Comment: Travel is reopening, but survival depends on volatility

Economic certainty is a solid foundation for strategic planning, says Elise Weber, co-founder of Skytra

After what has been an incredibly challenging 18 months for the travel industry, it was reassuring to see news recently that Ryanair plans to recruit 2,000 pilots over the next three years – one of aviation’s biggest recruitment drives since the start of the pandemic.

To add to that, Air-France KLM has started negotiations with Airbus and Boeing for up to 160 new short and medium-haul aircraft.

These announcements have come as the UK government allowed quarantine-free travel from July 19, so-called ‘Freedom Day’, for fully-vaccinated travellers returning from amber list countries.

There are green shoots of recovery and, if we compare where we are now to where we were a year ago, we can take some encouragement from the progress that has been made.

However, we’re not out of the woods yet.

The outlook is still volatile, and the UK’s traffic light system is changeable by its very nature. The travel industry’s recovery, let alone its future development, is dependent on managing this.

Revenue volatility is a huge thorn in the side for the airline industry. Even before the pandemic, 90% of ticket sales were sold within 90 days of travel, and ticket price volatility ranged from 7-22% per year.

This revenue challenge has now been exacerbated. If we consider the implications of this from the airlines’ perspective: revenue can be a greater contributor to airline profitability than cost, and can have an adverse effect on their credit rating, which can increase their cost of capital, in turn reducing their ability to invest in fleet upgrades or even to make lease payments on existing aircraft.

But the impact of fluctuating prices filters down to all participants in the air travel industry.

For airline treasury teams responsible for executing growth strategies, it prevents them being able to take an informed long-term view, constantly wary of the next unforeseen event.

For airline and corporate sales teams dealing with contract negotiations, it makes this process even more complex, making it challenging to agree prices and discounts to meet targets or manage corporate travel budgets.

Essentially, uncertainty is the enemy of planning.

Going forward, we are going to see different markets recover at different speeds.

Quarantine restrictions are still in place in many countries, and take-up of long-haul flights, in particular, is dependent on the progress of certain parts of the world.

European short-haul is less encumbered by the restrictions on different countries, and driven by people looking for affordable, lower-risk holidays or domestic flights to see family.

We can certainly expect a boost to low-cost air travel in the competitive summer period this year, but the overall route to recovery is far more complicated.

Buyers and sellers of air travel need to take a more macro view, re-focus their strategies and consider what tools they need to ensure they are not overexposed as we enter a new world of travel.

In December last year, we received FCA approval for our Skytra Price Indices, which have established a transparent reference price for air travel measured in $/KM that allows the industry to hedge revenue volatility for the first time.

While the hedging of currency, interest rates and fuel costs has been possible before, there have been no comparable instruments to allow airlines to manage the risk of falling or volatile revenues.

Likewise, major corporates who buy air travel can use the Skytra Price Indices as a reference price for air travel contracting or to hedge their travel budgets to avoid unexpected price swings.

Economic certainty is a solid foundation for strategic planning.

Travel volumes are currently lower than usual, but the ticket price volatility as a result of Covid is expected to last at least for another two to three years.

This reinforces the need to protect against this risk on both sides.

Research conducted by Regis Huc, from Toulouse Business School, found that the airline industry could save up to $7.7 billion per year in financing costs through adopting risk management strategies to handle revenue volatility.

This will be a vital part of the industry’s recovery toolkit and these savings, or cheaper financing rates, will enable fleet upgrades and open the industry up to far more opportunities than it had before, which in turn will benefit travel buyers.

And that’s the key: this is not just about getting the industry to the same way of operating as before Covid-19.

We can take advantage of this opportunity to overhaul many processes that have grown to become inefficient and build back better and stronger than ever before.

We will be happy to hear your thoughts

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