Airbus establishes Skytra for airline industry risk management
A new venture called Skytra has been launched by Airbus to develop highly regulated financial instruments and infrastructure to support the air travel industry’s risk management of its revenues.
Skytra has developed a family of global and regional indices which track the daily changes in the price of air travel in each geographic market. Airline ticket prices change constantly due to a multitude of external factors including supply or demand surges, political issues, tax and economic uncertainty. Whilst airline infrastructure and operational commitments are planned years into the future, the vast majority of airline tickets are sold in the last five weeks before take-off.
The indices will be used to price standardised futures and options contracts to be offered on a regulated derivatives trading venue that Skytra is developing, addressing a key need in the air travel industry. While airlines are currently able to hedge their cost base using derivative contracts – notably currency, interest rate and fuel prices – there are no existing instruments enabling them to manage air travel revenue volatility effectively. It makes airlines financially vulnerable and affects their ability to plan long-term and make the necessary investments to grow sustainably.
The impact of this problem is felt by the whole air travel value chain including the passenger, travel agents, airports and aircraft manufacturers. Today, 67 million jobs are supported by the industry globally and the wide-range of related industries around the world depend on the health of air travel. However, the cyclical nature of the industry, the high competition and its exposure to global events makes adequate risk management crucial for supporting the predicted growth. According to IATA the number of annual trips will double in the next 15 years from 4 billion to 8 billion.
As in the energy, agriculture or shipping markets, the indices and the platform Skytra is developing will ensure that air travel industry has its own class of derivatives to manage ticket price volatility. The benefits, however, are much wider-reaching. It will allow companies across the air travel chain to manage their own financial risk as well as to design and offer new products.
Airbus Chief Commercial Officer, Christian Scherer, says: “Airbus recognises that the air travel industry could see substantial value in being able to control its revenue risk. Financial predictability is beneficial to the whole value chain – from passengers to airlines, airports, lessors and aircraft manufacturers, enabling the industry to invest in reducing our carbon footprint. After considerable engagement with our customers, Skytra is born! Airbus is proud to support Skytra’s mission bringing together industry experts across air travel and the financial markets.”
Skytra CEO Mark Howarth says: “I have worked in financial services for more than 20 years and I have to say that Skytra will bring to market the most innovative trading contract I have seen in my career, and the opportunity to join the business was a very easy decision for me to make. We are reinventing risk management for air travel and I look forward to establishing Skytra in the coming months and years.”
Christine Rovelli, Head of Treasury at Finnair, says: “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.”
Jerome Kemp, Managing Director and Global Head of Futures, Clearing and Collateral, Citi, says: “Airbus’ creation of Skytra presents a genuine product innovation that seeks to resolve a real world industry challenge with established financial instruments. Citi is well placed to serve its many global customers by connecting them to this new market.”
London-based Skytra is seeking approval from the UK’s Financial Conduct Authority (FCA) to become a regulated Benchmark Administrator for its air travel indices, with the goal of making these available in late 2020. The company will also be applying to the FCA for a licence to operate a Multilateral Trading Facility (MTF).
Skytra is led by a senior management team drawn from both the aviation and financial sectors. The team has extensive experience in building and launching new trading venues and products, with former managing directors from firms including Cboe, Chi-X, LIFFE, London Stock Exchange, and Tradition.