A subsidiary of Airbus, the world’s largest planemaker, is preparing to launch a financial product aimed at helping its airline customers hedge against risks to revenue.
Skytra, a fully-owned subsidiary, plans to launch listed financial futures and options on exchanges this year that will represent airlines revenue and help the industry manage risks more efficiently.
Airlines typically hedge their fuel costs and foreign exchange exposures but the Skytra exchange is the first of its kind for the industry.
While airline infrastructure and operational commitments are planned years into the future, the majority of airline tickets are sold in the five weeks before take-off, according to a statement from Skytra.
Even those airline ticket prices are subject to constant change due to external factors including supply or demand surges, political issues, or tax and economic uncertainty.
But with no existing financial instrument to manage air travel revenue volatility effectively despite a fixed cost base, airlines remain financially vulnerable which Skytra’s product offering aims to address.
The London-based firm has developed a suite of global and regional indices that will track the daily changes in the price of air travel in each geographic market, based on an industry measure of demand called revenue per passenger kilometer (RPK) which measures the number of kilometres traveled by paying passengers.
“Finally we will have a risk management instrument tailor-made for the air travel industry that will help us manage our exposure to ticket price volatility more efficiently,” said Christine Rovelli, head of treasury at Finnair.
Skytra aims to launch indices for six of the most active geographic sectors and roll them out to other sectors gradually, executives at the firm said.
The product will be similar to typical futures contracts traded on most exchanges with quarterly expiries and offering contracts of up to two years.
Matthew Tringham, co-founder at Skytra, said he expects the product to bridge as much as 85% of the gap between costs and revenue for a typical airline.
The International Air Transport Association (IATA), which represents nearly 300 airlines, expects industry revenue to expand by 4% to $872bn (€786bn) in 2020 with revenue from other sources taking it to close to $1 trillion.