At Davos this year, Nasdaq announced a transformative deal with Airbus’ wholly-owned subsidiary Skytra to create a new derivative trading venue for the air travel industry. The agreement marks the first time that the industry will have financial risk-management instruments to address revenue volatility.
Airbus approached Nasdaq with this idea for a derivative trading venue, Nasdaq President and CEO Adena Friedman told CNBC. The aerospace company established Skytra to help the $1 trillion per annum air travel industry hedge its revenue risk through the trading of cash-settled futures and options contracts based on a series of Skytra Price Indices. The indices were developed over two years in close collaboration with the air travel industry.
Under the terms of the agreement, Nasdaq will deliver a suite of marketplace systems, including the core matching engine, the regulatory reporting required under MiFID II, as well as the market surveillance and pre-trade risk management solutions.
“We chose to work with Nasdaq because of its impressive track record in delivering best-in-class infrastructure, technology, and innovation for markets across the globe,” said Mark Howarth, CEO of Skytra. “Its modular architecture means we will be positioned for growth as the Skytra platform builds traction with the airline industry and as we cater to the wider needs of other market participants.”
“Nasdaq has been working hard to make sure we expand our strategy in our Market Technology business,” Friedman said. “The technology that supports capital markets should really support markets beyond the financial industry. And this is a great example of the type of marketplace that you can create to help other aspects of the economy – to hedge risk and to manage through and create liquidity in certain parts of their business.”
The air travel industry is currently challenged by short-term revenue visibility, where up to 90% of the tickets are booked within 90 days before take-off. Friedman also noted that the price of a ticket in any given month can vary by as much as 20%. In order to provide greater insight, Skytra partnered with a company that tracks every ticket price – before purchase and after purchase.
“They are able to look at certain routes, certain regions in the world, and they can say, ‘Well, how much has that price changed?’ They create an index on that, and they, therefore, are now creating a derivative that can be traded. So, you can hedge out the risk of the route between the U.S. and Europe or maybe between London and New York,” said Friedman, acknowledging that it is a professional market not available to consumers at this time.
Friedman also noted that traders can track changes on a broad basis or for a particular airline.
“What’s great about working with Airbus is that they are very focused on the long term, because, of course, building an airplane takes a while. So, they have a long-term orientation toward this [venue] as well, to make it so that it does change the face of travel, and makes it so that there is more stability in the industry going forward,” Friedman continued.