EasyJet Derivatives Strategy: Hedging Fuel and Currency Risk
This paper examines EasyJet's use of financial derivatives as a risk management tool, focusing on its forward contract programs for jet fuel, U.S. dollar, and euro exposures. It begins by defining derivatives and explaining why firms hedge to achieve cash flow certainty rather than to speculate. Using EasyJet's 2011 Annual Report as its primary source, the paper traces the evolution of the airline's hedging program from its 2003 launch through its mature multi-currency structure, assesses governance and monitoring practices, and evaluates ex-post outcomes — including the £330 million fuel hedging loss in FY 2009 and the net gains visible at early 2012 spot rates. The paper concludes that the value of a hedging program lies not in "winning" individual trades but in enabling better operational and pricing decisions.
- What Are Derivatives?: Definition and common types of derivatives
- Purpose of the Hedging Activity: Why EasyJet hedges fuel and currency exposure
- EasyJet's Three Hedging Programs: Fuel, dollar, and euro forward contract details
- Changes Over Time: Evolution of hedging program since 2003 launch
- Monitoring and Governance: Finance department oversight and forecasting processes
- Ex-Post Outcomes: 2008–2009 losses and 2012 spot-rate gains assessed
- Conclusion: Cash flow certainty as the true measure of hedging success
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What makes this paper effective
- It anchors every general concept in a concrete company example, moving fluidly between theory (why firms hedge) and specific data (hedge ratios, metric tonne prices, sterling calculations) drawn directly from EasyJet's annual report.
- The ex-post analysis is quantitatively grounded: the paper works through actual spot rates and hedge prices to show a net saving of £96.01 per metric tonne, making the argument tangible rather than merely descriptive.
- The paper consistently reinforces a single evaluative lens — cash flow certainty, not speculative gain — which gives the argument coherence from introduction through conclusion.
Key academic technique demonstrated
The paper demonstrates applied financial analysis using primary corporate disclosure (an annual report) as evidence. Rather than relying solely on secondary commentary, the student extracts specific hedge percentages and prices from EasyJet's 2011 Annual Report and performs original arithmetic to evaluate program outcomes. This source-to-analysis technique is characteristic of strong finance and business writing at the undergraduate level.
Structure breakdown
The paper follows a logical problem-solution-evaluation arc: it defines derivatives, establishes why EasyJet needs them, describes each of the three programs in detail, traces how the programs developed over time, explains governance, and then tests outcomes against real market data. The conclusion returns to the paper's central normative claim — that hedging success should be measured by operational decision quality, not by hedge gains or losses in isolation.
What Are Derivatives?
Firms use derivatives in order to manage the financial risk associated with maintaining open positions in either currencies or commodities. As a result, the firms that most commonly utilize derivatives are those that operate internationally or deal extensively with key commodities. EasyJet is one such company: it uses crude oil hedges on the price of jet fuel and currency hedges to manage its exposure to the euro and the U.S. dollar. This paper discusses the use of derivatives as a risk management tool, using EasyJet as an example firm.
Derivatives are instruments whose price is tied to the price of an underlying asset. Some of the more common derivatives in use are futures contracts, forward contracts, options, and swaps (Investopedia, 2012). The choice of derivative depends on a number of factors, including the needs of the firm, the availability of the instrument, the degree to which a specific derivative can hedge exposure, and its cost. Firms must therefore always be aware of the different characteristics of available derivatives in order to find the one that best meets their needs.
Works Cited
CAPA. (2009). Jet fuel price volatility returns. Centre for Aviation. Retrieved March 12, 2012 from http://www.centreforaviation.com/analysis/jet-fuel-price-volatility-returns-6416
Cobb, R. (2004). Jet fuel hedging strategies: Options available for airlines and a survey of industry practices. Northwestern University. Retrieved March 12, 2012 from
EasyJet. (2011). EasyJet 2011 Annual Report. Retrieved March 12, 2012 from
EasyJet. (2003). EasyJet to commence hedging program. EasyJet.com. Retrieved March 12, 2012 from
IATA. (2012). Jet fuel price monitor. International Air Transport Association. Retrieved March 12, 2012 from
Investopedia. (2012). Derivative. Investopedia. Retrieved March 12, 2012 from http://www.investopedia.com/terms/d/derivative.asp
Oanda.com. Retrieved March 12, 2012 from http://www.oanda.com/
Osborne, A. (2009). Fuel hedges hit EasyJet as revenue per seat rockets. The Telegraph. Retrieved March 12, 2012 from http://www.telegraph.co.uk/finance/newsbysector/transport/6590938/Fuel-hedges-hit-easyJet-as-revenue-per-seat-rockets.html
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