Tulip Holdings, a start-up trading company based in Atlanta, is moving ahead with plans to offer listed and over-the-counter derivatives on the seating capacity of airlines. John Lancaster, president, said Tulip Holdings entered in March a joint venture with a company that builds online derivatives markets, declining to name the company. Tulip plans to offer swaps, futures, forwards and options by the middle of next year. Tulip started preparing the move last year (DW, 12/18/00).
The rise in the cost of oil and labor, coupled with the slump in the economy--which may have a negative impact on business travel--makes this a good time for airlines to manage their seating capacity risk using derivatives, Lancaster said. Airlines likely will be interested because they are already active in managing oil price risk with derivatives, he stated. Tulip Holdings may eventually offer oil-hedging instruments once it is established in the seating capacity market.
Lancaster sees opportunities in structuring derivative transactions across various end users. For instance, when one airline sells a ticket to a customer and another airline carries the passenger on a leg of the journey, Tulip could structure an OTC option that would allow the two airlines to share the risk of "spoiled seats," the term used when a plane takes off with less than its maximum capacity used. Currently, either the marketing airline or the operating airline carries all the risk.
Tulip's joint venture partner will provide product development support and the technology for setting up networks to manage the derivative and underlying positions. The company is also in the process of forming an alliance with a major airline and a global distribution system, Lancaster said, declining to name these companies. He added that Tulip Holdings plans to eventually offer derivatives to rental car agencies, hotels and air cargo firms, all of which have the same inefficiencies in their distribution systems as airlines. The underlying for the rental car agencies would be the cost of maintaining un-rented cars, while it would be empty rooms for hotels and unfilled holds for air cargo firms.
