Professor Geek

This is a little off-topic for this blog, but I was showing my MBA students a video a few weeks ago that recounted the history of the Chicago Mercantile Exchange, which deals in futures. Since a futures market generally does well with a price-volatile product like precious metals, hog bellies, corn, and currency, why not have a futures market in airline tickets? It would seem that many businesses are unable to budget accurately for the travel of their employees, since airline tickets are so volatile. For example, if you were to check a typical flight, you would probably find that the 200 passengers on the flight paid 200 different fares for their tickets, depending upon when they bought them, what types of discounts they could muster, and what class of ticket they purchased. Further, if you were to check flights between point A and point B on a given day, you would find even more variation. If you checked a week’s worth of flights, who knows what you would find.

Since a future is a contract to buy at a certain price, it stablizes budgeting for an organization that needs the stability. Would there be any way to guarantee prices for airline tickets to be purchased in the future? Right now, the only way to lock in a price on a ticket is to buy the ticket. Since we can buy these well in advance, it essentially becomes a future (fixed price for a future flight). But what if we could lock in the price, but not have to pay for the ticket until it was time to fly? Why should the airline have the money for 6 months just so that we can guarantee the price? Maybe we should keep the money, but still be able to lock in a guaranteed price. payable right before the flight.

How would this work? I have no idea, but maybe someone smarter than me in the area of futures could figure out a way. I’d certainly volunteer to try it out.

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