Experts Form Airfare Futures Index

An airfare analyst and an aviation professor are working to shake up the ways fares are bought and sold in the United States with the creation of an exchange index that, if supported, would enable large-market buyers to purchase airfare futures on a per-mile basis.

Bob Harrell, president of airfare consultancy Harrell Associates, and Denver Lopp, an assistant professor of aviation technology at Purdue University, under the company name Aero Commodities Inc. are shopping their Aero 100 index to airlines, credit card companies and the Chicago Mercantile Exchange, attempting to establish a commodities trading market for airfares.

Harrell said the index would enable corporate travel buyers and travel management companies to lock in a per-mile airfare cost to ward off uncertainty in airfare pricing, much as many airlines hedge against oil price volatility.

The index already is constructed to track 10,000 fares in the top 100 domestic markets each day, Harrell said, representing daily spot prices in cents per revenue passenger mile.

"A lot of travel buyers don't like that they get a budget together and get in a position where the market comes in at variance with the budget. It makes them uncomfortable," he said. "This is a way to buy certainty. You lock in and eliminate risk."

The index offers an indication of "where fares are going to be in the next three to six months based on the analysis we do," Harrell said. "However, commodities often trade in futures. This will serve as the basis for trading contracts, futures and options on futures. It opens the door for interested parties to take a position on the future of airfares, which, said another way, gives airlines the ability to hedge their position on airfares. They've never had that."

The market will determine how far in the future fares are traded, Harrell said, "but it could go out several years."

Harrell, Lopp and others have worked on the project for years and have filed an application with the U.S. Patent and Trademark Office, though more is needed to get the idea off the ground.

"We're briefing airlines now, we've talked to the Chicago Mercantile Exchange a few times and we're talking to banks about creating markets in this," Harrell said. "We're hoping to get other financial interests to provide liquidity to the market."

Harrell said he has stress-tested the methods for collecting airfare data and compared daily spot prices in the index with actual fares reported quarterly by the U.S. Department of Transportation, noting a close match. "We have two years of data now and the weighted average variance between our data and the DOT data is less than 1 percent," Harrell said. "This index is published every day, and at the end of 90 days we check to see how we did."

The Aero 100 index is being used by the airfare consultancy as a benchmark offering, tracking published domestic economy fares in those markets, which "represent the far majority of fares sold. Economy fares also experience the highest volatility and are the most competitive category of fares marketed by airlines," according to a briefing distributed to corporate travel buyers.