When it comes to volatility in the currency markets, companies that operate travel websites face unique challenges as intermediaries between consumers and providers. Natasha Lala, Managing Director at OANDA Solutions for Business examines how FX movements affect these organizations and how corporate treasury experts there are responding.
Web-based travel companies represent one of the largest and fastest growing segments of online commerce. According to one measure, global online travel sales totalled 533.52 billion U.S. dollars in 2015 and are projected to grow to 762.34 billion U.S. dollars in 2019. Part of this is due to the improving economic well being of global consumers - travel is one of the first things that people tend to spend more on when they have more disposable income. Also helping matters: travel has become cheaper this year, thanks in part to falling oil prices, favorable exchange rates and greater competition among travel providers.
The explosive growth in this industry has led to the creation of hundreds of new companies in recent years, as well as the expansion of existing ones. Websites like AirBnb, Expedia, Travelocity and make their money in a variety of ways, but their primary source of revenue derives from commissions and service fees on transactions that they facilitate. As a result, they tend to have a lot of cash and liquid assets on their balance sheets (coming from a variety of currencies)—making them particularly sensitive to sudden fluctuations in the FX market.
For example: as the go-between for transactions that often involve more than one currency, travel sites often assume underlying currency risk to complete specific types of bookings. When, say, an American user books a hotel in Europe, he or she typically has the option to “Pay Now” or “Pay Later in Local Currency.” Assuming the first option is chosen, the user would pay with a credit card in US dollars—leaving the website to sort it out with the hotelier on the back end. A sudden swing in the currency conversion rate between Euros and Dollars could erode profitability of this—and millions of similar transactions. And those losses add up quickly.
On a more corporate-level issue, a lot of travel companies are using their free cash to engage in M&A activity as the industry continues its rapid growth. Many of these arrangements have a significant cross-border component. In 2014, for example, US-based Expedia acquired Wotif Group, an Australian company specializing in online travel bookings. Deals like this one carry with them a substantial degree of FX risk, and a turbulent marketplace can easily make or break such deals.
As cash management is such a critical function to online travel providers, most of them maintain access to sophisticated tools that allow them to assess and manage their FX exposure in real-time, including automatic data feeds with the most up-to-date rate information possible. While they are not FX traders, the financial controllers and CFOs at these companies need to keep a vigilant eye on what is going on in currency markets day-to-day.
Currency hedges and options are another strategy employed by these businesses to manage risk on their balance sheets. By using options and other derivatives to lock in desirable FX rates and offset potential losses, companies can safeguard their value of their cash and other liquid assets in a turbulent market.