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FUEL HEDGING AND INFLATION IMPACT ON THE PROFITABILITY OF A COMPANY: A CASE STUDY OF GARUDA INDONESIA By Adeline Vanessa 11303067

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By Adeline Vanessa

11303067

BACHELOR’S DEGREE in

INTERNATIONAL BUSINESS ADMINISTRATION - BANKING AND FINANCE BUSINESS ADMINISTRATION AND HUMANITIES

Swiss German University The Prominence Tower

Jalan Jalur Sutera Barat No.15, Alam Sutera Tangerang, Banten 15143 – Indonesia

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STATEMENT BY THE AUTHOR

I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgment is made in the thesis.

Adeline Vanessa

____________________________________ _____________________

Student Date

Approved by:

Ida Ayu Agung Faradynawati, M. Sc.

____________________________________ _____________________

Thesis Advisor Date

Dr. Nila Krishnawati Hidayat, SE., MM.

____________________________________ _____________________

Dean Date

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ABSTRACT

FUEL HEDGING AND INFLATION IMPACT ON THE PROFITABILITY OF A COMPANY: A CASE STUDY OF GARUDA INDONESIA

By

Adeline Vanessa

Ida Ayu Agung Faradynawati, M.Sc., Advisor

SWISS GERMAN UNIVERSITY

Over the last few years, there have been fluctuations in the world oil prices and exchange rates. This is very influential on companies whose components depend on the cost of world oil prices and exchange rates while majority of its income is in Rupiah like, Garuda Indonesia Airlines. Its largest expenses are the costs of airplane leases, aircraft maintenance, aviation fuel which are imported and priced in US Dollars. The objectives of this thesis are to define and examine the impact of fuel hedging strategy on the profitability of PT. Garuda Indonesia. This research is a descriptive study and a casual study using quantitative approach. The data are obtained from secondary sources. The financial statements of PT. Garuda Indonesia are analyzed using financial modeling in Microsoft Excel. The results of the valuation indicate that there is a significant impact by doing hedging strategy on the profitability of a company. From this result, it can be seen the potential benefit which will be achieved by PT. Garuda Indonesia and ensure that the company will perform well as expected in the future.

Keywords: Fuel Hedging, Exchange Rates, Inflation.

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© Copyright 2017 by Adeline Vanessa

All rights reserved

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DEDICATION

I dedicate this work to God, my beloved parents, my sister, and my brother, for their support, motivation, and endless love.

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ACKNOWLEDGEMENTS

First and foremost, I thank God, for only His Blessing I would be able to finish this thesis report on time.

To my family that I love, who always morally and emotionally support me during my whole life.

My deepest gratitude to all of my lecturers, especially to my thesis advisor, Ms. Ida Ayu Agung Faradynawati, M.Sc., who inspire me throughout the process of this thesis, guiding and encouraging me to finish this thesis. Without her selfless time, knowledge, and insight, this work would not have been possibly completed.

With a special mention to Richmond Jahja, for being patient, always ready to help me whenever I got stressed out because of the thesis work, for the continuous

encouragement, and the never-ending love.

Finally, I would like to thank my entire fellow at SGU Business Administration batch 2013, especially my best friend, Mercy Andrea, for the enjoyment, entertainment, and all of the hilarious moment during this 4 years journey. Also to Calvin Thelma, Immanuel Michael Budiman, Ivan Natanael, Kevin Chandrajaya, Ken Daniswara, and Raymond Hartono for always giving me the cheerfulness, support and motivation.

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TABLE OF CONTENTS

STATEMENT BY THE AUTHOR ... 2

ABSTRACT ... 3

DEDICATION ... 5

ACKNOWLEDGEMENTS ... 6

TABLE OF CONTENTS ... 7

LIST OF FIGURES ... 8

LIST OF TABLES ... 9

CHAPTER 1 – INTRODUCTION ... 10

1.1 Background ... 11

1.2 Research Problems ... 17

1.3 Research Questions ... 18

1.4 Research Objectives ... 18

1.5 Scope and Limitations ... 18

1.7 Structure of Chapters ... 18

CHAPTER 2 – LITERATURE REVIEW ... 19

2.1 Cost Structure ... 19

2.2 Inflation ... 22

2.3 Hedging ... 24

2.4 Financial Performance (Profitability Indicator Ratios) ... 26

2.4.1 Return on Assets (ROA) ... 26

2.4.2 Return on Equity (ROE) ... 26

2.4.3 Net Profit Margin ... 26

2.4.4 Fuel Price Growth Rate ... 26

2.5 Previous Studies ... 27

2.6 Study Differences ... 28

2.7 Research Model ... 28

2.8 Hypothesis... 28

CHAPTER 3 – RESEARCH METHODOLOGY ... 29

3.1 Research Process ... 29

3.2 Types of Study ... 31

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3.7. Data Analysis ... 33

CHAPTER 4 – RESULTS AND DISCUSSIONS ... 33

4.1 Company Background ... 33

4.2 The Annual Percentage Growth Rates and Average Annual Growth Rate of Fuel Price and Proportion of Fuel Expense to Operating Expense in Airline Industry 35 4.3. Analysis of the Annual Growth Rates on Revenues, COGS, and Net Income of PT. Garuda Indonesia ... 36

4.4 Vertical Analysis of PT. Garuda Indonesia Income Statement (2011-2016) 37 4.5 Projected Financial Statements of PT. Garuda Indonesia ... 38

4.5.1 Baseline Projection (with Hedging) ... 40

4.5.2 Scenario II (Minimum Value Forecast) ... 40

4.5.3 Scenario III (Mean Value Forecast) ... 41

4.5.4 Scenario IV (Maximum Value Forecast) ... 42

CHAPTER 5 – CONCLUSIONS AND RECOMMENDATIONS ... 43

5.1 Conclusions ... 43

5.2 Recommendations... 44

REFERENCES ... 44

APPENDIXES ... 47

Appendix 1: Balance Sheet of PT. Garuda Indonesia: Year 2012 – 2016 (in USD) . 47 Appendix 2: Income Statement of PT. Garuda Indonesia: Year 2012 – 2016 (in USD) 48 CURRICULUM VITAE ... 49

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