Do currency exchange rates impact inbound tourism?

Do currency exchange rates impact inbound tourism?

I recently read an article about tourism stocks that said something like “the lower Australian dollar is great for tourism demand.” It was implied that this is a tailwind for tourism companies.

That’s the consensus view and intuitively it makes sense. If 10,000 Chinese Yuan buys you A$2000, that’s not cool as if it buys you A$2500. From an economic and a rational perspective you would think that an Australian holiday is less attractive at a 1 : $0.20 exchange rate than at 1 : $0.25.

However I think that this is incorrect. While I could be convinced that there is such an effect, I think it is mild enough to be almost irrelevant.

According to Tourism Australia there were 9 million inbound tourists in the year to April 2018. 1.4 million or 15.5% of these were from China. China is not a great example of this effect for a number of reasons, but it will be suitable for this post:

Chinese tourist numbers going up like a rocket. Exchange rate – flat out like a lizard on a rock.

Here is the UK:

You can see some apparent links at various points but this could also be explained by political or economic impacts, not just currency.

Here is New Zealand, the second largest contributor to Australian inbound tourist numbers:

New Zealand is actually very interesting because it’s the one place where the underlying drivers of tourism are not changing much or quickly – unlike China. Where the financial and social circumstances of the pool of prospective tourists is much more stable, as it is in New Zealand, I would be more willing to believe in a currency effect (and it might be easier to spot).

My analysis is neither conclusive nor comprehensive, but prima facie it is pretty hard to see any kind of relationship between inbound visitor numbers and forex rates. I think there are likely a number of secondary reasons for this, and one major one.

First, the minor reasons.

• Air travel is getting cheaper both in absolute terms and relative to people’s wages, especially in emerging countries. Thus the ability to go overseas is not really constrained by forex rates, but by the affordability of travel relative to people’s incomes and budget – and this is improving in many places even if exchange rates move adversely. Other things like AirBnB can make accommodation more affordable. The pool of prospective tourists is increasing.
• It is getting easier to travel for a whole variety of non-financial reasons, that likely vary by region, but things like booking technology, the internet, greater recognition of tourism as an economic opportunity, bilaterial tourist agreements, proliferation of major travel businesses like Expedia, Flight Centre, and so on, make the decision to travel easier and more attainable. Financial impact aside, it is getting easier to travel and this also increases the pool of prospective tourists.
• Population growth (more people = more tourists)
• Wage / economic growth (more money = more tourism)
• Changes in migrant populations (e.g. there are more Chinese living here than there were 5 years ago – so there are likely more inbound/outbound Chinese visitors due to friends & family visiting etc)
• Political disruption is often correlated with currency disruption (which again makes it harder to discern that the effect is really due to forex rates)
• Credit availability – this isn’t a major contributor, especially not in many foreign countries, but on some level it is possible that the availability of credit (and credit cards) and/or the ability to pay for a trip on credit will have an impact in certain periods (bearing in mind that all credit does is bring consumption forwards).

 

The biggest reason of all however is simply that tourists are typically price insensitive and also that tourism is not a rational economic decision.  If you’re going to spend the equivalent of $5000-$10000 to travel halfway around the world for a once-or-twice in a lifetime trip to see the most miserable city in Australia kangaroos and the Sydney Opera House, do you really mind if the AUD has fallen from $0.80 to $0.75 or vice versa? I would say almost definitely not.

At some level you would think that forex should have an impact. For example you need 30,000 Brasilian reais to get around A$10,200 (rate of $1 = r0.34), which will buy you a decent Australian holiday and return flights. However if the rate were to halve, then you need 60,000 reais to get the same holiday, which is a ridiculously large sum of money.

When the currency change is very significant then I would believe that there is an impact on tourism, primarily because the exchange rate and the differences in the relative cost of living can make travel to a certain destination infeasible. However such currency moves are rare and I would conclude that most of the time the rate of exchange is almost irrelevant to the decision to travel.

Playing with the Tourism Australia website I came across an interesting example with Brasil. It’s a small sample but you can clearly see a possible political impact on tourist numbers due to the impeachment of their President around this time.

It is difficult to prove my point either way, because the currency also dipped severely at this point, I just found this an interesting example.

Lag time between decision and travel

One other item of note is that there is a lag time between planning a trip and currency movements. Trips don’t usually occur until 6-12 months after the decision to travel is made so there is an interesting element of consumer psychology to consider.

Let’s say for example that a currency declines and you decide to travel because a destination is cheap. You typically won’t travel for 6 -12 months after the decision is made and flights are booked. Are you going to cancel your trip if the currency moves adversely in that time?  Almost definitely not, and not just because of sunk costs.

Additionally, nobody is thinking about things like cost of bottled water or food when they travel. What they’re thinking about is the cost of accommodation, transport, or the cost of the events that they are doing. Most of the events will be tourist-style events where the customer is price insensitive. What is the difference between paying $60 or $100 (or the equivalent difference due to a change in exchange rates) for a ticket to Australia Zoo?  If you can afford to come all the way to Australia and you want to see kangaroos and crocodiles, you would probably be happy to pay either price.

Having said that, I am a wealthy (relative to the rest of the world) and privileged Australian so it is quite likely that I have a different attitude towards travel than many foreigners do. This is something to keep in mind and it is a place where unconscious bias could easily trip you up.

Tourism is not a straightforward tradeoff between pleasure and money. Rather it seems to be typically primarily a pleasure- or novelty- driven decision until or unless the prospective financial cost becomes too punitive. There is substantial flexibility in the willingness of the average tourist to pay, but only up to a point.

There are likely a large number of inbound arrivals that aren’t conventional tourists and are instead here on business or visiting family. Those situations may have different responses to exchange rates or the drivers of their travel may be different.

The bottom line

It’s really really hard, in my opinion, to prove any kind of strong relationship between currency movements and tourist numbers, either in the short term or over a longer period. I’m not convinced that there is a correlation, and I doubt if there’s much causation either.

My sense is that currency movements are not hugely important for tourism businesses. This is especially true if you use a really simplistic pairing like AUD/USD as a proxy for the affordability of tourism (especially given that >90% of Australian tourists come from outside the USA). Many other currencies like the Yuan, Euro, Pound etc have not moved significantly in the past couple of years.

I have thought about this and related issues a lot as I hold a (undisclosed) tourism stock. All else being equal, a low currency probably doesn’t hurt, but I think it is almost irrelevant when it comes to analysing or valuing tourism businesses, especially since there are so many different sources of tourists using many currencies.

A far more important concern is what are the underlying drivers of tourist numbers and in what situations would tourist numbers decline sharply?

One observation that arises from this post is that Chinese tourists are driving a large part of Australian tourism growth. Why? Despite the popular meme, it is likely not due to the emerging Chinese middle class – their wages simply aren’t high enough.  So what are the mechanics of this?  In what circumstances does it slow, stop, or reverse?  War is an obvious one, and of course trees don’t grow to the sky. That’s a bit off topic and probably deserves a post of its own in the future.

These are all questions that I don’t think have been adequately answered publicly (that I’ve seen), and could use a lot more work from the prospective tourism investor. I would be interested in recommendations for answers to these questions if you know of any good reports or articles.

I have no financial position in any company mentioned. I own shares in an undisclosed Australian tourism company. This is a disclosure and not a recommendation.