The US president is likely to impact next year’s market, but it’s virtually impossible to predict how, says Steve Endacott, chairman, Teletext Holidays
The main drivers of change in year-on-year holiday prices are fuel prices, dollar aircraft leasing costs and individual destinations’ exchange rates. The impact of these changes is also affected by when and how much tour operators or airlines, hedge fuel price and currency costs.
Historically, tour operators printed brochures with fixed prices and hedged enough fuel and currency to cover the first print run up until December. The aim was always to hedge at the same time as your major competitors, to remove any fluctuations within the competitive landscape. However, as brochures have become less relevant in the internet age and fluid pricing has become prevalent, the period and dates tour operators hedge have aligned themselves more to those of low cost carriers, who tend to hedge as they put the next seasons programs on sale in October.
Rising fuel costs are likely to reduce flight capacity in the market place as airlines cut back the amount of marginal early morning and mid-week flights they operate. Unfortunately, for airlines the dollar to pound exchange rate, although it soared as high at 1.48 is now level with the start of the year at 1.28 to the pound, meaning that there is no reduction in aircraft leasing costs to dampen the rising fuel costs.
At the moment it seems Donald Trump’s announcements can have a major impact on currencies relevant to beach holidays.
With Brexit looming it seems inevitable that the Sterling/Euro exchange rate will become more volatile over the next year as we appear to be staggering towards a hard Brexit. We have already seen what impact a Trump announcement about Brexit and a quick trade deal with the UK can have on the value of the pound.
Less expected was a doubling of steel trade tariffs against Turkey. This, combined with a fragile Turkish economy, has led to a 20% reduction in the value of the Turkish Lira in the last week and a year-on-year devaluation of over 40% versus the pound.
You would naturally expect that this devaluation would feed directly into lower holiday prices and make Turkish holidays better value against European beach destinations, however in reality it’s not as simple as that.
For a long time, Turkish hoteliers have contracted with UK tour operators and bed banks primarily in pound sterling or, to a lesser extent, in dollars. Therefore, Turkey has seen a benefit as the Sterling to Euro exchange rate has deteriorated over the last few years, but most of this is already backed into holiday prices as the fall in the last year has only been from 1.17 to 1.12.
Obviously, the spending power of customers in resort has been dramatically increased and the average cost of a beer down to £1.60. However, and this is mitigated by a more than 65% mix of all-inclusive sales contracted in sterling, the customer rarely wonders away from their free bar.
The hotelier who is getting the short term benefit of being able to buy more Lira with their Sterling receipts reduces their costs of operating. Unfortunately, with an inflation rate of 17% this benefit will be eroded quickly and is not likely to be passed on in lower hotel prices next year.
With self-catering properties being available from £1 per night in Turkey during October, there is likely to be a strong late demand for self-catering in the next few months, but with Google advertising costs relatively fixed, online travel agents need to make sure they are not selling this product at a loss given the low average booking values.
Love him or hate him, the Trump factor is likely to impact into next year’s market. The problem is that it’s virtually impossible to predict how.