Tour operators face serious currency hedging concerns

Travel companies are finding it increasingly difficult to hedge against the euro because of the volatile currency exchange markets.

The severe weakening of the pound against the euro, which led to almost parity between the two for the first time since the euro was created, has already hit companies such as bedbanks using “on the spot” hedging policies based on current exchange rates to buy product, such as overseas accommodation.

But there are concerns, particularly if the unfavourable exchange rate continues, that tour operators could suffer when they buy currency in forward policies.

Association of Independent Tour Operators chairman Derek Moore fears the worst for operators in 2009 because of the combination of the euro exchange rate fluctuations, fuel surcharges and a weaker holiday market.

He said: “There will be lots of operators in trouble and eating into their accrued profits. Operators have started 2009 with fuel surcharges, the question of whether to hedge or not on the euro, and trying to find clients to buy their holidays.”

In general terms, operators are more likely to hedge currency in advance while bed banks hedge on a regular on the spot basis, but many will operate a mix of methods to achieve the best prices for their products.

However, avoiding currency hedging or waiting for the exchange rate to pick up is a dangerous policy, warned Barclays Commercial head of travel Chris Lee, and could leave businesses exposed to factors outside of the company’s control.

He said: “If they don’t [hedge], the success or failure of their company will be based in part not on a profit generated by their core business but on foreign exchange rate movements outside their control.”


More information:

* Analysis – Understand the currency hedging dilemma

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