The Relationship Between Use of Financial Derivatives and Fuel Costs in Kenya Airways

Abstract

Oil has been used for many years as the main source of energy and its demand has made it to be one of the most sought after commodity globally. Its impact on national economies and institutions is enormous. The study used several theories in its study in order to bring out the issue of fuel pricing in the world economy. Various determinants of fuel costs were also analyzed by various institutions and scholars, bringing out the issue of price fluctuation and hedging. The objective of the study was to determine the relationship between use of financial derivatives and fuel costs in Kenya. With these objectives, empirical studies on relationship between use of financial derivatives and fuel costs, both local and international were done which assisted in the formulation of data analysis model. The research design was based on a longitudinal study, which looked at the unit of analysis (Kenya Airways) for three years, gathering information relevant to the study in order to come up with a proper analysis. After data collection and cleaning, analysis was done through regression analysis, Pearson’s correlation test, and Chi-square test using Statistical Package of Social Sciences (SPSS). The results of the study showed that financial derivatives do not have a relationship with fuel costs in Kenya Airways. The regression test showed that the financial derivative had an R value of 0.017 which indicated that financial derivative is not a good predictor of fuel cost at Kenya Airways. Correlation tests performed also indicated that there was no correlation (r=-0.017) between financial derivatives and fuel costs in Kenya Airways. However, Chi-square tests indicated that financial derivatives are effective means of fuel cost management in the airline. The study recommended the establishment of a fuel derivatives market in the country so that people can be able to transact the derivatives. This will help monitor the prices from a central point, and also can help in the predictability of the fuel prices as earlier studies have pointed out. The study had the limitation of absence of centralized data for the airline and a derivatives exchange in the country. With that, the study had to look at the contract prices of Kenya Airways and the banks. These prices may not truly reflect the nature of derivatives as different companies would have different contract prices which are confidential to them.