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Britain’s departure from the European Union has left a trail of uncertainty on the travel industry since June 2016. However, despite this, international travel is still increasing, albeit at a slower pace than in previous years. As the Brexit deadline draws closer, there is still little guidance around the consequences that each potential scenario may bring. In this article, CMS Analytics looks at how the possible outcomes could impact the travel money industry – including exchange rate volatility and changing travel trends.
The intensity of each challenge for travel money operators depends on whether Britain leaves the European Union with or without a deal.
Despite the ongoing uncertainty around the prospect of a no-deal departure, travel money operators around the world need to be prepared for the varying challenges and opportunities that may arise from both potential scenarios.
The recently announced five-week shutdown of parliament from September 9th, is an apparent attempt from Boris Johnson to prevent MPs from forcing any further extensions to the Brexit deadline. As such, a no-deal Brexit is now the most likely outcome.
In the event of a no-deal Brexit, Britain would revert to World Trade Organisation (WTO) terms. Currently, all the UK’s existing trade deals fall under the European Union’s umbrella; therefore, the British government would need to establish new deals with all major trading partners. Due to increased tariffs on goods, including 10% on cars and up to 35% on agricultural produce (UK Government), and likely barriers on the movement of people, there will be little confidence in the UK economy and the value of sterling would see an immediate decline.
Ahead of the 2016 Referendum result, there was a surge in UK holidaymakers buying their travel money to outrun the market and lock in favorable rates before the value of the pound declined (see Figure 1). This consumer behavior might be expected again in the build-up to a no-deal announcement in October. Consequently, travel money operators need to balance high availability with the threat of a significant movement in the exchange rates.
Figure 1: Brexit Referendum: Impact on EUR Demand in the UK and GBP/EUR Rate
In the short term, under a no-deal, travel money demand may fall - consumers might postpone their trips to avoid travel disruption as well as the inevitable devaluation in sterling. This will continue until trade deals are restored, travel disruptions are resolved, and the exchange rate becomes stable.
If the value of sterling sees a sustained decline, there will be an increase in purchases from British consumers, as the value of their residual foreign currency increases. The devaluation of sterling would also reduce the cost of a holiday for foreign tourists visiting the UK. Some institutions, including travel data firm ForwardKeys, believe rates are already having positive effects on inbound tourism. According to ForwardKeys, tourism increased by 6% from long-haul markets, where the UK has historically been an expensive destination, following the pound hitting a 31-monthly low against the dollar in August 2019.
However, recent data from the ONS suggests that global tourism declined in April and May of this year (by 8% and 6% respectively) – with the only growth region being North America (6.7%, see Figure 2). The most significant tourism market – Europe - declined by 3.3%, with 0.4m less passengers traveling to the UK this year. With North America only contributing to 11% of inbound passengers, increases in North American tourism will not offset negative trends from other key destinations such as Europe; however, it may alter the mix of currencies sold at the bureau. The perception is that unless political stability is restored, in the short term, inbound passenger numbers will fall.
Figure 2: Change in Inbound Passengers to the UK (ONS Overseas Travel and Tourism August 2019)
If the government leaves the European Union with a deal, confidence in the UK economy will be restored, and sterling will regain strength. However, the magnitude of any market movements and economic confidence will rely on the nature of the deal.
A strong deal, addressing key issues, such as establishing the Irish border ‘backstop’ and positioning the UK with ‘business as usual’ arrangements, would lead to substantial increases in the value of sterling. Consumers, who may have been holding-off on foreign currency purchases and high-cost holidays, would take advantage of favorable exchange rates and economic stability.
We would expect demand for all currencies to increase as a result of the strengthening of the pound. However, with restoration in economic confidence, holiday budgets may also increase. This could increase visits to long-haul destinations such as the USA, Canada, and Australia, and drive up the average transaction value.
The outlook remains uncertain; nobody knows what October 31st will bring. YouGov’s latest poll has revealed that 56% of the public believe Britain will not have left the EU by the deadline as they anticipate further delays. However, it is vital to remain dynamic and ready to capitalize on the opportunities presented by Britain’s departure from the EU, while mitigating any potential risks.
Here are CMS Analytics’ top tips for travel money operators around the world to help them navigate any challenges Brexit may present:
Optimizing cash holdings at the bureau becomes imperative when the exchange rate is volatile. When the referendum results were announced in 2016, sterling dropped 10% against EUR and USD (Bank of England). As a result, travel money operators saw their inventory increase in value by 10% overnight. Future events, including negotiations, deadline day, and exit day, are likely to have dramatic impacts on exchange rates – with seven-figure impacts on inventory values across national networks. Therefore, travel money operators need to optimize cash holdings and ordering before any major announcements, and hedge against any positive rate movements that may devalue their stock.
During significant events, foreign currency demand becomes more volatile, and purchases are likely to increase. Travel money operators need to balance increased availability with preparation to receive more foreign currency cash from purchases while reducing exposure to exchange rate swings. This requires tailored bureau-level models and can result in substantial costs or inventory devaluation if implemented ineffectively.
Exchange rates will become more volatile as the October deadline approaches. As volatility increases, customers adjust their buying habits by staggering their transactions, selling back residual foreign currency, and bringing demand forward. This changing customer behavior and increased transparency can create opportunities for operators, as well as increase competition.
Operators need to measure the elasticity of demand for every currency at each location and optimize margins accordingly. Traditionally inelastic currencies may become more elastic; static pricing strategies would fundamentally lead to missed sales opportunities as customers can easily look elsewhere for competitive rates. Now, with a greater mix of currencies at the bureau and a potential change in the ratio of sales to purchases, operators must optimize their pricing strategies accordingly.
The demand for exotic currencies will change regardless of how the UK leaves the EU. Travel money operators must ensure they have the optimal currency mix at each bureau while understanding the demographics and requirements of their customers. If a static, network-wide currency mix is implemented, bureaux will become over-stocked with exotic currencies that do not fulfill regional demand and, therefore, will be exposed to volatile rate movements.
Exotic currencies are typically high-margin currencies and would substantially increase bureau profitability when available to customers. However, high availability must be balanced with minimizing exchange rate risk.
Brexit will undoubtedly impact the travel money industry through volatile demand, increased exchange rate risks, and changing customer preferences. No matter the outcome, travel money operators need to take appropriate action to convert market challenges into revenue-generating opportunities.
CMS Analytics helps travel money operators navigate challenging market conditions and achieve best practice in over 30 countries worldwide. Our solutions range from bureau-level forecasting models – presented through an online ordering portal, to dynamic pricing strategies – utilizing machine learning to optimize margins.}
For more information on how you can best adapt your cash operations to steer through the upcoming challenges of Brexit, or how CMS Analytics can help you achieve best practice, please contact:
Lee Williamson
SVP, Commercial Director
E: lwilliamson@cmsanalytics.com
T: +44 (0)7889 535 544
