7 Apr 2020
Today, we announced a new member of our Nasdaq Market Technology community in Skytra, Airbus’ new air travel price derivatives marketplace that aims to re-imagine risk management industry. Skytra will leverage Nasdaq technology – matching, risk management, market surveillance and regulatory reporting, in addition to managed services – to operate the new regulated trading venue. We sat down with Skytra co-creators Elise Weber, Skytra Chief Sales and Marketing Officer, and Matthew Tringham, Skytra Chief Strategy and Product Officer to discuss how Skytra came to be, their aims for the new venture and the road ahead.
How did you discover the need for Skytra and what was your involvement in developing the idea into reality?
Elise: Matt and I were responsible for running several innovation workshops with Airbus teams and airlines. We analysed the challenges faced by airlines and linked these to their current business model. The aim was to enable a more robust business model for our customers. When we investigated the financial aspects of running an airline, we noticed the large conflict between the huge investments required to operate the business and the very short-term visibility into future revenues. This conflict, combined with high ticket price (revenue) volatility presents a cash flow challenge. What was even more striking is that whilst airlines used risk management tools to hedge their cost volatilities (fuel, interest-rates, fx) they didn’t have any instruments at all to manage the revenue volatility. This is how the first post-it note emerged – it read: financial derivatives for air travel? And this is where the journey started.
Matt: It was mind blowing that an industry of this size had no tools to hedge revenue when other industries, including agriculture, and more specifically shipping have been using such risk management tools for years. We spent 2 years researching to find the correct unit of value for our indices to ensure it services our customers’ needs. It is important to get it right, which meant researching and working closely with our customers – Skytra has been created by the air travel industry for the air travel industry.
We started out with just the two of us so we have been involved in every aspect of the business. We are fortunate that we began this way, with both of us leading from the front as it gave us the ability to bring true innovation to market. Initially, the 2 of us covered all the typical business functions. We have grown from a 2 – 30 member team so we now focused on more specialised areas, myself as Chief Strategy and Product Officer, Elise as Chief Sales and Marketing Officer.
You will administer new air travel price benchmarks; can you explain what this means for what impact will this have on the air travel industry and the capital markets ecosystem?
Matt: It is important we have designed something that is compatible with the world as it is today and reflect the way the air transport industry is organised. There are a number of regional and inter- regional markets around the world which are mirrored by our indices reflecting the price of air travel for each of these markets and segments. At the beginning we will focus our attention on the largest markets with a view to release the full index family covering the whole world as a function of customer needs.
Elise: We have created indices and derivative contracts that can be leveraged by airlines to complement their existing risk management strategies. The same tools can be used by travel agents to propose new services to their existing customers. We are essentially providing new tools for existing tool box.
You can have a look at how we have developed this at our website.
In addition to the benchmarks, you will also provide eligible participants the ability to trade financial instruments linked to Skytra indices on a trading venue. Can you explain how this will work and who benefits from this?
Matt: The indices are at the core of the innovation; however, the way value is delivered is through the use of derivative contracts, specifically index futures and options. A derivatives market enables risk management, where counterparties can transfer risk between each other. The Skytra derivatives market will be specifically designed for the air travel industry to manage its revenue volatility. For example, an airline may expect to sell a billion km worth of air travel in Europe, there is a volatility of approx. 15% on the price at which they can sell these km. Today they have no means to protect themselves against this price volatility driven by market forces, tomorrow they can use our derivative contracts to hedge their exposure to this risk.
This is just one example of how our derivative products positively impacts the whole ecosystem.
From your perspective, what is the most important thing that you want readers to take away about Skytra?
Matt: We need a more predictable air travel industry. Over 4 billion trips were taken last year, set to double in 15 years, over 65 million people are supported by the industry, over 30% of global goods by value are transported by it and the cultural, social and economic benefits of it have changed the world for the better. But the industry needs to transform to a more sustainable future.
What excites you most about the future and is there anything forward-looking that you can share with our readers?
Matt: In the immediate future we are turning an idea into reality, but also with the backing of Airbus we have the means to bring new products to market in the medium and long term
Elise: Actually, this is the reason we have decided to setup the whole infrastructure and MTF, we think long term and we want to build up our capacity to reduce time-to-market for future products. We will always continue listening to our customers for further product development.