FCA approves world’s first air travel revenue hedging system
The UK’s financial regulators has approved Airbus subsidiary Skytra’s Air Travel Price Indices, a key step in allowing airlines to manage revenue volatility.
Through building the world’s largest air ticketing database, the firm has developed a set of regulated benchmarks based on US$ per Revenue Passenger Kilometre ($/RPK).
This represents the price of air travel per kilometre flown by an individual passenger in each of the six regions it represents.
Now the Financial Conduct Authority (FCA) has given Skytra “benchmark administrator” (BA) status for the product.
This means customers will now be able to use the benchmarks to price derivative contracts, providing an hedging solution to protect against revenue volatility.
These contracts will at first be traded in over-the-counter markets, facilitated by banks and brokers.
Skytra chief executive Mark Howarth said the pandemic had proved how important it was for airlines to be able to hedge against 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.”
Airlines are highly exposed to revenue volatility, which can impact their credit rating and so increase their cost of capital – as has been demonstrated by Covid-19.
Reducing this volatility could lead to multi-billion dollar savings in financing costs across the industry, Skytra said.