ABSTRACT
This paper explores the evolution of 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. Finally, the paper reports our findings on effectiveness of revenue hedging using the newly proposed price indices by Skytra
Keywords
Hedging, Skytra Price Indices, Derivatives