Airbus' decision to launch a new product in the middle of a crisis might seem strange, but travel buyers, corporations and airlines will likely be receptive to anything that can help insure them against suffering such big losses again.
It’s common for airlines to hedge against volatility in fuel prices and foreign exchange rates — soon they’ll be able to manage revenue risk and pricing volatility in a similar way, using a trading system that’s being developed by Airbus.
London-based Skytra, a wholly owned division of Airbus, is building a financial product to allow the trading of cash-settled futures and options contracts based on custom-made indexes designed to represent airline revenues.
And corporate travel agencies as well as corporates will be able to place their bets too — a development that has the potential to shake up the managed travel distribution landscape.
Hedging typically involves two sides. Initially, Skytra envisages airlines on the selling side of the trading system, with business-to-business travel agents and large multinational corporates on the buying side.
As the system develops, consumer travel agents, airports, hotels, investors and speculators will be phased in as part of a balanced growth.
American Express Global Business Travel will be one of the first corporate travel agencies to help launch Skytra, Skift has learned. Both companies declined to comment.
Skytra’s overall mission is to bring long-term stability to the market. Industry experts have told Skift they welcome the innovation, but raise questions over what kind of role the system will play in the marketplace.
Before exploring the implications for procurement, it’s worth taking a step back to look at what prompted Airbus to launch a new concept of trading for the travel industry in the first place.
Why’s an Aircraft Manufacturer Involved?
The story goes airlines were approaching Airbus about buying its planes, but at the same time voicing concerns that after making such a large capital investment, there wasn’t really a way to protect themselves against drops in ticket prices.
Skytra was founded by Elise Weber, chief sales and marketing officer, and Matthew Tringham, chief strategy and product officer, after a series of customer workshops. It’s been some three years in the making, but in January the company made some significant announcements.
How Does the Trading System Work?
It’s not officially live yet, but the company has spent a long time working on how it can represent global air fare movements. It has developed its so-called Skytra Price Indices, which track daily changes in the price of air travel in certain markets.
These indices are based on revenue per passenger kilometer, which measures the number of kilometers traveled by paying passengers, based on economy-class tickets. It is not measuring individual airlines, or individual routes.
They will initially cover Asia Pacific, Europe and North America, but could be expanded depending on specific market segments required by the industry.
Where’s Skytra Getting its Data From, and How Robust is the Platform?
The company has normalized revenue passenger kilometers into its family of indices by “working closely with its data partners and in close collaboration with the industry to reconcile the different methodologies of each airline in calculating this industry metric”.
It doesn’t comment on the data vendors it currently uses to build its indices, but announced a strategic partnership with the International Air Transport Association on April 7.
“The association’s unique data are generated by its payment settlement platforms, reporting the prices paid for tickets sold directly by almost 500 airlines and indirectly sold by them through travel agents,” the company said.
“The data captured more than 1.6 billion tickets issued in 2019 covering over 212 countries, a number that has grown each year. This strategic partnership reflects Skytra’s purely data-based approach towards its index construction, management and calculation.”
It says it has sourced data covering 80 percent of worldwide tickets flown by value and has developed the indices in collaboration with the air travel industry over a period of two years. It’s important to note here that it’s basing its indices on actual transaction data with real ticket prices.
Gaurav Sundaram, president of ProKonsul Consulting, said travel buyers might be concerned about that 20 percent gap in the data, and time will be needed to adjust to the new financial instrument. “As a concept, it does seem interesting, but maybe in the next two to three years. It all depends if the market can use it or accept it,” he said.
On the technical side, Nasdaq (a financial market infrastructure provider) is underpinning the multilateral trading facility, which is a trading system that facilitates the buying and selling of financial instruments between multiple parties. As well as the technology, Nasdaq acts as the clearing house for payments.
The Nasdaq tie-up was announced at the end of January, with Adena Friedman, Nasdaq president and CEO, saying: “Skytra represents a dynamically new intersection between aviation and financial marketplaces, where the benefits will extend to companies in both ecosystems and the broader markets economy.”
For now, one consultant believes Skytra is primarily targeting investors.
”I think the proposition from Skytra is focused totally on the financial community — and giving them a new commodity to buy and trade,” said John Harvey, founder and chief marketing officer at Globalyse.
How Could the Corporate Travel Sector Benefit?
This system will be the first of its kind, so right now it’s hard to say. As mentioned earlier, airlines can use Skytra to insure their revenue, protecting themselves against the impact of reduced demand or increased seat supply.
For the corporates and travel agencies, Nasdaq’s Friedman summed up the advantages during an interview on CNBC: “You have a natural alignment of interest between the agencies, airlines and consumers in terms of how they manage the risks of ticket pricing. The travel agencies should be able to hedge out some of their ticket price risk, they should be able to pass that benefit on.”
During that interview, she was quizzed on how corporates, for example organizations like Apple that travel frequently between San Francisco and China, could benefit: “Apple could work with their travel agency to see whether or not they could create some hedges against that risk.”
Skytra’s Weber has also said: “The indices and derivative contracts can be leveraged by airlines to complement their existing risk management strategies, but the same tools can be used by travel agents to propose new services to their existing customers.”
So what could those new services look like?
For corporates and travel agencies, there are several implications. The most notable is a new way to price-lock fares, which could bypass dealings with airlines.
Large corporates typically negotiate fares with airlines on popular routes, such as a bank agreeing rates on the busy London to New York route.
“This could change the dynamics of airline pricing and commercial behavior, and relations between the distributor and the airline,” said an industry source who wished to remain anonymous.
“The agency can avoid lengthy negotiations with the airline by instead hedging on Skytra, and offer fixed fares to the clients.”
Corporates price-locking airfares with their travel agency would also feel less pressure from airlines if they weren’t delivering on their contract, or opting to fly with other airlines.
“A corporate travel agency can say: I’ve a got a fix, it’s a deal. The agent delivers the ticket at that price. There’s nothing more to it,” they added.
However, they said that the current crisis means corporate clients aren’t really sure of their volume requirement going forward.
There’s also the matter of translating the financial instrument into physical seats.
“The big question remains how the travel agency or corporate client would convert the units it acquires off the Skytra marketplace into real tickets,” added Globalyse’s Harvey. “This is unlike an airline buying a commodity like jet fuel, which is a single common product, or hedging currency forex, which has a single recognized value like sterling or euro.
“Real tickets come in so many different types and classes with multiple conditions and rules. They are not sold in revenue per passenger kilometer. This means that the index needs to be converted somehow, either into cash equivalent or fare construction units, to buy the many different fares.”
Who’s Raising the Stakes?
Meanwhile, with the ongoing crisis, questions were raised over how much demand the trading system will generate as many travel agencies are financially impacted by coronavirus.
“In the pre-COVID 19 market, some travel agencies would have had the financial ability to play with this kind of market. Now, agencies may not have the money to take the positions; somebody has to give them to money to block that spot,” argued ProKonsul Consulting’s Sundaram.
“They’d need money from the client to pay into the futures market. Who’s going to be paying who money? There has to be something in it for everyone, otherwise why would the agency offer this?”
Why Would Anyone Launch a New Product in the Middle of a Crisis?
Skytra has been in the making for three years now, and there are still regulatory hoops from the UK’s financial authority to jump through. But the company believes a post-Covid-19 launch would good timing for several reasons.
During a recent webinar, it revealed it believes risk management will be in greater focus; price-locks could support airlines during recovery; and it will help get customers back on planes quicker. It will also protect against selling tickets too cheap, as well.
In one respect, there are probably many airlines who wish they’d had their hands on this kind of trading system at the start of this year as the crisis began to unfold.
What Happens Next?
Before Skytra officially launches, not that much. It is currently applying to the UK’s Financial Conduct Authority for authorization as an investment firm operating a multilateral trading facility under Part 4A of the Financial Services and Markets Act 2000, and expects sign-off in the first quarter of next year.
It is also applying to become a registered Benchmark Administrator producing air travel indices, which it hopes to have approved in the third quarter of this year.
In the meantime, expect Airbus’s foray into airfare trading to generate a high level of interest from the wider travel industry. Sundaram predicts the large online travel agent players like Expedia — reportedly seeking $1 billion in new funds — and Priceline will find Skytra particularly useful as a way of hedging their bets in the future.
This crisis is revealing an industry that’s increasingly open to adopting new ways of thinking, from new business models for travel agencies to airlines refocusing on direct selling, to help it recover.
Skytra’s gamble that clients will want to invest in wholesale blocks of virtual tickets in advance, which at the same time guarantees revenue to airlines, is a bold move.
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Photo credit: The new system From Airbus will let industry players bet on future airfare revenues in a similar way to Wall Street trading. Mark Lennihan / Associated Press