Blog homeOne of the reasons I got into blogging is that it is a convenient way to learn new stuff. I tend to come from a business / technology / web user perspective on much of what I write….. as this is where my experience counts.
Today however I thought we would cover a topic that is very important in travel ecommerce - but one I have very little understanding of - currency exchange rate hedging. As a result I have asked Kevin Gyateng from Corporate FX to explain the key issues.
I am going to start with a fact faced by any company dealing with international payments.
For a company operating on 10% profit margins, a 1% weakening of its reporting currency will erase 10% of its profits. (The same 1% move for a company working on 20% margins would see 5% profit reduction, and 5% margins a 20% profit reduction).
This is an issue that I find is pertinent to the travel industry where bookings can be priced and costed based on today’s conditions but due for settlement months later. Within that period of time exchange rate fluctuations can significantly alter the cost of the booking made months ago. In the first 5 months of 2008, the Pound has fallen by over 10% against the Euro. Connect this reality with the mathematical fact presented above, and it paints a worrying picture for the financial performance of companies exposed to Euro payments.
Most companies that I speak to say that they are happy with the pure profit margin generated by their products. When I ask why they do not take exchange rates out of the question and hedge, the typical response is “I don’t know enough about currency markets and I don’t like to gamble”. I typically interpret this to mean, “if I hedge now and the exchange rate improves, then I have lost out”. For me that is the gamble. A refusal to fix exchange rates at the time of winning holiday sales, and hence securing your profit margins suggests a desire to enhance profits through currency gains, and ignores the effect of downside moves in exchange rates.
While it is true that surcharges can be added to compensate for currency fluctuations, this can affect the relationship between your business and the customer and can negatively affect the word-of-mouth reputation of your service.
In these increasingly competitive times, success is determined by companies that employ effective hedging strategies.
I know that surcharges are seen as very unpopular - Travel Rants recently wrote about surcharges from the consumer perspective - and listed the 15 UK companies that the UK trade organisation ABTA have so far permitted to add surcharges this season.
If you would like to contact Kevin to talk about hedging….. here are his details:
Kevin Gyateng
SmartFX Team
Corporate FX Ltd
T: +44 (0)20 7743 7010
E: KevinGyateng@corporatefx.co.uk
W: http://www.corporatefx.co.uk
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A tip to make exchange rate hedging easier:
Pool your payments. E.g. pay all incoming agents (only once a month) on the same day. Then also it helps if your system (like tourcms) gives you a summarize how much funds you will need in a specific month in the future.
-Harald Lux
P.S.: We are still looking for a company like Corporate FX Ltd with an office in Germany. If someone reads this feel free to contact me …
Hi Alex,
I think hedging is an item that is frequently forgotten as a potential source of income for travel companies. Especially the small - to - mid size companies tend to focus on their product, and tend to limit their profit potential to the margin that can be generated by the product.
Following the business model of the low cost airline industry, focussing on the ancillary profit that can be generated by the “side effects” of our core businesses can be an eye-opening exercise; besides curreccy exchange rate hedging the cancelation revenue is a major potential source of income, especially if you DO NOT outsource your cancelation insurance to a third party but manage it yourself.
In our milimeter margin business, focussing on these items can result into a 30 - 50% increase on your average profit margin. I would call this “Ancillary revenue management”
Jan Peeters