chapter  1
33 Pages

Airline finance: an overview

This chapter introduces the concepts of revenue management and risk management, and their relationship with a company's overall management strategy. The various methods that are used within the airline industry to price discriminate for revenue management purposes were covered. The more sophisticated expected marginal seat revenue (EMSR) model was presented, to illustrate the concepts of nesting fare structures and the creation of a probabilistic normal booking curve. The chapter covers the identification of the main components of risk, together with appropriate risk mitigating strategies. Emphasis was placed on the various hedging strategies that can be used in risk mitigation activities. Financial derivatives and how they can be used strategically as part of an airline's overall risk-management program were discussed in detail, with appropriate quantitative examples. The principles of hedging presented in the chapter focused on airlines, but the hedging strategies explained are shown to be universal, applicable to multiple industries and commodities with price variability.