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An Options Trader’s Guide to Post-Pandemic Air Travel

An Options Trader’s Guide to Post-Pandemic Air Travel

Saturday, 6 February, 2021 - 05:00

As Covid-19 vaccines start to roll out around the world, people who haven’t been beyond their suburb in months are thinking of spreading their wings.

There’s an opportunity here for both travelers and the airlines that are keen to coax them back on board. To get the best value out of the transaction, it’s worth taking some lessons from financial markets.

For starters, there’s a drastic liquidity mismatch right now that passengers would do well to exploit. Airlines are in desperate straits. At listed carriers alone, debts have increased by about $124 billion since the start of the pandemic. Tens of billions of dollars more will be burned before the industry starts getting back into the black in the fourth quarter, according to the International Air Transport Association.

On the customer side, things couldn’t be more different. While many workers have suffered from unemployment and reduced shifts, households in aggregate (and especially the more affluent core air-travel demographic) are swimming in money. US households have set aside roughly $30 trillion over the past year, with the savings rate peaking at more than a third of disposable income in April.

That presents a phenomenal incentive for carriers to shift funds from household balance sheets to their own. United Airlines Holdings Inc.’s decision last August to abolish fees for changing flights is a decent example. Ancillary charges made up a particularly profitable $2.4 billion of the company's $43 billion revenue in 2019. By canceling change fees, it’s giving up that long-term margin for the sake of some short-term cash.

There’ll be plenty more such examples as the world emerges from its quarantine cocoon.

“Airlines are having to lower prices to encourage people to make long-term plans,” said Andrea Staines, a non-executive director and chief executive officer of Qantas Airways Ltd.’s former Australian Airlines unit. That means that people aren’t just buying air tickets any more: “You’re paying for options.”

If that sounds like passengers are engaging in a complex derivatives trade, it’s no accident. Airlines are in the business of selling a highly perishable commodity — tickets for travel on a specified route and date. Within each part of the cabin, these vary from pricier fully flexible fares to the cheapest buckets, where all the costs of cancellation or changes may fall on the customer.

You could define the basic value of a ticket as the airline’s costs — typically around 7 cents or 8 cents per passenger, per kilometer almost everywhere in the world — plus whatever margin they can hope to eke out. On top of that, you’ll pay a premium for things like flying business class, booking late or during holiday periods, ancillaries like luggage fees, or having more flexibility to change your booking.

A fully cash-refundable fare is like an option to buy a ticket on a specified date. Ignore the opportunity cost of having your money locked up, and it’s free as well. That's an attractive prospect. With so much uncertainty about governments’ decisions on opening borders, that option value has gone up substantially — a fact that ticket prices don’t always reflect. This is all the more reason to closely scrutinize terms and conditions, which appear to be shifting in the customer’s favor, according to Staines.


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