A regular feature, inviting key individuals to comment on an aspect of scenario planning. Chris Greenwood of VisitScotland examines the relationship between Tourism and Currency Exchange Rates

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The influence on Inbound/Outbound Tourism of Currency Exchange Rates

The relationship between international tourism and exchange rates does have a direct influence on visitor spend.  However when used as a driver to determine the attractiveness of a destination, exchange rate is not as important as first thought.  Long haul visitors usually plan their trips well in advance, and therefore are committed to visiting chosen destinations regardless of exchange rate at the time of their trip.  Needless to say, should consistently high exchange rates occur over time this may cause a destination to shift from high volume to niche tourism attracting only the dedicated or wealthy visitor.  This would obviously have impacts on the industry in terms of infrastructure.  For short haul visitors the exchange rate has a much greater impact, as the impulse traveller may consider the relative values of goods from their home country compared to their potential destination.  Looking at recent trends in travel and exchange rate it is the case however that the trend between spend and visits does fluctuate depending on the favourability of currency values for some markets.

There are many factors that have altered the traditional models for tourism.  These include the ease and liberalisation of travel (such as the growth of low cost airlines and online travel booking), issues of security (growth of global terrorism) and economic fundamentals (low historic interest rates, fuel prices, country economic and globalisation); US and European visitors to and expenditure in Scotland has grown and declined in line with strong and weak exchange rates.  In particular the Euro strength and Dollar weakness against Sterling in recent years has been reflected in tourist activity.  As previously mentioned exchange rate is one symptom of a range of economic factors.  In a country with a rising interest rate it is usually associated with increasing inflationary pressures which will be partially linked to consumer activity.  Therefore in the US the weak dollar rate is indicative of the decline in consumer activity and the rising current account deficit.

Outbound visitors from Scotland to Europe and the US have increased exponentially in the past seven years.  Whilst low cost airline growth has been a key driver, increasing consumer credit and low interest rates have been linked to the growth in spending culture in the UK over that period.  The advent of budget airlines has seen an increase in affordable airfares.  Globally the number of low-cost airline flights has more than doubled in the five years up to 2006, according to latest figures released from the Official Airline Guide.  In April 2006, budget airlines planned to operate more than 300,000 flights, compared with 142,000 in April 2001.  With Europe and principally the UK driving a large proportion of this market, the variety of European destination has led to a boom in outbound travel.  However exchange rates with the Euro and increasing household spending have led to a decline in expenditure at the destination.  The purchasing power parity (PPP is the comparative value of identical goods in two countries) between France, Germany and the UK is very similar however for the newer route destinations such as Poland and the Czech Republic, PPP favours the strong pound and it is these destinations which are seeing the growth in outbound UK visitors.

In conclusion, there is a fundamental correlation between exchange rate and tourists spend and visits.  The relationship of exchange rate and tourism however is influenced by other tourism, consumer and economic drivers.  To mitigate against the influences of exchange rate tourist providers can amend prices to allow for rate change or be creative in presenting packages where consumers are required to change currency. As an example, US travel operators in 2006 were selling European packages to customers in US dollars therefore the agents were taking the exchange rate depreciation.    This resulted in the customers the agents were bringing over having higher spend levels with associated business in the UK compared to independent US travellers booking accommodation direct with the destination country.  Exchange rates will always be part of the international Tourism and Travel environment therefore quality product and value for money have to be present to smooth the transition between the consumers expectations and experiences.

Chris Greenwood is a Research Analyst within Scenario Planning at VisitScotland.  chris.greenwood@visitscotland.com