Squeezed incomes, cuts in corporate travel budgets and flat economic growth have all created a perfect storm for the travel industry since 2008. However, the industry has worked hard to adapt, cut costs, re-shape services and build online offerings. Positive results from industry leaders such as TUI and Thomas Cook point to a resurgent industry and one that is leaner and better able to profit from the improved economic headwinds.
However, while the market has improved, consumer incomes remain squeezed and both retail and business customers are far more price-sensitive, so maximising profits and driving down costs remains vital. I believe that 2014 will see currency hedging and trading rising up the agenda for travel businesses, which are more exposed than many companies to the volatility of foreign exchange movements.
Over the past 12 months, we have seen record highs in the Renminbi against the US Dollar for example, and two year highs in Sterling. Global fluctuations have been driven in part by on-going economic instability and concerns about when the US will end its Quantitative Easing programme. Large swings have also occurred in response to economic data and government announcements and as confidence remains fragile, we see this volatility remaining a feature for 2014.
As travel firms deal in many different currencies, making payments to suppliers overseas including hotels and airlines, fluctuating rates can really hit the bottom line, but there are also opportunities in currency markets to maximise return and reduce foreign costs in real terms.
Even seemingly mundane tasks such as setting prices and managing payment in foreign currencies can be fraught with challenges for travel firms. However, there are also opportunities and with the right strategy, foreign currency transactions can be far more than an administrative burden – they can act as a profit accelerator, with a managed currency portfolio used to increase the competitiveness of travel companies’ pricing and ultimately improve the bottom line in an extremely competitive margin environment.
We are speaking to an increasing number of travel firms that are looking to take a more proactive and sophisticated approach to managing currency risk. Most are looking to achieve this by hedging forecasted foreign currency expenditure, particularly over the peak travel season of the summer months, rather than trying to second guess the unpredictable foreign exchange markets and leaving it to the exchange rate on the day. A portfolio approach involving spot purchases, forward obligations and option products is fast becoming the most popular way of managing currency risk.
Hedging also allows some flexibility in the amount that has to be converted into foreign currency to match payments. Using a portfolio approach will mean that if certain contracts from abroad do not materialise or a particular season proves to be slightly disappointing, it’s easier to manage the shortfall. It means businesses have the confidence to leave a small amount to discretion and may only hedge 50% of their expected expenditure.
Currency is a business risk inherent to the travel industry and managing it effectively should be a fundamental function within the finance department. There are solutions available to minimise the risk of currency exposure and accelerate profitability by sending currency at beneficial rates, as well as offering the flexibility to have some discretion about the amount of currency you choose to buy.
With the right currency management solutions companies can turn the curse of trading in multiple currencies into a benefit.
More information can be found at: www.investec.co.uk/treasury