Video: Airbus subsidiary paves way for airline revenue hedging
Airbus risk-management subsidiary Skytra has made it possible for airlines to hedge revenue for the first time, by gathering data covering 83% of daily worldwide ticket sales. Skytra co-founders Elise Weber and Matthew Tringham discuss how this came about and what it means for airlines.
Rush transcript of interview:
Victoria Moores: Today, Air Transport World is interviewing the two co-founders of Skytra, which is an Airbus subsidiary. And now, what Skytra has done is they've developed an index for air travel costs, which can basically be used by the industry as a tool to hedge their revenue and thereby minimize risk, which is particularly relevant in the current COVID climate. So with me today is Elise Weber, who is the Chief Sales & Marketing Officer for Skytra, and also Matthew Tringham, who is the Chief Strategy & Product Officer. Good morning.
Elise Weber: Good morning, Victoria.
Matthew Tringham: Good morning.
Victoria Moores: So my first question is, whereabouts does this come from? You announced on the 11th of January that you got UK finance regulator approval to go ahead with these indices, which is a set of ticket data – basically - for the industry to hedge their revenues against, if they want to. So could you just introduce whereabouts this idea came from and what it will do for airlines?
Elise Weber: Sure. So as you were correctly mentioning, we are a 100% Airbus subsidiary. And this idea really came from when both of us, Matthew and myself, were working at Airbus. We both spent the last 15 years of our careers working there. And in the last couple of years, we were in charge of strategy and business development. And we were looking at the pain points our customers were facing when wanting to buy our products, the aircraft. And obviously they had a big visibility and stability on their cost side, but what was really worrying for them was the revenue side.
Typically, tickets get bought in the last 90 days before flight. And therefore, you don't know how much you will make on each given flight. So on an airline level, you basically have no visibility on your revenues in the next couple of months. And we thought that maybe we could come up with a new set of indices that would permit our customers to hedge their revenues in the same way as they're already doing on the fuel side. And that's where the concept was born, with three newly worked air travel derivatives, in a workshop. And now three years later, here we are. They are regulated and it's great news, a big milestone for us.
Victoria Moores: And you got to that milestone in the middle of COVID as well, which considering that your business is managing uncertainty, that's quite ironic.
Matthew, can we move over to you for a moment? So if I was an airline and I wanted to set up some kind of hedge for my revenue, what would I need to do to go ahead with that? And then perhaps we'll come back to you, Elise, to find out why an airline might want to do that.
Matthew Tringham: Sure, well there's two fundamental things that you’d want to establish. If you're an airline and you want to set out to hedge your revenue using the Skytra Price Indices.
The first thing is what is the strategy that you want to execute on the hedging of your revenue? Our understanding, for example, from the people we've been speaking to is to be fairly similar, at least to start off with, as a fuel hedging strategy.
So what you do is you identify the part of your business that you want to hedge. So in this case, I guess we're saying in six months time inside Europe, I'm expecting to sell a certain number of tickets, which means a certain number of Revenue Passenger Kilometers. I might decide that I want to hedge a proportion of those kilometers. I might want to set out to use a straight sort of futures contract on those kilometers. I might want to use an option, or I might want to construct a collar using two different options.
Those are strategies, which like I said, they'll probably be fairly similar to the fuel hedging strategy today. We suspect that probably the proportions of kilometers being hedged would be fairly similar to the proportions of fuel being hedged. What you're trying to do is introduce a damper into the system to make any movements smaller and more predictable. That's generally the objective in hedging.
And then secondly, you'd want to establish the comparability of your business to the Skytra Price Indices. Of course, our Skytra Price Indices are measuring the average price per kilometer of transport in each market, for tickets sold within a certain timeframe. At least the average price. Now an airline might be more expensive than average because they're offering more services or they might be cheaper than average because they are maybe offering a de-bundled service. Perhaps they are a low-cost carrier.
You want to establish I am on average 10% cheaper, or maybe 50% more expensive, than the Skytra Price Indices. And that's a fairly straightforward thing to imagine. And the second thing is, as a consequence of the revenue management strategy, what we've seen is certain carriers have a sort of amplifying or damping effect on price movements. So what that means is if the price goes up by say 10% in the market, certain airlines prices will go up maybe 20 or 30%. They're amplifying the movements and certain other carriers following a different revenue management strategy, have a down, a slower response. They might only go up by a couple of percent rather than the full 10%. So it's that type of statistical analysis, which would also need to be accomplished.
And there's combining those two pieces of knowledge together. An airline would be able to go back to their board or their risk management committee and propose a strategy.
Victoria Moores: Perfect. And so, it’s that question of…you can reflect the specifics of your own business model by how you sit in relation to those indices.
Matthew Tringham: Exactly. Of course, we're actually very happy to help anybody who is interested in using the indices. We put together a small guide and working with the relevant data and so on. And so anybody who's listening to this, we are ready to help.
Victoria Moores: I imagine there's a lot of complexity beyond what we're talking about here, so that's great.
Turning back to Elise, again. Elise, we touched on the idea of the predictability of revenue and how that might help an airline. I'm wondering what knock on impact that could have for the airline itself, so what's the wider benefit of hedging revenue for the business?
Elise Weber: Yeah, sure. So if you think for a second about the fuel market, it roughly took 10 years to maturity. What I mean by that is it took the airlines some time to adopt this new, well [new] at that time, the hedging of fuel.
So if the hedging of revenue also becomes an industry standard, then it could potentially bring huge benefits to the whole industry. Because if you think about stabilizing EBIT margins of airlines, that's what effectively you are doing by locking in both sides of the equation. And having higher predictability, it means that you can also potentially have a better credit rating and cheaper access to capital. And if you consider the overall debt of industry, which is enormous, these are billions that you can save for the industry. And we're actually just finalizing a study on that. And yes, it is billions that could be saved by the industry, if it was to become a standard.
Victoria Moores: So the knock-on impact is onto that financing cost and general risk-management predictability. My final question before we wrap up today is you've got these indices, you have all of this data. Whereabouts does the data come from? How are you finding this commodity price for air travel?
Matthew Tringham: So, we were looking around for data a couple of years ago. We settled on working with the dataset from IATA, which we understand to be the largest ticket-issuing database in the world. So in a normal year, we'd see two, two and a half billion ticket transactions every year through that data feed. And we're complementing that dataset with a second one we're getting from kiwi.com. And Kiwi, essentially, are giving us the equivalent of 20 billion price checks every single day. They're looking at many thousands of routes, potential routes in the world and seeing what prices ticket being offered out for multiple dates on that route into the future.
And we're, cross-referencing those two datasets with each other. That’s actually one of the core innovations we've done at Skytra was the ability to make these two data sets work together. By taking a transaction from the IATA side, and we combine it with a price for the Kiwi side, giving us a cross-reference and a redundant view of the price of air travel on any given day, on any given market, for any given day in the future.
Victoria Moores: My understanding... [crosstalk 00:08:39] My understanding is that 83% of the industry ticket prices, you would expect to cover using that [model]. That really is a significant volume.
Sorry. Yeah, go ahead, Elise.
Matthew Tringham: Yeah, I was just wanting to underline how important this cross-referencing is, because even if every... The IATA data set is the master because it tells us that a ticket got sold, we take another price. And this has a good reason because we want to make sure that the price we're taking represents a price of a public fare that you could buy on the internet. So that's our target.
The IATA ticketing data set is prices that can be sometimes a corporate fair. It could be also like friends and families. There are some miles. There's some zero pricing ticket. So what we wanted to do is really to take the transaction and attach a public reference fare to this one. And that's actually the reason we can claim that our price of air travel is a public fare, public reference that would be paid in any given market.
Victoria Moores: Thank you very much for coming in today and for talking to us about this project, especially having brought this together during such uncertain times as well. But Elise, Matthew, thank you very much.
Elise Weber: Thank you, Victoria. Have a lovely day.
Victoria Moores: Thank you.
Matthew Tringham: Thank you very much. Bye bye.
Victoria Moores: Thank you. This is Victoria Moores, reporting for Air Transport World.