COVID shows need for currency automation in travel

“Wait a minute, Doc,” says Marty McFly in the iconic movie Back to the Future. This is good advice to those who insist that the coronavirus pandemic has “forever changed business structures.” The overused cliché needs to be turned on its head - at least in the travel industry, where COVID only reinforces the previously existing case for business process automation.

There is no point in denying the damage caused by the pandemic. According to UNCTAD, the biggest episode of market risk in our lifetime has translated into an unprecedented shock to an industry that accounts for 29% of the world’s service exports while employing more than 300 million people globally. All in all, a massive GDP loss of between $1.7 and $2.4 trillion can be expected in terms of the world economy. 

Yet, like the character played by Michael J. Fox, we would do well to take a trip back to the future - or rather, back to the forward, since most currency hedging is performed with forward contracts. For airlines, hotel chains and wholesalers, the ever more compelling case for foreign exchange (FX) automation sheds light on their different strategies in regard to:

• Avoiding speculation in currency markets
• Efficiently managing cancellations
• Using more currencies in daily operations
• The use of FX as a tool to increase competitiveness and conversions 
• The margin-boosting benefits of using more currencies
• FX automation and risk management

Slowly but surely, catalogue-based pricing in travel distribution is losing ground to dynamic pricing. In this scenario, the most efficient way to protect cash flows in FX-denominated transactions is to apply automated micro-hedging programs to “firm commitments” or bookings. 

Yet, the lack of adequate tools - or, in some cases, insufficient understanding of the sources of FX risk - may lead finance teams to base their hedging on forecasts created for an entire calendar or budget period. This was a broadly adequate strategy for the inflexible travel distribution technology of the past.

However, the ease with which today’s players connect and integrate in real-time and dynamically offer personalized travel experiences has made forecast-based FX management techniques too rigid and risky - unless they are properly combined with conditional orders and micro-hedging programs for firm commitments. 

Some companies prefer to hedge their transaction risk in an unstructured way rather than following a policy-driven FX micro-hedging program. This FX risk management strategy is very flexible, but it also exposes the company to currency fluctuations. It is based on speculation about exchange rates and hedged amounts - and who can boast about accurate forecasts in the current travel environment?

Taming the ghost of cancellations

Cancellations are one of the more pressing pain points in travel. A cancelled FX-denominated booking diminishes the exposure to currency risk if the corresponding hedge has not been executed or if an already executed trade is closed out at the same FX rate. Otherwise, there would be a situation of over-hedging.

Manually adjusting hundreds or thousands of individual pieces of exposure to their corresponding hedges can quickly become an impossibly complicated task, especially under high uncertainty. The good news is that technology is coming to the rescue of hard-pressed finance teams.

API-powered solutions allow treasurers to set rules for pre-determined cancellation rates and, even more importantly, to create “negative entries” from their own enterprise resource planning (ERP), booking engine or data lake to efficiently adjust the firm’s exposure to currency risk. Industry participants are thus in a position to soften the blow of cancellations to a wider extent than ever before.

FX as a key undercover pricing tool

There are many ways in which automated foreign exchange solutions can help travel companies gain a competitive advantage in their day-to-day operations. A streamlined process of FX rate sourcing allows players in the travel industry to: 

• Be the first to react to favorable FX market conditions
• Set pricing markups for different client segments
• Use forward points for competitive pricing

Take the case of forward points, defined as the difference between exchange rates for different value dates. In the event of "favorable" forward points - when selling in currencies that trade at a forward premium or buying in currencies that trade at a forward discount - using the forward FX rate translates into more competitive pricing. With an added bonus: currency risk is systematically kept under control.

Surprisingly enough, these types of win-win automated opportunities are largely neglected by participants, reflecting either insufficient knowledge of their own "FX risk map," or the lack of adequate software tools. Yet, they are the key to a more efficient use of invested capital, and therefore to an enhanced return on capital and firm valuation.

Embracing currencies 

Last but not least, FX automation allows airlines, hotel chains and wholesalers to confidently "embrace currencies" in their day-to-day operations without currency risk. Buying and selling in suppliers’ and customers’ currencies frees travel industry players from the risk of using only one currency as it creates numerous opportunities, including:

• Implementing multi-currency offerings to create a seamless online buying experience that increases trust and reduces cart abandonment. 
• Capturing FX pricing markups to undercut the competition by allowing customers to settle their bills in their own currency.
• Expanding into promising new markets to increase revenue while protecting profit margins
• Avoiding inflated prices from FX markups charged by suppliers while widening the range of potential suppliers
• Increasing direct, high-margin sales on firms’ own websites with virtual credit cards and other payment methods
• Preventing currency to turn into credit risk in the event of sharp currency devaluations

No matter how we slice it, the case for FX automation in travel distribution is becoming ever more compelling - in good times or in pandemics. From pricing with foreign currencies all the way to the ‘cash flow moment’ of FX payments and collections, technology allows data to seamlessly flow between different systems - ERP, treasury management system (TMS), booking engines and others - without any need for spreadsheets. 

By automating the three phases of an FX risk management process - pre-trade, trade and post-trade - finance teams in the travel industry can protect their profit margins, tame the ghost of cancellations and confidently create more opportunities for their customers and themselves.