The impact of currency can be huge for airlines that operate globally and have exposure in many currencies. It’s not without reason that almost every airline’s yearly fiscal report includes remarks about the impact and result of foreign exchange (forex). And often the context is negative.
Most of their cost – staff and fuel often being the biggest ones – are in one or two currencies whereas their revenues are in many different ones, so there is a mismatch and consequently an exposure (risk).
To address this, airlines need to make proper planning per currency, calculate their exposure, and look for natural hedges in the first place – e.g., try to pay more in local currency for services like catering, airport charges, overflying fees, and fuel costs. The solution is a combination of cash and currency management.
Full-service airlines often have a professional Treasury desk and manage a variety of currencies themselves – either by in-house measures or by ad-hoc currency instruments with banks and financial institutions. Low-cost airlines, mostly smaller, might not have this capability themselves and likely have to outsource it to financial parties. When airlines are members of the International Air Transport Association (IATA) and have agent sales as well, they will use IATA Currency Clearance Service (ICCS) – for Billing and Settlement Plan (BSP)/Cargo Account Settlement Systems (CASS) revenues – to convert their cashflows from across the globe into a few currencies managed by their Treasury. For their online sales, airlines will instruct their payment service provider (PSP) to do the same. It is essential to have clear agreements about the forex rate applied (including any markup) and the timing of those transactions.
Treasuries must manage several risks, including fuel, interest, and forex. The cost of managing these exposures should be considered. This is similar to paying an insurance fee. The cost for forex hedging is derived from the differential in the interest rate of the two currencies. The more volatile or unstable a currency is, the higher the interest and therefore the cost to hedge that specific currency. No one has a crystal ball, but it is advisable to hedge at least a portion of volatile currencies in unstable times.
Airlines like consistent results from forex money flows and aim to avoid huge currency fluctuations, which can impact their financial results. To ensure this, they should consult with their banks financial instruments, such as forward contracts, swaps, currency options (derivatives) or non-deliverable forwards (NDFs). Think also of stop-loss or take-profit orders at a certain forex level for a currency pair. Leave overnight orders with your bank to avoid surprises in unstable times. Some airlines also look at what the competition is doing.
In many such countries, the process of transferring out funds and obtaining hard currency is quite cumbersome. It often starts with lengthy bureaucratic processes where a copy of tickets must be handed over as well. Because of the unstable situation, the currency can depreciate or even devaluate regularly, ultimately causing a loss for the airline. We worked with the local Board of Airline Representatives (BAR) to establish the fare (the basis) of a ticket in hard currency as much as possible. If financial regulations (often imposed by the Central Bank) mandated it to sell in local currency only, we would convert the fare into the local currency at the time of sale and leverage the prevailing rate of exchange (ROX). By doing so, airlines minimise the exposure in time by eliminating the translational risk and limiting this to a transactional risk only.
Airlines operating in countries with unstable economies or restrictive currency regulations can also minimise the number of tickets sold in that country/currency and dynamically steer to sales from incoming traffic. Sales, Revenue Management, and Treasury have to cooperate closely in this case. Currency management is not just a responsibility of the Treasury, although they have to teach and educate other relevant departments.
If exposure still exists, airlines can look for non-governmental organisations (NGOs) that often need money for projects in that country and, thus, are short in that currency. Fund them locally with your surpluses in local currency and charge their head office in hard currency at a mid-rate, creating a mutually beneficial agreement. It is important to ensure that this is legal, but it should be noted that there's room for creativity and collaboration with local parties as well.
Finally, in these markets, NDFs are often excellent external financial instruments. Although NDFs do not convert your currency locally, they settle the difference in ROX in hard currency at an agreed moment in time in the future.
One of the most rewarding projects I did in my 30 years working for an airline was implementing a multi-currency service called Multi Currency Pricing (MCP). It was like changing your payment department from a cost centre into a profit centre. In the online sales environment, MCP allows customers to pay in their home currency rather than in the default currency of the airlines’ website and so shift the currency margin from the (card) issuing bank to the airline, without this being an additional charge to the customer. It can be applied to cards but also to several other payment options.
Source: a co-production of Payments Taking Off and Up In The Air in a joint webinar in April 2024
Everyone can relate more to the value or cost of something if it is expressed in their own currency. Thus, allowing customers to pay in their preferred currency also increases sales conversion simply because customers feel more comfortable and understand the value better.
When using MCP or Dynamic Currency Conversion (DCC), the customer knows exactly what to pay in their currency at the moment of checkout on the airline’s website rather than at the moment of receiving their statement from the bank with the forex conversion including a forex markup, which often comes as a surprise. This guarantee of knowing the exact amount at checkout leads to an increase in customer satisfaction as well.
Apart from that, MCP and DCC are an ongoing revenue stream to the airline (a financial ancillary). It becomes a win-win with the customer if airlines charge a forex markup lower than what the customer normally would pay through their issuer. MCP and DCC are commission-based ancillaries which are quite rewarding both from a financial and marketing perspective. There are some companies out there that provide this as their core service and can also advise airlines on how to offer and position it on their website. They can adjust the markup depending on the payment option or the currency pair, allowing airlines to be flexible. When selecting such a company as a merchant, it is advisable to do your research properly to find out which proposition best fits your requirements. Some vendors of MCP/DCC are more flexible than others, some are more IT and process focussed, whereas others are more financial/bank (hedging) orientated.
Currency and forex are often seen as something vague, unclear, and mysterious – and considered simply as the cost of doing business. With a good and proper forex strategy, airlines can save a lot of money and even make some profit from it.
Maarten Rooijers is an airline Treasury and Payment veteran, with 35 years of experience in the industry. Before starting his own payment consultancy firm in 2021, he worked for over 30 years at KLM Royal Dutch Airlines in various roles, including in the Treasury and Digital department. In his last role (2006-2021) he was the Director of Customer Payments, heading a team responsible for AFKL’s payment strategy and proposition in over 75 countries.
Payments Taking Off (PTO) is a payment consultancy company that serves the travel and airline industries. PTO helps airlines in sharpening their payment and forex strategy and in selecting vendors. PTO also works with financial companies seeking to better understand how airlines work and operate in order to effectively market their products and services. PTO works in a fully agnostic and non-exclusive way.
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