Skytra obtains FCA approval for world’s first Air Travel Price Indices enabling airlines to hedge volatile revenues
Skytra, a wholly-owned subsidiary of Airbus, has obtained approval from the UK’s Financial Conduct Authority (FCA) to be the regulated Benchmark Administrator (BA) for its Air Travel Price Indices.
Regulatory approval marks a key milestone in Skytra’s strategy of bringing to market the next generation of risk management tools allowing the air travel industry to manage air travel pricing risk for the first time.
Through building the world’s largest air ticketing database, Skytra has developed a set of regulated benchmarks based on USD per Revenue Passenger Kilometre (USD/RPK). This represents the wholesale price of air travel per KM flown by an individual passenger in each of the six regions it represents. Marking the one-year anniversary of Skytra’s launch, its BA status allows customers to use the benchmarks to price derivative contracts, providing an effective hedging solution to protect against revenue volatility. These contracts will initially be traded in Over-The-Counter (OTC) markets, facilitated by banks and inter-dealer brokers.
As revenue is a greater contributor to airline profitability than cost, Skytra believes that the introduction of financial instruments to manage this volatility for the first time will be a crucial part of their Covid-19 recovery toolkit. The provision of an independent benchmark and reference price for air travel acts as a universal language for buyers and sellers in contract discussions, and facilitates price negotiations at a regional level. Both benefits will empower the air travel industry as it begins its recovery from the pandemic and enters a new era.
Airlines are overexposed to revenue volatility, which can have adverse effects on their credit rating and so increase their cost of capital - a challenge magnified by Covid-19. Reducing this volatility could lead to multi-billion dollar savings in financing costs across the industry. While airlines can hedge currency, interest rates and fuel costs using derivative contracts, no comparable instruments allow them to manage the risk of falling or volatile revenues. Likewise, major corporates who buy air travel can hedge their travel budgets to avoid unexpected price swings. Though travel volumes are currently lower than usual, the extreme increase in ticket price volatility – expected to last for the next two-three years – increases the need to protect against this risk on both sides.
Beyond financial risk management, an independent reference price for air travel available for all major regions across the world - published on a daily basis - opens up opportunities such as new ways of negotiating and contracting for air travel between airlines and corporates.
Mark Howarth, Skytra CEO, says: “Covid-19 has highlighted why it’s imperative for airlines and other companies in air travel to be able to manage revenue risk. Had our risk tools been available before the pandemic and airlines had correctly hedged their exposure, the financial instruments would have mitigated the devastating impact on revenues of the travel bans and restrictions. We are currently observing that ticket price volatility has doubled in certain regions.
“The FCA’s approval is a testament to three years of hard work in developing the indices with the air travel industry, ensuring they are robust and fit for purpose, and putting in place a rigorous governance framework to give users confidence in their quality and accuracy. We are now able to proceed in our mission to deliver new risk management tools to help the air travel industry build back better and stronger.”