AST21617 Tutorial 2

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1. Doing a web search, define what is “fuel hedging” in the airline industry?

Answers:
Fuel Hedging is a contractual tool for some large fuel consuming companies like airlines to reduce their
exposure to volatile and potentially rising fuel costs through locking in the cost of future fuel purchases. It
allows companies to cap a fuel price at a certain level and period of time.

2. With reference to the following two figures of fuel hedging in Cathay Pacific during 2006-2015,
discuss the advantage of fuel hedging by airlines?

Answers:
• Airlines use hedging to protect fuel costs. Through hedging to stabilize fuel costs, it can protect
airlines against sudden losses from rising fuel prices (but it will also prevent sudden drop in cost
from decreasing fuel prices).

• For example, Cathay Pacific is benefiting from hedging with the continuous increasing fuel price.
In general, apart from 2008 where fuel price drops dramatically at the end of year, Cathay spent less
in fuel expenses through hedging.
 3. A report from Gurufocus: 2018’s Cathay Pacific ROIC or ROC % was 0.5%, the WACC % was
2.63%. As a new investor, will you recommend your company to invest into Cathay Pacific in
2019? Why?

Answers:
• No.
• As the ROIC is lower than WACC. If I am a new investor, I will not have any return.

4. Based on the business model canvas, develop a business model canvas for Hong Kong Express
(UO). (you can use below blank area to draw the canvas or list out by point form)

Key partners Key activities Value proposition Customer relationships Customer segments
Core Business partners: 1. Online sales 1. Safe, low fare, and 1. Social Media 1. Vacation travellers
1. Government, aviation authorities 2. Marketing on-time air 2. Online platform 2. VFR
2. HK and other international airport 3. Flight operations – transportation - app
authorities fast turn-around 2. To the most popular 3. FFP – Reward U
3. Ground handling services providers: time cities
GHA, GSA, catering, etc 3. No Frills

Side Business partners:

1. Hotels booking platform – Agoda and
Relux Key resources Customer channels
2. Car rental company – Rentalcars.com
3. Insurance company – Zurich 1. Staff 1. Website
Insurance (HK) 2. Homogeneous 2. Social medial
4. IT supplier aircraft fleet 3. App
5. OTA platform (i.e. Klook) 3. Airport offices
8. Credit Card Companies: Visa, 4. Digital platforms:
Mastercard, UnionPay, JCB, AE Website, app, social
media
Cost structure Revenue Streams
Direct operating costs: Indirect operating costs: 3. Ticket sales
1. Airport charges 1. Other personnel wages and training 4. Ancillary sales (in-flight sales, baggage, catering, long-leg seat, seat
2. Landing and navigation fees 2. Office rentals reservation)
3. Fuel 3. Outsourced services fees: GHA, GSA, 5. Penalties (no-show, change ticket, cancel reservation)
4. Maintenance costs catering
5. Aircraft leasing costs 4. Sales costs
6. Flight crew wages and training 5. General and administration costs
Other costs:
1. Taxes
2. IT supports