Weak pound spells trouble for the tourism industry
Many costs are in US dollars and euros while revenue is sterling
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Your support makes all the difference.While holidaymakers come to terms with the weak pound – and airport rates of exchange as low as £1 = €0.85 – the UK travel industry is bracing for the rest of 2019 and the year ahead.
For package holiday companies such as Tui, Jet2 Holidays and Thomas Cook, revenue is substantially in sterling. Costs, though, are mainly in euros and US dollars.
The European currency is required to pay bills in EU destinations for hotels, transfer coaches, etc. The American dollar is the principle currency for two of the biggest costs in aviation: leases on aircraft and fuel.
Most tour operators and airline have “hedged“ much of their currency requirements for the summer, extending into 2020.
They calculate their dollar and euro obligations and negotiate contracts with counterparties (some would say gamblers) to lock into specific rates. Effectively it is an insurance policy against an increase in the sterling cost.
Many airlines go one stage further and hedge their fuel requirements as well.
But such insurance policies are expensive, and when the hedges “unwind” – start to run out – any slump in sterling becomes painfully clear.
On Monday, Michael O’Leary, chief executive of Ryanair, said he believes some weaker European carriers will collapse in the next few months: “We expect high fuel prices and overcapacity in European short-haul to lead to further airline failures this winter.”
Even if he is proved wrong, if the deterioration of sterling continues, UK air travellers will end up paying more and having less choice.
Cruise passengers, too, may see prices rise if the pound stays low.
Ships consume a vast amount of fuel, priced in US dollars, and most shipping contracts are negotiated in the American currency.
British passengers, though, will feel an immediate hit on the many ships where prices for drinks and gratuities are in US dollars.
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