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Airbus plans derivatives trading for airline tickets

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Via Financial Times

Airbus is setting up a trading venue for derivatives designed to hedge the air travel industry’s exposure to highly volatile ticket prices.

The European aircraft manufacturer is due to announce the project, named Skytra, on Monday after more than two years of preparation.

The London-based venue plans to offer futures and options contracts based on newly developed indices that track the daily changes in the price of air travel. Mark Howarth, a former executive at the London Stock Exchange and Chi-X, has been appointed to run the venture.

Airbus’s decision to run its own venue is a departure for an industry where companies wanting to hedge fuel prices or interest rates typically turn to banks or exchanges such as CME Group and Intercontinental Exchange.

Airbus believes the derivatives exchange will help airlines struggling to cope with the volatility of fares. “The whole idea emerged during a workshop with a customer that was in a financially stressful situation,” said Elise Weber, who has moved from Airbus to Skytra as chief sales and marketing officer.

Skytra said airlines were exposed to uneven cash flow from passenger bookings as customers typically only purchased their tickets to fly in the final five weeks before departure.

The move also highlights manufacturers’ nervousness about the strength of some airline customers as they expand capacity. Global passenger growth has begun to slow, yet both Airbus and its US rival Boeing are sitting on record order backlogs.

With about 7,500 aircraft in its backlog, Airbus has orders representing close to nine year’s worth of production and analysts expect cancellations if the slowdown intensifies.

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“Airbus’s concern is that they are interested in improving the long-term viability of all participants in the air travel sector,” said Mr Howarth. “A stable customer base means more growth for Airbus.”

Airbus has been working to develop indices and benchmarks that could accurately represent an average ticket price in different regions around the world.

“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,” said Christine Rovelli, head of treasury at Finnair.

However, some airlines questioned the value of hedging fares with contracts extending out a year or more. “We don’t plan to [hedge fares] as the pricing is demand-led,” said one big European airline with knowledge of the product. The carrier executive said he feared it would be a “high risk, illiquid derivative, which means it will be costly”.

One derivatives exchange chief executive questioned how Skytra would attract enough buyers and sellers, or intermediaries who could make markets. “Where’s the liquidity going to come from?” he said. Ms Weber said travel agents were natural counterparties to deals.

Airbus will provide the funding for the business, which will include regulatory capital if the venue and its air travel benchmarks are approved by UK markets regulators. It is aiming to launch by the end of the year.

Further details, such as the company providing the technology for the exchange and the clearing house handling the futures and options contracts, will be announced in coming weeks, it added.

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Mr Howarth also defended the decision to base Skytra in London even though Airbus is based in the EU and the UK would shortly be leaving the bloc. “It’s the concentration of experience and market knowledge,” he said.

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