Travel Industry: Managing Foreign Exchange in Times of Uncertainty
This article was co-authored by Marc Padrosa, Kantox Global Industry Leader for Travel.
The Coronavirus crisis is a perfect example of what economists call ‘undiversifiable’ market risk: it affects all (or most) firms. Swept by a massive wave of cancellations, travel is arguably one of the hardest-hit industries. Tour operators, Online Travel Agencies (OTAs), bed banks, hotel chains and other participants are scrambling to adjust to the new scenario. Added to the industry’s woes, the wild gyrations in currency markets further complicate the task of finance teams.
As we discussed in a recent webinar organised by Kantox, the crisis provides a good opportunity to raise awareness about the role played by foreign exchange (FX) in the travel industry. Currencies can and should be seen as a source of competitive advantage—not as something to be feared or wished away. They will always be with us. Properly managed, they can foster the resilience of the modern travel company.
The language of currencies
Currencies are like languages: the more languages you know, the better. If fear sometimes keeps us from speaking in a different language, so it happens with currencies. Yet the opportunity cost of avoiding currencies is particularly high in the travel industry. On the contracting side, buying capacity in the local currency immediately results in a wider range of inventory choices. Crucially, it allows firms to avoid costly markups charged by suppliers who seek to protect themselves from FX risk when forced to sell in a foreign currency.
In the low-profit margin world of middle-chain travel players, this can be a decisive factor. On the selling side, dealing in the local currency makes customers happy and leads to higher conversion rates. Furthermore, firms that sell in the local currency avoid passing on FX markups to their clients, gaining competitiveness and expanding sales in promising new markets. Finally, in terms of pricing, there are several ways in which the FX-savvy travel firm can take advantage of forward points, the difference between forward and spot currency rates.