Unlocking the Final Code to Managing Financial Risk in the Airline Industry

This paper reports our findings on the effectiveness of revenue hedging using the newly proposed price indices by Skytra. In the example analyzed we find that when hedged, if United Airlines’ transatlantic ticket price yields fell as much as 98%, its revenues would have only fallen 8%.

Firstly, we explore revenue hedging and the evolution of financial risk management practices for the aviation industry. Until now, the industry has been confined to hedging risks posed by its major cost drivers, including fuel, foreign exchange and interest rates. However, even the most significant driver of these costs (fuel) makes up only 20 to 30% % of the total cost and until now, airlines did not have an ability to hedge the revenue side of their profit and loss account, limiting the impact of their hedging strategies. Skytra, a subsidiary of Airbus, has recently proposed a novel approach to managing the yield risk for airlines, which will complement the cost side hedging. Further, the ability to hedge yield would make the treasury functions of an airline more complete, by allowing it to focus on its two most significant drivers of economic outcome- yield and fuel.