Risk Management

Flying High: How to Survive in the Aggressively Competitive Travel Industry Competition is tight in this dynamic sector, with no room for mistakes on exchange rate movements or inaccurate pricing. The key to surviving and thriving in this sector is to ensure optimum efficiency across the company whilst also keeping an ear to the ground for incoming threats to the status quo.

Flying High: How to Survive in the Aggressively Competitive Travel Industry

by Antoni Rami, Co-founder, Kantox

Contributing £106bn to the British economy, tourism is a key driver of wealth and jobs in the UK. However, as with many industries, the travel sector has faced a prolonged period of change in recent years. Many forget that this sector was one of the first to feel the impact of the digital revolution. Over time, online aggregators have dramatically driven down prices and driven up competition. Traditional tour operators, who work with printed catalogues and have a seasonal pricing policy, have struggled to keep up. By operating 100% online, the latter benefit from the flexibility of setting their rates daily, which gives them a competitive edge in a market that is extremely sensitive to even marginal price differences.

Aided by this added flexibility, online travel agencies (OTAs) have captured a 15% share of the market globally and compelled many traditional operators to compete by rolling out online business offerings that are gaining increasing prominence within these companies' overall activities.

Further disruption is headed in the direction of the travel industry, in the wake of Brexit. Questions over whether the UK will remain a part of the single aviation market are causing concerns among a number of major airlines and many travel operators are having to adjust their forecasts in line with the potential decline in European travel.

It is not just the future of movement across borders that is causing concern for the sector. By nature and definition, all companies in the sector operate in various markets and currencies – and are impacted by currency volatility. We saw the pound drop to its lowest level in recent history upon news of Brexit, which will have hit operators hard if they did not take necessary precautions in advance. 

In the midst of a volatile trading period, what can tour operators do to protect themselves from potential market upheaval?

Offline operators: Traditional tourism operators need a simple, efficient strategy that enables them to build the foreign exchange rate into their budgets in advance, providing a secure base to meet their sales and profit objectives.

Online operators: OTAs, meanwhile, find themselves striving to protect tight margins on sales made daily and with dynamic prices. An efficient, commercially aggressive pricing policy is a crucial factor in maximising profitability.

Operators with a combined online and offline model require security in relation to advance catalogue sales, while combining this with a flexible strategy enabling them to change the prices of their online offerings on a day-to-day basis, without endangering their profit margins.

Regardless of the business model, there are two fundamental factors that all travel operators need to consider, in order to mitigate the risks of relying on overseas trade.

Dynamic Hedging against exchange rate volatility: The complexity of activities in the sector requires a blend of simple strategies to safeguard profitability of catalogue products. Dynamic hedging is the ideal solution to efficiently automate the management of currency risk. There are four simple steps that any dynamic hedging strategy should include:

1. Identify your business' FX exposure from inception

2. Define business rules to manage exposure according to your company’s FX policy

3. Use a tool to monitor FX risk in real-time

4. Automate trade execution to be able to answer to volatility 24/5

One of our larger clients from the travel industry has been able, thanks to Dynamic Hedging, to reduce the impact of FX volatility on its profitability to less than 1% in 2015.

Centralisation of multi-currency payments: When managing a high volume of payments in different currencies, tour operators can’t waste time managing each currency in silo. Moreover, failure to effectively manage the payment flows in each currency can affect payments to suppliers and sales in different currencies. Centralising the management of payments is crucial to boosting efficiency by cutting back on low low-value-added bureaucratic tasks. By managing the exposure on each and every one of these currencies, corporations can avoid losing money on account of poor exchange rate management and increase liquidity, by boosting cash flow.

Competition is tight in this dynamic sector. There’s no room for mistakes on exchange rate movements or inaccurate pricing – a single slip-up can see other operators stepping up and taking customers. The key to surviving and thriving in this sector, is ensuring optimum efficiency across the company and keeping an ear to the ground for incoming threats to the status quo.

 

Antoni Rami
Co-founder, Kantox

Toni directs the daily operations at Kantox, including international business development. He holds MBAs from ESADE and Singapore Management University, majoring in corporate finance at the latter. Prior to Kantox, he was in venture capital in the biotechnology & tech sectors, and served as a strategy consultant at Deloitte.

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