The moreOPEC cuts the supple of oil, which is needed for airplane fuel, airline companieshave to depend more and more on hedging. In an ideal case, the company has aflexible policy regarding hedging that matches to tries to match thefluctuations. If “OPEC” decides to produce more or increase supply then thecompanies will be left with extra output.
If the company is considering relyingon Shell instead of the bigger OPEC then this is will be an advantage becausethis will be a natural hedge against any OPEC decision to cut or increaseproduction, providing the company with more stability in that field. However,the choices are still narrow and changes affect the entire market1One majorshift will be the use of certain flowers, or natural herbs (algae, flax,coconut husks or even from used cooking-oil) to produce airplane fuel( Bio Fuel),this is a huge advantage because the airplanes engines will not have to bereplaced, changed or even renewed because of the newly produced fuel. We aretalking about a fuel that is eco-friendly and “green” because the plants fromwhich they are derived absorb CO2 from the atmosphere as they grow and releaseit when they burn, and this fuel is renewable unlike the classic fossil fuel.Since the number of passengers and relatively the number of flights is likelyto double as we go into 2030, having such a replacement is good news in a”Win-Win” situation.
2One examplewould be Airbus; they also say the technology, in which it and the Bavariangovernment are investing more than 10 million euros ($11 million) between them.3Secondly, aircrafts are considered the most important and highest expense in the airline industry. The main suppliers within the airline industry are themanufacturers of aircrafts like Airbus and Boeing, Two majordeterminants in terms of aircrafts and their manufacturers are sale or leasebasis, which means that it mostly depends on the companies and whether theywant to have the aircrafts as assets on their balance sheet or would prefer ahigher ROA by applying the lease basis. Moreover, atthe current stage, aircrafts for long distance travel cannot be substituted byany other product, which strengthens the bargaining power of the suppliers evenmore. In thisindustry, the inputs are extremely standardized allowing for only minor changer.
Airline companies only seem to differentiate with amenities. The planes arevery similar. Bulky aircraft purchases are also very common.4Boeingand Airbus respectively have been the two major suppliers of aircrafts to the airlinesover the world. For the past few years, we have seen a huge increase in theproduction which resulted in delivering aircrafts at an above-average pacewithout defaulting a single time, even though the commercial aviation industrywas slowing down in terms of production due to effects of the overall globaleconomic conditions.
The total deliveries in 2009 were close to 1000, with a 1 (SIA extends fuel hedging as Opec cuts sway crude oil, 2017)2 (Plant-Powered planes show promise, 2014)(TheHedgingEfficiencyofCrudeOilMarkets, 1995)2 (From green slime to jet fuel: algae offers airlines a cleaner future, 2016) (Flying on Flowers, 2017)4(5 Biggest Aircraft Manufacuring Companies, 2016)