The global airline industry's fuel bill was approximately $181 billion in 2015 and is expected to fall to $127 billion in 2016 (or 27 percent and 20 percent respectively). % of operating expenses). However, these numbers are more than 4 times the $44 million 2003 fuel bill and represent only 14% of operating expenses. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Fuel prices are highly volatile. Hedging allows airlines to fix or cap fuel prices, protecting them from sudden increases in fuel prices and thus having a more stable profit stream over the years. In 2008, high fuel prices resulted in $26.1 billion in losses in the airline industry, which could have been avoided or reduced by hedging. Low earnings volatility and smooth cash flows also allow companies to increase the sustainable level of debt financing, thereby increasing enterprise value through tax shelter and rising stock prices. Minimizing liquidity volatility and generating internal cash flows also protects a company's ability to finance opportunistic investments in times of recession. Furthermore, hedging reduces the impact of agency problems between bond and equity holders or between management and shareholders. Reducing risks decreases the likelihood of financial distress and also reduces the volatility of riskier projects, which may be unattractive to managers despite the high NPV due to the shorter horizon but attractive to shareholders. Finally, hedging allows businesses to reduce their tax burden while earning regular profits as corporate tax rates rise. However, hedging comes with its share of disadvantages. While the coverage protects airlines from rising fuel prices, it also prevents them from saving money through lower prices. For example, Delta Air Lines suffered losses of more than $1.2 billion in 2015 due to falling fuel prices. Such situations also prevent the airline from lowering prices, while other competitors might do so, thus causing the risk of losing market share. Furthermore, airlines incur additional costs to maintain an active risk management policy while the owners of the companies, as investors, are assumed to have a diversified portfolio and therefore already eliminate a high percentage of their risk through the diversification strategy . Hedging also incurs additional costs in terms of bid-ask spreads and other trading expenses. Companies must commit cash to fund margin calls and also maintain a higher cash balance on their balance sheets. The cost of fuel is Ryanair's largest cost and represents 43% of its cost base. However, the price of fuel is very unpredictable, ranging from $28.8/barrel in 2003 to a peak of over $140/barrel in 2007, and then falling back to $55/barrel in 2015. Therefore, it is very important that Ryanair manages the risk associated with its main cost element to avoid any earnings surprises and therefore hedge the fuel price risk. For fiscal 2017, 95% of its fuel is hedged to about $62 barrels and 44% hedged for fiscal 2018 to about $50 barrels. The coverage protects Ryanair from rising fuel prices. Since Ryanair's revenue is primarily in euros, it also hedges its US dollar exposure..