“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
- The margin-boosting benefits of using more
- 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.
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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
- 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
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
- 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
About the author...
Marc Padrosa is global travel industry director at Kantox