Comment: FLT debunks the FX myth

Comment: FLT debunks the FX myth
By admin


So mum and dad have gathered together a few brochures and switched on the laptop. Mum fancies a road trip around California, dad wants to relax by a pool in Fiji and the kids, well, the kids don’t have a choice in the matter.

But if they had their way they’d all go to London and Disneyland Paris.

But hang on a minute, dad exclaims as he digs out the Australian Financial Review. What are we thinking? Let’s look at the foreign exchange rates and then we can make a truly informed decision about where to spend $10,000 on our annual holiday. Who cares if none of us wants to go there? If the exchange rate is strong, we’re there…….

The scenario above is exaggerated to make a point. But there are many who believe this is not so far from the truth. But I have never agreed with the general assumption that a strong dollar fuels outbound travel.  And clearly nor does Flight Centre.

In a presentation to Citibank yesterday, chief financial officer Andrew Flannery sought to dispel four “broad misconceptions” associated with a strong (or weak) Australian dollar.

One, that a strong dollar is the catalyst for a growth in outbound travel; two, it has been responsible for a surge in travel to the US; three, that a weak dollar will see Australians switch to domestic breaks and four, that the first three will affect Flight Centre’s future earnings.

Analysis provided by the agency was pretty compelling, with its figures around US bookings particularly interesting.

The US market share of Flight Centre sales has actually slipped since 2001, from 10.4% to 10.2% last year. This, of course, during a period when the Australian dollar peaked at US$1.10.

Furthermore, between 2008 and 2009 when the dollar fell sharply against the US dollar, the number of US tickets sold by Flight Centre rocketed 30%. Hardly an example of the exchange rate shaping consumer buying patterns.

The catalyst for this spike, according to Flight Centre, was the launch of Virgin Australia flights to LA (then V Australia), followed five months later by the entry into the market of Delta. These developments sparked a price war across the Pacific on a route that had previously seen exorbitant prices. It proves that we are more interested in the affordability of airfares than we are in the strength of our currency.

Fundamentally, the vast majority of consumers are not currency traders. Contrary to widespread belief, most consumers do not trade in stocks and shares, they do not monitor the fluctuating fortunes of the dollar and they do they base their choice of holiday on the strength of that dollar.

Sure, it can’t do any harm that our dollar has performed well against other currencies. But as Flight Centre stated, its impact has been overestimated. Which is why the world will not end for tour operators, wholesalers and agents if the dollar continues to depreciate against the greenback.

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