Everything you always wanted to know about FX strategies in the travel industry (but were afraid to ask)

Growing up, we spent many family summer holidays caravanning in France. I have nothing but fond memories of sunny games of football, but I’m sure it was less rosy for our parents – the bickering of three boys wedged in the back seat, the insistence on a soundtrack of 90s heavy metal and the constant nagging of, “more pocket money for frites” (always pronounced frights). I can clearly remember the little ledger book Mum kept for our allowances, with each payout carefully noted along with a description of what it was for. That two of her sons turned out to be accountants is little wonder!

Another thing that sticks in my mind is that she offered a fixed rate of exchange – for years, one pound always equalled 10 French francs. At the time, I appreciated the simplicity and ease of calculation. However, looking back now, I can’t help but think it a naive FX strategy. An expensive one, too, given the actual rate, hovered around the seven to eight mark for most of that time, and we negotiated our pocket money in sterling.

Like a harassed school teacher who only wanted a quiet couple of weeks of rest and guaranteed sun, the travel sector is also highly exposed to the ups and downs of currency rates. But unlike Mum, they have a few more levers at their disposal to manage it.

First: understand your exposure

The first step is to identify whether you have a problem. Exposure to currency fluctuations can take a few different forms, each with different approaches to mitigation.

Here are the main three:

• Transactional exposure: This one hits hardest. It’s the risk you face when buying or selling in foreign currencies. For example, you’re paying hotel suppliers in euros, but your customers are paying you in pounds. If the exchange rate shifts between pricing the package and paying your supplier, there goes your profit margin.
• Translational exposure: Sounds complicated, but it’s basically accounting headaches. For example, if you’re consolidating financial statements from different countries or systems, currency fluctuations can make your numbers look better or worse than reality.
• Economic exposure: This is the long game. It’s the risk that currency shifts will slowly chip away at your competitiveness. Say one of your key markets’ currencies strengthens then suddenly, your once-affordable travel packages look pricey, and travellers start shopping elsewhere.

Most travel businesses will have some level of exposure in one or more of these categories, so it’s time to dust off that risk register and get your financial models up to scratch.

Second: identify natural hedges

A natural hedge is where incoming and outgoing currency payments are matched, therefore reducing the number of currency conversions.

Some examples of this:

• Allow customers to pay in their local currency. For example, if you have customers from Europe or the US, set up euro and dollar bank accounts and allow them to pay in their own currency. This will allow you to build up currency balances that you can use to pay suppliers based in countries using those currencies.
• Include currency volatility in your pricing strategy. This is typically done by setting the rate in your reservation system 2-3% lower than the spot rate.
• Pass on the risk to suppliers by negotiating payment in a stable currency. If you’re a South American specialist, locking suppliers into US dollar agreements will reduce exposure to one currency rather than several.
• Consider local bridging or factoring. Where a third party settles supplier payments when due, allowing you more time to build up currency balances from customer sales.

The idea is to minimise the number of currency conversions that need to be made, thereby reducing your exposure. However, this doesn’t come without its risks. If your expected dollar sales come up short, you might need to fall back on the market.

Third: enter the currency markets

No business can naturally hedge 100% of its exposure. So sooner or later, you will need to enter the market. The approach to currency markets comes down to one decision – do you lock in a rate or spin the wheel and hope for a better one later?

Here’s what to consider:

• Market volatility: If the currency markets are acting like a rollercoaster, locking in rates can save you from nasty surprises. Sometimes, stability beats the gamble.
• Business forecasts: Got confirmed bookings or solid revenue projections? Locking in makes sense – you’ve got predictable income, so you can hedge confidently without overcommitting.
• Time horizon: For short-term commitments, locking in protects against sudden shifts. But if your timeline stretches out, you might have the flexibility to ride the waves.
• Risk appetite: What proportion of your exposure do you want to protect? For example, a cover ratio of 90% would limit downside risk whilst allowing the potential for upside.

If you decide to lock in rates, there are a few products at your disposal (e.g. forward contracts or currency options), each coming with its own pros and cons. But most importantly, seek advice if you aren’t sure what approach to take.

Fourth: review your systems

When it comes to managing currency risk, outdated or clunky systems are like using a paper map in the age of GPS. If your tools aren’t tracking real-time exchange rate changes or worse, you’re still relying on manual data entry, you’re leaving the door wide open for costly errors.

Ask yourself:

• Can my accounting and reservation systems handle multi-currency transactions without breaking a sweat? Or am I managing everything in a spreadsheet?
• Are my reporting tools allowing me to track my exposure on an ongoing basis?
• Are my financial models sufficiently able to project my future risk?
• Am I using a dedicated currency platform or relying on my high street bank?

As important as the tools themselves, are the people using them. So ensure your finance teams understand how to get the most out of the systems you have invested in.

Exchange rates have always been difficult to predict, but when the stroke of a fountain pen (or a Sharpie) can have an instant impact on financial markets across the world, all businesses should be aware of the risks that they are exposed to. Otherwise, you’ll end up like that poor harassed school teacher, who paid an extra 25% for her frites because of a badly managed hedging strategy.

If you’re feeling a little exposed or unsure if your current approach is working, we’re here to help.

If you liked this article, we think you’ll love these:

• 6 ways to recognise revenue in the travel industry
• TTC Travel Fundamentals – 6 February 2025