Wall Street’s next trading innovation: Airline fares derivatives

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An Airbus narrow body plane

Nicolas Economou | NurPhoto | Getty Images

European planemaker Airbus is working with Nasdaq to develop a derivatives-based trading platform that will allow airlines to protect against swings in ticket prices.

Just like airline companies use oil futures to hedge against the volatility in fuel costs, they will soon be able to do the same with the swings in ticket fares, which fluctuate drastically during holidays, events and different weather.

The London-based platform Skytra will enable airlines to manage its revenue risks for the first time by trading futures and options contracts based on its proprietary indices. The company said it has been developing benchmarks to track the daily changes in the price of air travel for two years.

Nasdaq will provide technology to ensure functionality including matching, surveillance, risk management and regulatory reporting.

“Skytra has been created in collaboration with the air travel industry and players outside it to enable more financial predictability in a volatile market,” Christian Scherer, Airbus’ chief commercial officer, said in a statement.

Airlines have long been exposed to uncertainties around short-term revenue. Up to 90% of the tickets are booked within 90 days before take-off, and reduced demand or increased seat supply can hurt sales significantly, according to Airbus.

“The creation of Skytra by Airbus represents a dynamically new intersection between aviation and financial marketplaces, where the benefits will extend to companies in both ecosystems and the broader markets economy,” Adena Friedman, president and CEO of Nasdaq, said in a statement.

Financial Times first reported Airbus’ plans to launch such a venue.

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