $26.1 billion in losses in the airline industry, which could have been avoided or reduced through hedging. Low earnings volatility and smooth cash flow also allow companies to increase the sustainable level of debt financing, thereby increasing the value of the company through the tax shield as well as the stock price. Minimizing liquidity volatility and generating internal cash flow also protects a company's ability to finance opportunistic investments during recessions. Additionally, hedging reduces the impact of agency problems, either between shareholders and shareholders or between management and shareholders. Reducing risk decreases the likelihood of financial distress and also reduces the volatility of riskier projects, which might be unattractive to managers despite a high NPV due to a shorter horizon but attractive to shareholders. Finally, hedging allows businesses to reduce their tax bill through consistent profits as corporate tax rates rise. However, hedging comes with its share of drawbacks. While the coverage protects airlines against rising fuel prices, it also prevents savings from falling prices. For example, Delta Air Lines suffered losses of more than $1.2 billion in 2015 due to falling fuel prices. Such situations also prevent the airline from lowering its prices, when other competitors could do so, thus leading to the risk of loss of market share. Furthermore, airlines bear additional costs to maintain an active risk management policy, while airline owners, as investors, are expected to have a diversified portfolio and thus already eliminate a high proportion of their risks through a diversification strategy. Hedging also comes with additional costs in terms of bid-ask spreads and other trading costs. Companies need to raise cash to fund margin calls and also maintain a higher cash balance on their balance sheets. The cost of fuel is Ryanair's largest cost and represents 43% of its cost base. However, the price of fuel is very unpredictable, rising from $28.8 per barrel in 2003 to a peak of over $140 per barrel in 2007, only to fall to $55 per barrel in 2015. It is therefore very important for Ryanair to manage the price of fuel. risk associated with its main cost element to avoid any profit surprises and thus hedge its fuel price risk. For fiscal 2017, 95% of its fuel is hedged at approximately $62 per barrel and 44% is hedged for fiscal 2018 at.