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UK financial regulator approves Airbus risk management offshoot

An Airbus subsidiary has won approval from the Financial Conduct Authority to be the regulated benchmark administrator for its air travel price indices.

The regulatory green light obtained by Skytra is described as a “key milestone” in a strategy to bring to market the next generation of risk management tools allowing the industry to manage air travel pricing risk for the first time. 

Skytra has developed a set of regulated benchmarks based on US dollar per revenue passenger kilometre by claiming to have built the world’s largest air ticketing database.

The firm’s ticketing database is fed daily by billions of transactions recorded by Iata and matched by similar levels of ticket prices from online travel platform Kiwi.com. Overall, Skytra is collecting 83% of worldwide ticket sales by value on a daily basis. 

This represents the wholesale price of air travel per kilometre flown by an individual passenger in each of the six regions it represents.

The status allows customers to use benchmarks to price derivative contracts, providing a hedging solution to protect against revenue volatility.

The contracts will initially be traded in over-the-counter 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 enables 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, according to the company.

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, Skytra claimed.

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 to 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. 

Skytra chief executive Mark Howarth said: “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.” 

Air France finance and treasury senior vice president Bruno Lecerf said: “Having been involved throughout the process with Skytra on their new price indices, it is exciting to see that the regulatory approval by the UK’s FCA will enable Skytra to take the concept of airlines hedging revenue volatility to an actual reality.

“Greater financial predictability will have other positive knock-on effects on airlines’ balance sheets and will ease the travel industry’s recovery. Skytra Price Indices should become an important component of an airline’s risk management tool box.”

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