Airlines are generally risk averse. They like stability, a challenge in an industry with unpredictability at its heart. The shockwaves of the COVID-19 pandemic will continue to be felt for some time, but airlines have an increasing arsenal of tools to better prepare themselves for the future. Practices such as hedging fuel prices had become commonplace… now airlines can even hedge revenues!
Revenue volatility is by far the airline’s biggest financial risk. In the light of COVID, with ticket prices being more unpredictable than ever, CFOs and treasury teams are increasingly expected to more widely consider using risk management tools to protect their top line.
Skytra co-founder and chief sales and marketing officer Elise Weber, speaking at the Apr-2021 edition of CAPA Live – a monthly virtual summit, offering insights, information, data and live interviews with airline CEOs and industry executives across a next-gen virtual event platform – stated that volatility in airfare pricing “has dramatically increased” in the context of the COVID-19 pandemic environment.
Volatility “has doubled or tripled” in some markets, according to Ms Weber, and she believes the volatility “will last for at least two to three years”. As such, she explained that in this context “being able to protect the top line… can make a big difference”, adding that the ability for airlines to hedge both revenue and fuel costs “is protecting the EBIT margin” and makes the EBIT margin “more predictable”.
Skytra, an Airbus subsidiary, has just obtained regulatory approval from the Financial Conduct Authority for the Skytra Price Indices which measure the price of air travel in $/RPK. Treasury teams can now complement their existing hedging tool box with these unique indices to manage revenue volatility. By hedging fuel and revenues, airlines could protect their EBIT margins and improve their credit ratings, which is key in the current climate where 95% of airlines worldwide are non-investment grade, making debt servicing costly.
In the CAPA Live session, Ms Weber joined CAPA – Centre for Aviation, senior advisor, John Thomas, to discuss how these new tools can help to strengthen the industry for the short- and long-term. She revealed that Skytra plans to complete its first revenue hedging trade with an airline by the end of 2021.
Skytra captures more than 80% of worldwide tickets by value for its benchmark indices. The company offers regulated indices for the intra-Europe, intra-US, intra-Asia Pacific, Europe-Asia Pacific, Europe-US and Asia Pacific-US markets and is able to secure regulation for other markets in response to demand.
You can few the full session here: