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Law360, London (January 11, 2021, 12:42 PM GMT) -- The Financial Conduct Authority has approved the world's first air-travel price index to help airlines hedge swings in ticket fares as the COVID-19 pandemic continues to inflict chaos on the travel industry.
Skytra, a wholly owned subsidiary of European aerospace company Airbus SE, said on Monday that the British financial regulator has approved the Skytra Price Indices as an officially regulated benchmark administrator for airfares.
The company introduced its international airline price index, which allows carriers to hedge volatile revenues and manage pricing risks, in response to the extreme volatility of airline prices since the beginning of the coronavirus pandemic and the travel bans and lockdowns that followed.
"COVID-19 has highlighted why it's imperative for airlines and other companies in air travel to be able to manage revenue risk," Mark Howarth, Skytra chief executive said. "Had our risk tools been available before the pandemic, and airlines had correctly hedged their exposure, the financial instruments would have mitigated the devastating impact on revenues of the travel bans and restrictions."
Howarth said that the volatility of airline ticket prices has doubled in some regions as a result of the pandemic.
Skytra's database of global air ticketing prices has allowed it to create a set of regulated benchmarks for flight prices based on the wholesale price of air travel for every kilometer flown. Airlines can use the benchmarks to set prices on derivative contracts for air travel tickets — which means that air travel companies can use these financial instruments to hedge their own exposure to rapid price changes.
Heightened price volatility resulting from the COVID-19 pandemic will last another two to three years, the company said. Trading in derivative contracts tied to pricing will allow airlines to manage the extent to which their finances are exposed to that volatility.
Skytra said its ticketing database is fed daily by billions of transactions recorded by the International Air Travel Association, a global trade organization made up of the world's airlines, and matched by billions of offered ticket prices from online travel platforms.
The company said its database collects 83% of global ticket price data each day. Its price benchmarks will help the airline industry recover from the worst effects of the pandemic, the company added.
Virgin Atlantic was given court approval in August to take its planned £1.2 billion ($1.6 billion) recapitalization to creditors for approval, after the British airline said it is facing a severe liquidity crisis because of the coronavirus pandemic.
Airlines have also run into trouble over their alleged mishandling of the crisis. The competition watchdog said in December that it is launching an investigation into whether airlines failed to give passengers refunds for flights they could not take lawfully because of government travel restrictions imposed to fight the COVID-19 outbreak.
The Competition and Markets Authority said it will investigate airlines that offered customers only vouchers, or offered to rebook trips, for flights that were not technically canceled amid the lockdowns but which customers would have had to break the law to board.
--Additional reporting by Paige Long. Editing by Ed Harris.
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