The case study below is based upon an entry that won the Risk Management category at the gtnews Awards 2014:
Hotelbeds is one of TUI Travel plc’s many wholly owned subsidiaries, residing in the accommodation and destinations sector (A&D) sector. It is a leading global business-to-business (B2B) ‘bed-bank’ with an online portfolio of 60,000 hotels, offering online rooms across 180 countries, where firms can quickly identify spare capacity.
Unfortunately, Hotelbeds experienced significant profit margin erosion last year due to adverse foreign exchange (FX) moves so TUI Travel’s A&D treasury unit started looking for a solution to mitigate the impact of FX risk on its earnings.
The corporation partnered with Citi to roll out a new solution this year, using the CitiFX guaranteed rates and netting engine product called InstantFX, plus an overlying non-deliverable forward (NDF) hedging programme to further mitigate the risk at the Hotelbeds subsidiary.
Since its implementation in late 2013 and the project’s end last January, monthly profit and loss (P&L) volatility at Hotelbeds has fallen by three-fifths, margins have been locked in at the time of booking, and technology integration has delivered on-going operational benefits such as easy scalability for new markets currencies.
The Problem and Project Aims
Hotelbeds accepts payments for hotel bookings via its online database upfront in the payer’s home currency. Payment to the hotel is not due until after the traveller checks out, and is made in the hotel’s functional currency. The firm is therefore exposed to FX risk between the time of the initial reservation and the time when payment is due. This can be a period of many months, or even a year, hence Hotelbeds’ wish to lock in margins earlier.
TUI Travel’s A&D treasury unit worked with Citi FX to design and implement a new solution for its subsidiary, which would:
- Maintain the margin over the lifecycle of a booking, from reservation through to payment.
- Eliminate the FX exposures, reducing the month-on-month P&L volatility.
- Not interfere with the existing payment collection process.
- Offer full automation, with straight-through processing (STP) connectivity to existing systems.
Due to the large number of daily reservations, possible currency pairs and check-out date permutations, it was important to design a robust, automated process which would give the desired results in a satisfactory delivery time.
The CitiFX partner team proposed an overlay hedging programme, allied to the new Instant FX netting engine technology, to allow Hotelbeds to eliminate FX exposures as much as possible while still leaving much of the current payment process described above in place.
The agreed solution package facilitated a faster implementation timeframe, and has delivered the desired FX risk management results.
The InstantFX product retrieves guaranteed FX rates for Hotelbeds from Citi via an application processing interface (API) connection. The TUI Travel subsidiary uses the rates on their website for live pricing for a certain period of time, and then automatically uploads hotel booking information back to CitiFX via the same API connection – all as part of a fully automated STP process.
By additionally using a NDF FX forwards programme as an economic overlay hedge – and compressing the vast amount of reservation data through Citi’s InstantFX netting engine – Hotelbeds has been able to fully hedge the FX exposure on its large volume, but low-value transactions. The newly-implemented solution has not placed an undue burden on TUI Travel’s A&D treasury team either as it is largely automated, with strong STP features aiding operational efficiency.
The key benefit of the project undertaken with Citi has been to enable Hotelbeds to remain in a highly competitive travel industry market segment, where margins are extremely tight, and to be able to look forward to future business success. The key metric here is its reduction by three-fifths of the firm’s monthly P&L volatility.
The InstantFX solution has also delivered other benefits, such as enabling Hotelbeds to automatically lock in margins and remove any long-term FX impact. The overlay hedging solution is highly efficient, because it ties the rates at which hotel rooms are priced to those at which hedges are placed. This means that Hotelbeds is able to manage its FX risk in a highly effective and efficient manner, as detailed below:
- Highly-effective risk management structure, which has dramatically reduced earnings volatility due to FX risk, principally by locking in margins from the time of the hotel booking, not later on.
- More competitive pricing of inventory has also been possible since the InstantFX solution was installed.
- The fully automated solution allows TUI Travel A&D’s treasury to focus its efforts on other value-add areas.
- Integration into Hotelbeds’ reservation system has also been enabled, providing scalability to accommodate growth, new markets and currencies in the future, plus new business lines or changed assumptions can now be accommodated.
- Transaction data is yielding interesting insights into customer buying behaviour, such as advance bookings and cancellation rates.
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