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Skytra has been given the regulatory thumbs up to launch a new set of airfare benchmarks by the UK’s financial watchdog.
The Airbus-owned technology company has developed the Skytra Price Index, which are benchmarks that track the average price of air travel, based on dollars per revenue passenger kilometer, across different regions.
These benchmarks will allow airlines to hedge their future revenue in the same way they do their fuel costs, while financial institutions will also be able to trade them.
At the same time, company travel managers are being encouraged to use the benchmarks in their own airline contracts, as Skytra claims no other platform offers such transparency when it comes to seeing the actual price paid for tickets.
The index includes billions of transactions recorded daily by the International Air Travel Association, and matched by billions of offered ticket prices from online travel platform Kiwi.com. Skytra claims it collects 83 percent of worldwide economy-class ticket sales by value, on a daily basis, spanning 435 airlines.
Working Out Discounts
London-based Skytra has been three years in the making, and on Monday announced its indices had been approved by the UK Financial Conduct Authority. Now, its co-founder believes its airfare data could help companies stabilize their travel budgets in what is set to be a volatile pricing environment over the next few years.
“If you have an airline selling corporate travel, and you have a corporate on the other side who wants to buy corporate travel, it’s a long, painful and messy negotiation,” said Elise Weber, chief sales and marketing officer. “On both sides there’s no transparency. Corporates have spent ages negotiating for origin and destination, letter class, then they come to the booking system and it’s not available any more.”
Airlines, meanwhile, have reduced the sizes of their sales teams due to coronavirus, and can no longer demonstrate their value if their customers source better deals by booking a public fare, Weber added.
As a result, she argues travel managers could base corporate fares on Skytra’s indices, with a 20 percent discount, as an example.
Skytra is not intended to bypass corporate travel agencies either, as Weber said they typically accompany corporates through the request-for-proposal process. Agencies could even negotiate their own corporate fares.
An Airline Advantage?
Skytra was built because airlines were approaching Airbus about buying its planes, but voicing concerns that after making such a large capital investment, there wasn’t a way to protect themselves against drops in ticket prices.
“There are still some hurdles. We’re ticking the box for the indices to be regulated, so (airlines) can finalize their internal correlation analysis. They can get it for their risk committee to approve this instrument, and with their bank they can hedge. The bank will be key to facilitate that.”
Weber said Skytra has worked with different airlines to develop the index over the last two or three years. Currently, Air France has made public it will be a launch customer.
“Having been involved throughout the process with Skytra on their new price indices, it is exciting to see the regulatory approval by the UK’s FCA will enable Skytra to take the concept of airlines hedging revenue volatility to an actual reality,” said Bruno Lecerf, senior vice-president, finance and treasury.
“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.”
British Airways is also open to the idea, with its head of global sales saying new methods will be needed after the pandemic. “The fact is, the data we need to bring in to corporate contracts is a different data set than we had previously,” said Mark Muren at a conference in September last year, when asked about the concept. “So we’ll take whatever data our partners make available to us. It’s about being as transparent as possible. If this type of tool is helpful, we’d welcome that conversation.”
Weber said Skytra would not comment on who its other launch customers are, but said: “We wouldn’t be here if there wasn’t an interest from both sides. We’re putting the actors together, and providing them with the data and analysis.”
Weighing Up Risks
Corporates too can hedge against airfares. Hedging is typically used when there is a risk exposure you want to get rid of. For airlines, there’s that volatility in fuel prices which they’ll want to remove — “to make a wobbly line flat,” notes Weber.
“On the other side of the trade, you have corporates who have swings in travel budgets. They could say in the same way, I want to stabilize this spend. If their volumes are very low, it’s the right moment to think about how to use it,” she added.
She said companies could negotiate their air travel spend for a region based on the Skytra Price Index with a set discount. As that doesn’t stabilize the volatility, they can then also hedge on top. “So one, I get my discount, and second, I have more predictability. It’s a two-step process which is actually very elegant,” Weber said.
However, one travel buyer told Skift he has yet to be convinced how this would be funded by corporates.
And questions have been raised over the limited data.
“It’s innovative, potentially disruptive for distribution and airline corporate contracting. But the indices do not factor in business class, which is the main cost driver for potential large-spend corporations,” one aviation analyst told Skift.
Skytra said including business-class fares was something it could look at in the future.
Meanwhile, while hedging could reduce the corporate fare negotiation talks to a bare minimum, other aspects like service levels, added value items and sustainability still need to be thrashed out.
And travel agencies, like many airlines, have suffered widespread furloughs and layoffs. “It seems unrealistic under the current ‘survival’ environment that they would be able to create trading departments with skilled people,” the analyst source added. “Air travel is not a core strategic asset for a corporation like fuel is for an airline, it is just one of many cost items to run their business.”
For now, Skytra will most likely appeal to airlines and investors who for the first time can trade such a speculative product; the volatility of airfares means there are potential high gains to be made — but also big losses.
Despite the three-year wait, Skytra may need to wait even longer. As most companies have yet to return to their offices, yet alone reboot their travel programs, it’s unlikely they’ll be willing to gamble their budget in such an uncertain world.