According to UKinbound, the UK’s trade association focusing on inward tourism, exchange rates have become the main concern of the body’s members, with 77% citing the issue as having a negative impact on revenue and bookings. This comes from the association’s bi-monthly survey, with exchange rates a much bigger concern than other issues such as regulation, tax, and capacity. While outlook for 2015 is positive, according to Deirdre Wells, UKinbound’s CEO, bookings from eurozone markets – the primary source of visitors after the US – for 18 months hence are already under pressure. Indeed, the pound's strength against the euro has boosted the impetus to pursue other foreign markets, particularly in Asia, the Middle East, and South America. This has driven UK companies to accelerate efforts to tap into the emergence of the wealthy middle class traveller from these countries. Growth has been strong from these other regions, but total numbers are still small and not large enough to cover any fall from Europe.
Although the UK will remain one of the most popular tourist destinations in the world, there are notable challenges ahead, many of which are underpinned by exchange rate dynamics. One such challenge is the changing nature of travel from being attraction-led to experience-led, notes Ms Wells. The UK has some of the most sought-after attractions in the world, but once a visitor has ticked off specific attractions, it can be hard to attract them back. Although the country has much to offer in terms of experience holidays – country walks, good eating, theatre, shopping, for example – this aspect of the UK's tourism market is less well known than in some competitor countries such as France.
Experience travel, while much less country-specific, is more likely to create repeat visits. It is also more price- and fx-sensitive than attraction-driven travel. Many UK suppliers are reluctant to negotiate on prices for inbound operators, particularly those specialising in the smaller markets that are driving growth, forcing operators to squeeze savings elsewhere. Better exchange rates, cheaper currency hedging products, and foreign currency invoicing are all opportunities for margin improvement and cost savings. These products are offered by specialist currency brokers, but typically not by the high street banks – even their commercial services – that most travel companies rely upon.
Many UK agencies sending travellers abroad have been unable to lower prices for euro area packages despite the currency’s weakness. This is due to poorly-advised forward contracts, observes Jeremy Scott, founder and managing director of B away, an independent, family-run tour operator and travel agency. Similarly, many UK operators catering to inbound foreign groups will not have taken adequate measures to help protect their customers from a stronger pound. With costs in pounds, most simply invoice their foreign partners in sterling. This, however, not only forces additional costs and currency risk onto their partners, but may also mean that the UK operator misses out on extra margin. Invoicing in a partner’s currency not only boosts goodwill, but could save both sides money, given the competitiveness of providers of cost-saving and risk-mitigating foreign currency products in the UK.
A common complaint from smaller independent operators in particular is that banking services, especially with regards to foreign payments, are insufficient and expensive. Unless a company transacts in larger volumes, or the financial director has negotiated favourable rates and fees, companies can find themselves overpaying by 2-4% thanks to poor exchange rates and transfer fees. And even that assumes that the bank can offer all the currencies a company may need to pay in; it is not unusual for smaller agencies to pay suppliers by credit card because their bank cannot offer them specific currencies.
Given the nature of the travel business whereby prices are set up to 18 months in advance, companies with foreign exchange exposure should already be making use of forward contracts, says Mr Scott. These can deliver the protection of future rate certainty by allowing customers to lock in a favourable exchange rate today for a future transaction. Given that the volatility of a currency over the period can have a much larger impact on costs or savings than obtaining a better exchange rate, forward contracts are essential. However, while most forward contracts will require a deposit, those charged by banks can often be markedly larger than those demanded by specialist currency brokers, needlessly tying up cash or incurring unnecessary borrowing fees.
Mr Scott believes that there is a gap for specialist financial service providers to offer currency options for SMEs. For a fee, options grant the right, but not the obligation, to buy or sell a particular currency by a future date at an agreed rate. While options create rate predictability, they are more complicated products than stop or limit orders or forward contracts, and so are more suited to high currency volumes, especially when the timing of transfers is not known. For example, when planning for sporting tours, when teams may go to foreign tournaments, options may be a useful tool. Generally, however, given that travel cycles, traveller numbers, and destinations are well-established, forwards will generally be the most appropriate way to de-risk future currency payments, be they flights, hotel rooms, cruises, when prices are set and deposits received many months in advance.
The problem is that most SMEs’ bank relationship managers themselves do not understand drivers of currency movements or risk mitigation products, and so rarely even offer suitable solutions, let alone at reasonable prices, says Mr Scott. Stephen Brook is financial director of a cultural tour specialist Ciceroni Travel. He adds that getting a good deal from a bank in terms of competitive exchange rates or certain hedging products is heavily dependent on the expertise of the business owner or financial director. Banks rarely chase the modest fx volumes of most SMEs, whereas specialist currency providers focus specifically on providing for the needs of SMEs.
Currency presents a fundamental risk to travel and hospitality companies, but they are often not receiving the best advice. Specialist products are necessary to guard against such risk, but these need not be expensive or complex. At the end of the day, “Ciceroni is a tour operator, not a currency dealer”, says Mr Brook, for whom the prime currency goal is simply to cover pricing costs and achieve a measure of predictability. For SMEs underserved by their banks, expert currency providers can help businesses take advantage of various ways to save money, reduce exchange rate uncertainty and secure margin predictability. This then allows the business to focus on its real purpose, ensuring that people have a great experience, whether visiting the UK or going abroad.
By Jonathan Hyman
Jonathan Hyman is Chief Economist at FXcompared Intelligence, the research arm of FXcompared.com, which provides industry leading insight, analysis and learning on the international foreign exchange markets. FXcompared is the premier independent resource for International Payments solutions and provides comparisons for international money transfer and currency-risk products for individuals and SMEs.