Risk management practices in the airline industry

This paper reviews the use of financial derivative instruments by non-financial entities to manage risk exposure. It provides the main objectives of a non-financial corporation to enter into derivative contracts with a counterparty and the scope of usage of these instruments. It is evident that most companies use derivative instruments to preserve cash flows and firm value as opposed to taking positions in contracts for speculative purposes. The paper focuses on the risk management practices of a specific industry: Airline transportation. The airline industry employs derivative instruments primarily to manage volatility in jet fuel prices, interest rates and foreign exchange rates. In spite of the la ck of consistent information provided in the annual reports, there is strong evidence to support the effective use of derivative instruments to manage operating costs and thereby maximize firm value.