Foreign exchange is not all about risk, says Kantox’s Antonio Rami
Comment: Cash in on currencies
Foreign exchange is not all about risk, says Kantox’s Antonio Rami.
The travel industry has undergone massive changes in recent years. The arrival of a new generation of disruptive players, the emergence of innovative direct-to-consumer sales channels, and market developments like dynamic packaging have resulted in generalised price and margin compression across the entire travel chain.
The collapse of Thomas Cook last September highlighted the vulnerability of the traditional package holiday model, with fixed prices printed in a catalogue. On top of its unsustainable debt structure, the venerable tour operator had to contend with slow economic growth, currency fluctuations, Brexit-induced uncertainty about travel — and even flygskam, the Swedish neologism that encapsulates the shame of air travel on environmental grounds.
However, currency risk is the number-one issue for many participants in the travel industry. This is understandable. Given the global nature of the business, currency risk exists both on the sales and purchase sides due to the high number of daily small transactions with an extended period between booking and settlement.
And, as new destinations are made available to customers worldwide, more currency pairs are involved, further adding to the apparent complexity.
We believe that this negative perception of FX risk is largely misguided. Currencies should be viewed as a business tool, rather than as a mere problem to solve. Travel companies can take advantage of currencies in a number of ways. Buying in more currencies allows them to widen the range of inventory choices.
For example, a British bed bank buying capacity from Thai hotels can obtain better deals by sourcing in Thai baht and not just in British pounds.
In addition, by purchasing in the local currency of the suppliers, firms avoid inflated prices charged by suppliers who add mark-ups to compensate for their own FX risk.
By selling in the currency of their customers, travel companies can avoid passing on FX mark-ups to their clients, gain competitiveness and expand sales in promising new markets. Also, OTAs can boost conversion rates by providing clients with the ability to pay in their preferred currency.
Finally, there are several ways in which FX-savvy travel firms can profit from forward points, the difference between spot and forward currency rates. Fortunately, companies do not have to face the trade-off between financial risk and the decision to embrace currencies as a business opportunity.
True, in an industry as dynamic and as complex as travel, currency hedging can be expected to be an equally dynamic and complex undertaking.
However, automated FX risk management solutions allow finance teams to effortlessly manage FX risk and to scale their treasury operations, regardless of complexity.
The Chinese symbol for risk is a combination of ‘danger’ and ‘opportunity’, representing the downside and the upside of risk. It is high time for travel industry participants to ditch the negativeonly vision of currency risk.
To successfully navigate the treacherous waters of dynamic prices, currency fluctuations and low margins, the positive side of currency risk must be fully embraced.