A Fair Exchange?

One of the elements that are having an ever-diluting effect on traditional airport foreign exchange transaction numbers is online travel money purchases, which in many instances are delivered direct to a customer’s door, usually free of charge and normally at extremely attractive rates of exchange.

Business Analyst, Neel Kapoor, from International Currency Exchange looks at the problems facing dealers in the UK market.

One of the elements that are having an ever-diluting effect on traditional airport foreign exchange transaction numbers is online travel money purchases, which in many instances are delivered direct to a customer’s door, usually free of charge and normally at extremely attractive rates of exchange.

Spend a day at almost any UK airport and you may overhear a tourist or business traveller exclaim, “What?  That’s a bit steep”, or words to that effect, as they survey the currency exchange rates on offer.  The negative customer perception regarding this subject – particularly in the holiday season – is almost embarrassing to us, if a little repetitive.
“Of course there are quite valid reasons for this,” says Paul Glossop, Director of Retail Development at International Currency Exchange (ICE) Plc.  “We can’t deny it, until many airport authorities relax their rent expectations for retail foreign exchange activities, then on price alone airport outlets are not generally going to beat the big retail businesses offering foreign exchange, such as the UK’s Post Office and the retail chain Marks & Spencer (M&S). They have a consistent flow of footfall and much cheaper costs and accommodation.  Square footage and the operating costs we incur to cover the unsociable hours when passengers need foreign currency services in good airport locations are extremely expensive by comparison.”
For sure, airport foreign exchange pricing has received quite damning media coverage in recent years, polarised even more due to collapsing sterling exchange rates, particularly against the euro and to a lesser degree the dollar.  Also, in no small part because of this constant focus, customers are far more aware of exchange rates nowadays and generally know what value they should get for their hard-earned cash.
Furthermore, on top of the woes affecting the aviation industry as a whole, which have reduced the number of outbound passengers, the poor sterling exchange rate has seemingly created a ‘perfect storm’ of commercial negativity for every UK airport retailer.
However and more specific to this particular article, it appears that retailers providing foreign exchange at airports have been impacted to a much larger extent than most other vendors.  Indeed, industry sources confirm that some foreign currency operators have suffered sales volume declines of up to 50% during the last three years or so.  This at the very time both M&S and Post Office have been actively engaged in ‘aggressive’ marketing campaigns that have vociferously extolled the virtues of their own highly competitive price policies in comparison to purchasing travel money at the airport.

Competition between airport currency exchange outlets and those on the high street has never been higher. Are new rental agreements the key to survival for airport-based foreign exchange outlets?

To put some sort of perspective on the impact both M&S and the Post Office pricing and marketing activities have had on the industry and how, over time, these campaigns have completely reshaped the foreign exchange landscape in their favour; these two organisations now account for over 50% of the market share of the total UK retail travel money business.
Whilst initial M&S and Post Office market share gains came predominantly from more traditional outlets, such as travel agents and banks, etc, in recent years, possibly helped by bad media publicity surrounding airport exchange rates, they have progressively eaten into airport currency sales turnovers; and this trend seems to be gaining momentum.
Another element that is also having an ever-diluting effect on traditional airport foreign exchange transaction numbers is online travel money purchases, which in many instances are delivered direct to a customer’s door, usually free of charge and normally at extremely attractive rates of exchange.
Notwithstanding recent media coverage about the calamitous collapse of Crown Currency, (a large online pre-order business that was involved in immediate and forward ordering of foreign currency at hugely competitive pre-fixed rates), and trust issues, this might evoke in the buying public’s mindset, it has been estimated that this type of transaction method is set to grow by around 20-25% in the coming year.
All of which seems to point to continuing difficult times ahead for airport foreign exchange operators and in particular their attempts to retain market share.
As Paul Glossop implied in his earlier statement, airport authorities seem reticent to adjust their rent models, certainly mid-term.  Of course, this is totally understandable and not at all surprising as they obviously have their own very challenging funding and capital requirements to satisfy.
Nevertheless, against this backdrop of diminishing turnover and income revenues, change will surely be forced.  It seems beyond doubt that many airport foreign exchange retailers are suffering operating losses as a direct result of these changing market dynamics and the apparent reticence of airport authorities to either revalue rental agreements or their longer-term income expectations from this type of business.
Irrespective of the obvious prestige attached to having a presence at premier airports, such as Heathrow, Gatwick and Manchester et al, no organisation can afford to continually sustain loss; especially if they see no long-term end to their plight.  These operators will simply look to other areas where they can make money: this is an economic reality.
So, does airport foreign exchange have a future in the long term; and, if so, how can this be achieved?
Firstly, it is abundantly clear that consumers are, by and large, price driven and that they can be enticed to change their buying habits if they believe they will get value for money.
Secondly, most certainly regarding foreign currency, people are far more aware nowadays of the exchange rate value they should get.
ICE Plc, as part of the Lenlyn Group, has worked closely with its sister company, Raphael’s Bank, to develop a pre-paid traveller’s cash card. Back in 2005 this was the first ever pre-paid foreign currency card to be introduced in the UK. (All images ICE Plc)

Thirdly, historic excuses used by airport operators and airport foreign exchange retailers to explain the reasons for higher prices/charges etc, (that due to the hours of operation, costs associated with this and the convenience of being able to get currency at time of departure and arrival, irrespective of when this might be), are inconsequential to customers in these times of instant and low price retail gratification.
Nonetheless, despite this apparently insurmountable pessimism the situation is far from irretrievable.
New products and services continue to be introduced by more forward-thinking foreign exchange operators.  For example, ICE Plc, as part of the Lenlyn Group, has worked closely with its sister company, Raphael’s Bank, to develop a prepaid traveller’s cash card.  Back in 2005 this was the first ever pre-paid foreign currency card to be introduced in the UK.  You can charge currency onto the card online and shop with it across the world with all the security of CHIP and pin technology.  Its main competitor, Travelex, also has a similar card and the word in the industry is that this type of product is being used more and more frequently as an electronic alternative to the once ubiquitous but all too often cumbersome traveller’s cheque.
Both ICE and Travelex have also launched a network of foreign exchange ATMs.  These cash machines are fully accredited by both MasterCard and VISA; every one has multi-currency dispense abilities, and can provide domestic and/or foreign currency from one point.  Getting passengers to withdraw their foreign currency from an ATM before departure, rather than waiting until they reach their destination is providing a valuable new income stream.
Indeed, some of the smaller less well-known airport foreign exchange retailers that have no ATM capabilities now use the Raphael’s Bank multi-currency ATMs as part of their own airport product and service portfolios.
“Ideally, airport authorities should reduce rental agreements enough to allow us to focus on price as well as service and help operators to build this business once again. Surely, it’s in everybody’s long-term best interest, isn’t it?” – Paul Glossop

Additionally, both ICE and Travelex have been highly responsive to changing consumer mindsets by way of their growing online trade, offering either a currency pre-order pick-up service at the airport or next day home delivery.  All these options come at much better rates than are generally available for walk-up counter transactions and are fast becoming the preferred choice for many passengers.
Unfortunately, this creates a sizable dilemma for airport foreign currency retailers, who are trying to subsidise ever-decreasing gross profit levels once achieved from traditional business, with fast-increasing but extremely low margin turnover from newer product innovations.  The reality is that the only option available to us is to increase counter margins even more.
Consequently, this is squeezing these operators’ margins to unsustainable levels, certainly in relation to the rents they are still expected to pay to their airport landlords.
Sadly, despite this raft of new product and service implementations and the heavy investments made, particularly by ICE and Travelex; to date, most airport authorities are not willing to take a longer term view on the issues facing the industry and the financial implications it will ultimately have on them.
Clearly, they must confront these problems eventually and begin to work in conjunction with their retail foreign exchange partners, allowing them to compete on price with both M&S and the Post Office.
Rationally, the only way this can ever be achieved, certainly for future tender situations, is for the relevant airport authorities to determine exactly what it is they want.  Are they after a business that is able to compete head-to-head with major high street competition and begin to claw back market share or, one that continues to lose its ability to increase profit, which will endanger the amount of rent it can pay to airports?
Now back to Paul Glossop, he says that: “constant innovation, brand-promoting and loyalty-winning are obviously essential elements in a market where the traditional service and product is under pressure.”  He added: “Ideally, airport authorities should reduce rental agreements enough to allow us to focus on price as well as service and help operators to build this business once again.  Surely, it’s in everybody’s long-term best interest, isn’t it?”