One of the responsibilities of a good meeting manager or corporate travel buyer is making informed buying decisions when it comes to air travel. Now a couple of airline analysts are adding a new twist to those buying calculations.
Denver Lopp, a professor of aviation technology at Purdue University, West Lafayette, Ind., and Robert Harrell, airline industry consultant and principal at Harrell Associates, New York, N.Y., have come up with what they call the “Aero 100 Airfare Benchmark Index,” a commodities market based on a 30-day rolling average of domestic economy fares, representing 13 major airlines and 10,000 daily fares on the 100 largest revenue-producing routes in the United States.
The idea, according to Lopp, is to allow airlines and large-volume ticket buyers to mitigate risk by locking in a per-seat-mile airfare cost.
“There’s obviously a lot of volatility in this market,” says Lopp. “What this will allow [buyers] to do is manage the [the price paid for] seat miles [they’ll have to purchase in the future] by building hedging programs.”
Lopp and Harrell hope to see the index begin trading futures and optionsin the next three to six months, but they still face regulatory hurdles. They are also working to secure a spot on the Chicago Mercantile Exchange or another trading exchange. “The reaction has been very positive,” says Lopp.
A player in the Aero Index 100 would not actually buy or sell seats. “You can’t transfer tickets, so there’s no easy way to deliver seat miles,” says Lopp. Instead, according to Lopp, a planner or a corporate buyer looking at the Aero 100 may see a rate they believe is low and buy those airline ticket futures at a low price. If rates increase, the buyer can sell those futures for a profit, which they can use to help pay for the costs of travel they need to purchase at that later date. Airlines should be interested, according to Lopp, because they’ll be able to buy futures that could help mitigate the risk of either low ticket fares, which will decrease airline revenue, or high ticket fares, which could depress air travel and also decrease revenue.
The Aero Index 100 is comparable to other commodities markets in which no product changes hands. In that sense, it’s similar to the Chicago Mercantile Exchange’s Weather Index in which companies interested in mitigating the risk weather can have on their business operations can buy options based on temperature ranges (which have dollar values).
Lopp and Harrell are in the process of trying to sell the idea to the airlines, as well as organizations such as travel companies, large corporations, and credit-card companies, which, according to Harrell and Lopp, will be interested because they earn revenue from fees based on transaction percentages, which can vary greatly depending on whether airfares go up or down.
Lopp and Harrell are also taking steps to assure potential participants in the Aero 100 that the index is well protected from market manipulators. Built-in factors such as the 30-day rolling index and the inclusion of the 100 largest routes, make market manipulation “virtually impossible,” says Lopp.