The crash of the Turkish lira on Monday August 11, spurred by sanctions imposed by the United States, caused the South African rand to plummet to its lowest level against the US dollar in two years.

The rand – often placed in the same emerging-market currency bracket by investors – dipped by 12% against the US dollar, opening at R14.06 on Monday morning. While many players in the SA tourism industry sat up in anticipation of wider profits, the truth is that those profits will generally not be enjoyed by any link in the inbound tourism wholesale channel.

Martin Wiest, CEO of Tourvest Destination Management, says that it is the overseas banks that provide forward-cover to international wholesalers that will reap the benefits. “When the rand weakens, nobody in the inbound wholesale channel makes exponential profit. It is actually the banks of the overseas wholesalers that have forward-cover of that currency that make the profit. Forward-cover is like taking out insurance with your bank for a particular rate of exchange. It costs money to mitigate that risk, because there’s always a space between forward-cover and the real rate of exchange, but it limits the risk.”

“So the majority of big players cover 80% of their anticipated turnover, and they leave 20% of their anticipated turnover in free flow,” continues Wiest. “But it differs per player. There’s inherent risk in that as well, because if you get your forward-cover wrong, you might end up being uncompetitive in your marketplace without being able to fix it.”

Smaller businesses in the value chain, in comparison, are generally unable to make use of forward-cover due to the high cost, and are more exposed to fluctuations in the exchange rate. So to mitigate this risk, a euro quotation based on a certain rate of exchange will be given, then the pricing will be adjusted at the booking and deposit stage.

“Of course there are companies that take a chance with the currency,” says Wiest, “but the vast majority are in countries that, from a consumer protection law point of view, will have to publish rates in their home currency for a foreign destination. So those types of tour operators will adjust their selling price for their products continuously to the date of payment and ability to forward-cover”.

Wiest emphasises that a stable rand would have the biggest positive impact on SA as a destination. “The reason for that is that we continue changing the price value proposition of the country. So in a year when the rand is at, for example, R16/R17 to the euro, it represents unbelievable value for money, then the following year the rand is at R14 to the euro, and the value proposition drops. Then the next year the value proposition improves again. I think it would be better for the destination to have a more continuous value proposition.”

Wiest believes that players in the tourism value change are misguided in thinking that customers go to their travel agents and say ‘I want to go to SA’ – “and that’s not how it happens in the vast majority of cases. In the vast majority of cases they’ll go to a travel agent or to the internet, and they’ll say ‘I have a budget of €4 000 to go on holiday, I want a round-trip holiday, I want to explore something new, and maybe I want to go to SA’. And it is through that process that they are guided. So people’s holidays are very strongly influenced by their budget – there’s research that shows that they are more often than not guided more strongly by budget than destination”.

Looking at the internet environment, one may argue that tourism players in the digital space would have an advantage over players in the traditional value chain in the face of exchange rate fluctuations, due to its ‘immediate’ and dynamic nature. But Wiest disagrees. “When the rand weakens they become more competitive than us in our digital distribution channels; but when the rand strengthens they are actually at a disadvantage in a traditional distribution channel. In a weakening rand environment, the channel mix will favour the digital competitors, and in a strengthening rand environment the channel mix will favour the big inbound DMCs. That’s because from a pricing perspective, in a strengthening rand environment, the traditional competitor will become more competitive as your big customers, that have always forward-covered the rand, have a forex advantage.”

Suppliers are currently suffering from a declining market, says Wiest, “and when the rand collapsed by 12% they immediately thought that life as they knew it would change, forgetting about the material lag you experience in the environment. So in our mixed value chain of forward-cover distribution channels and non-forward-cover distribution channels, SA as a destination doesn’t switch on immediately when the rand weakens, which is the downside. But the upside is that it doesn’t immediately switch off when the rand strengthens. It becomes virtually a hedge, softening the blow in either direction”.

“So it’s not one of the stakeholders in our industry that makes a profit,” concludes Wiest, “because there’s always some ‘jealousy’ amongst suppliers when the rand weakens as they think their distributors in the traditional channel are making a killing. The truth is, nobody does. Except, at the end of the day, the bank."