Airbus unit plans financial products to help airlines manage risks to revenue

London-based Skytra is developing tools to manage ticket price volatility within the aviation industry

(FILES) In this file photo taken on November 17, 2019 An Airbus 330 commercial airplane is seen during an event at the Dubai Airshow in the United Arab Emirates. Unlike Trump's multiple, unilateral trade conflicts -- over steel, aluminum, autos and with China -- the Airbus dispute predates his administration, and the tariffs on $7.5 billion in product from the European Union were authorized by the World Trade Organization following 15 years of litigation. The tariffs are a bid to hurt European companies to pressure those governments to abide by global trade rules and withdraw the subsidies -- which the US argues allow Airbus to compete unfairly against Boeing. But American businesses argue they are collateral damage in a dispute, and many may not survive. / AFP / KARIM SAHIB / TO GO WITH AFP STORY by Heather SCOTT, "US uncorks a bottle of job-killing wine tariffs on American firms"
Powered by automated translation

A unit of Airbus, the world's biggest plane maker, is planning to offer financial instruments to help airlines manage the risks to their revenues, the first of their kind for the industry.

London-based Skytra, a fully-owned subsidiary of Airbus, will offer financial futures and options contracts on a regulated derivatives trading platform aimed at global airlines, the unit said in a statement on January 20 on its website.

"Airbus recognises that the air travel industry could see substantial value in being able to control its revenue risk," Christian Scherer, Airbus' chief commercial officer, said. "Financial predictability is beneficial to the whole value chain - from passengers to airlines, airports, lessors and aircraft manufacturers, enabling the industry to invest in reducing our carbon footprint. After considerable engagement with our customers, Skytra is born."

Overall airline industry revenues are projected to grow 4 per cent to reach $872 billion (Dh3.2 trillion) in 2020, up from $838bn in 2019, according to the latest forecast by the International Air Transport Association, a trade body that represents about 290 airlines. Last year, the industry suffered from lower passenger and cargo demand, leading to weaker revenue growth, against a backdrop of sluggish global economic growth and slower world trade. In 2019, passenger yields fell 3 per cent and cargo yields dropped 5 per cent.

Airlines are currently able to hedge their fuel costs and exposure to currencies, but there are no existing tools allowing them to manage air travel revenue volatility - making Skytra's platform the first of its kind for the industry.

The lack of such instruments currently "makes airlines financially vulnerable and affects their ability to plan long-term and make the necessary investments to grow sustainably”, Skytra said.

Airline ticket prices are constantly changing due to external factors such as supply or demand surges, political issues, tax and economic uncertainty.

While airline infrastructure and operational commitments are planned years into the future, the vast majority of airline tickets are sold in the last five weeks before take-off, Skytra said.

"The cyclical nature of the industry, the high competition and its exposure to global events makes adequate risk management crucial for supporting the predicted growth," the company said.

Skytra's products aim to ensure the airline industry has its own class of derivatives to manage ticket price volatility.

“Finally we will have a risk management instrument tailor-made for the air travel industry that will help us manage our exposure to ticket price volatility more efficiently," Christine Rovelli, head of treasury at Finnair, said in a statement.

London-based Skytra is seeking approval from the UK’s Financial Conduct Authority to become a regulated benchmark administrator for its air travel indices.

It aims to make these available in late 2020 following regulatory approvals.