Foreign Exchange and the Travel Industry
June 22nd 2010, Sholto Thompson
How foreign exchange fluctuation is dealt with by travel operators is a matter of some controversy. In the period between a booking and the actual date of departure the value of the currency in which the holiday was paid will of course fluctuate against Sterling constantly and, occasionally, considerably. A holiday, therefore, costing £20,000 at time of booking could, 6 months later at the time of departure, cost substantially more, or less depending on the fluctuation in the value of the particular currency against Sterling. Of the difference in cost incurred by these fluctuations, a travel operator is legally allowed to pass on a surcharge of up to 10% (after this the client has the option of cancelling the booking with a full refund) to the consumer. Many consumers have therefore found themselves presented with considerable surcharge bills for forex swings against the pound on the eve of their holiday. Of course, when currencies move in Sterling’s favour, the consumer will not see this money discounted, rather it will serve as a nice little booster to the company’s profits.
In turbulent times the value of currency can fluctuate catastrophically and, in worst case scenarios, companies have actually gone under due to massive, unforeseen forex swings which they simply haven’t been able to handle. In 2008 three AITO operators went bust because they did not manage their currency risk sufficiently on EUR, USD and JPY respectively. A swing of 50% on the USD against the GBP was simply too catastrophic that not even surcharging could have saved them. In other years, 2007 for example, currencies moved in Sterling’s favour and lots of companies saw nice bumps to the their profit margins.
Hedging foreign exchange therefore effectively manages the risk for both company and client. Many travel companies however either do not hedge properly or simply choose not to hedge and will quite happily pass on surcharges to their clients whilst reaping in the profits when forex swings their way. This is not only unfair but completely avoidable. Most ludicrously, ABTA, the association of British travel agents, allows companies to pass on surcharges providing that they reserve the right to do so in their booking conditions, and absorb an amount equal to 2% of the holiday cost. This is actively supported by the government, which has made no steps to pass legislation preventing travel operators from doing this. In this way, time and time again clients have had to face paying extortionate forex surcharge fees just before going on holiday because the travel company with whom they booked through simply couldn’t be bothered to hedge its foreign exchange effectively.
In 2007, Nick Newbury, the director of bespoke travel operator Original Travel said live on the BBC that his company would not pass on any surcharges to clients post booking. This the only time a British tour operator, big or small, has said this and as a result it has caused a bit of a stir from competitors in the industry. In his own words: ‘on balance, not surcharging is a better strategy then running the gauntlet in the hope of a slice of the upside.’ To make a promise of this kind and benefit to consumers, Original Travel is required to manage its foreign currency requirements very closely and actively engage in a hedging strategy. A practice many other tour operators are still to take on.
