NichCage
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How do airlines make profits when they sell tickets for different currencies?

Fri Jan 13, 2017 10:57 pm

Hello everyone, I have been wondering something about how airlines makes profits. Airlines fly to many different countries, and sell tickets in many different currencies for each different country. The question that I have is that if an airline sells tickets in dozens of different currencies, how do they produce profits in there local currency?
 
Varsity1
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Re: How do airlines make profits when they sell tickets for different currencies?

Fri Jan 13, 2017 11:08 pm

Profit*

They use currency hedging like most multinational organizations.

We should really be using the term revenue on a/net more often. Profit is a bottom line denominator that isn't appropriate in most operation based monetary discussion.
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ryan78
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Re: How do airlines make profits when they sell tickets for different currencies?

Fri Jan 13, 2017 11:22 pm

Actually for a lot of airlines, international ticket sales, ie. tickets purchased in foreign currency, actually makes the airline more money then if the ticket were purchased in the carriers local currency. This is due to currency hedging as Varsity1 stated. Essentially they squeeze a fraction of a cent out of each dollar in the exchange rate whenever they can, times that by the millions, potentially hundreds of millions of dollars customers spend on tickets each year and that tiny fraction of a cent can add up rather quickly. Airline Economics is a beautiful thing when you break it down...
 
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mercure1
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Re: How do airlines make profits when they sell tickets for different currencies?

Fri Jan 13, 2017 11:32 pm

Airlines also incur many cost in many foreign currencies. From local staff, rents, handling, etc..

Airlines are just like any large multinational corporation that must work with different types of currencies as part of routine business.
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Richard28
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Re: How do airlines make profits when they sell tickets for different currencies?

Fri Jan 13, 2017 11:52 pm

Hedging can work for and against an airline.

It does not guarantee a better return in the local currency,it simply reduces or removes the currency risk.

If the currency goes one way the hedge has saved the airline money - the other way and it comes at a cost.
 
mjoelnir
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 1:07 am

I would say the same way as they would do in a single currency, by having higher revenues than cost.
 
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JetBuddy
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 2:26 am

I don't understand the question. They follow exchange rates, and sell tickets priced accordingly.
 
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aemoreira1981
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 4:08 am

JetBuddy wrote:
I don't understand the question. They follow exchange rates, and sell tickets priced accordingly.


Not every country is good at following the exchange rates. Notorious for not doing so are countries like Nigeria and Venezuela, which is why airlines have fled from there.
 
QANTAS747-438
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 6:05 am

What does it mean for airlines to hedge exchange rates?
My posts/replies are strictly my opinion and not that of any company, organization, or Southwest Airlines.
 
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LAXintl
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 6:15 am

aemoreira1981 wrote:
Not every country is good at following the exchange rates. Notorious for not doing so are countries like Nigeria and Venezuela, which is why airlines have fled from there.

Those are not really exchange rate issues. They are a remittance issue.

QANTAS747-438 wrote:
What does it mean for airlines to hedge exchange rates?


Same way airlines hedge fuel, one can hedge foreign currency, to hopefully help build some predictability.

Foreign currency hedging pretty common for multinational business.
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PanHAM
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 8:09 am

in a market lik Germany the faresm have to be competetive. Same for the neighbpring countries. A fare from FRA/DUS/MUC to the FE may be different than from LHR or AMS. That has nothing to do with Exchange rates.

But for interlining and Clearing between the Airlines, as well as for charges collect on freight shipments, there is a monthly chaning IATA EXCHANGE RATE. Whatever the actual currency daily bank rate is, for the calculation of - say US$ into € on a freight collect shipment, , the IATA x-rate applies.
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b747400erf
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 11:54 am

NichCage wrote:
Hello everyone, I have been wondering something about how airlines makes profits. Airlines fly to many different countries, and sell tickets in many different currencies for each different country. The question that I have is that if an airline sells tickets in dozens of different currencies, how do they produce profits in there local currency?


http://lmgtfy.com/?q=airline+currency+hedging
 
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Channex757
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 12:04 pm

As more and more tickets are bought online, then some of the currency work and risk moves to the credit card processor. Many airlines are also starting to offer PayPal as an option. This is transparent to the customer who might (for instance) book a ticket on an airline leaving Japan with a local credit card and pay in Yen, but the foreign carrier's credit card company would do the conversion at market rates then pay out the airline in local currency. The sale would then go through the international Visa or Mastercard system, or one of the others like Amex.
 
MalevTU134
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 12:19 pm

b747400erf wrote:
NichCage wrote:
Hello everyone, I have been wondering something about how airlines makes profits. Airlines fly to many different countries, and sell tickets in many different currencies for each different country. The question that I have is that if an airline sells tickets in dozens of different currencies, how do they produce profits in there local currency?


http://lmgtfy.com/?q=airline+currency+hedging

:bigthumbsup:
 
Bongodog1964
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 12:44 pm

Channex757 wrote:
As more and more tickets are bought online, then some of the currency work and risk moves to the credit card processor. Many airlines are also starting to offer PayPal as an option. This is transparent to the customer who might (for instance) book a ticket on an airline leaving Japan with a local credit card and pay in Yen, but the foreign carrier's credit card company would do the conversion at market rates then pay out the airline in local currency. The sale would then go through the international Visa or Mastercard system, or one of the others like Amex.


Credit card processors don't accept any risk at all, they just convert the transaction at the prevailing rate and charge a % commission, or do the conversion at a rate with the commission built in. Your description of a Paypal transaction is exactly how it works anyway with your credit card.

As an example I've just looked at an old credit card statement and in July last year I was in Belgium. Over 4 days they successively converted transactions from Euros to pounds sterling at 1.203450, 1.203426, 1.203402 and 1.203501. These will have been the official exchange rate, and in addition they also charged a 2.75% transaction fee.

In the case of tickets sold in local currency, airlines will firstly use the money to pay local expenses, then repatriate the remainder to their home nation, paying some form of commission along the way. In some cases however they may actually incur more expense locally than their ticket revenue, in which case they have to send money the other way.

Sometimes they may wish to leave the money in the foreign bank for a while for sound business reasons, or they may even as mentioned earlier have considerable difficulties repatriating their money due to the intransigence of the government at the other end.

As to hedging, that's just a form of gambling, you are betting on your predictions being better than the other party.
 
aviationaware
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 12:58 pm

Profit is a residual factor, so we should be talking about revenue/yield.

1) The first priority to minimize forex effects for any business is natural hedging, as in trying to align the share of costs a business incurs in any foreign currency with the share of revenues in that currency. So for example British Airways, which earns aprox. 40% of its revenues in USD, will try to achieve a 40% USD expense ratio. USD isn't the best example here because many airline expenses will be USD anyway (since it is the global reserve currency, many financial market transactions are available predominantly in USD); but the ratio matching is true for any other currency.
Natural hedging is one of the reasons why many international airlines have flight crew bases abroad. Natural hedging does not use any financial instruments.

The trend towards joint ventures between big airlines is also partly driven by the need to achieve income-expense parity in any given currency.

2) Yield management, among many other uses, is also an instrument which can help even out currency effects. Often you will see flights being much more expensive or cheaper when you book them from the other starting point in the local currency. While that is also an effect of the local purchasing power, airlines will try to price in any anticipated currency losses.

3) Most airlines also use financial markets to insure themselves against currency fluctuations. Hedging is like playing the lottery and, in the long term, will produce a zero sum net effect while having produced huge organizational costs, so I don't get why so many airlines are still doing it (many are abandoning it at least partly of late).
 
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flyingturtle
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 1:49 pm

QANTAS747-438 wrote:
What does it mean for airlines to hedge exchange rates?


In the simplest way, they contract with a bank to buy 1'000'000 USD a month - for several years - at a fixed price in EUR. Then, the bank has to care about the currency risk. Converting a variable rate into a fixed rate is called a swap.

More famously, they buy fuel the same way.


David
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BestWestern
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 2:00 pm

This question isn't about hedging, which is just a financial tool.

But about cash repatriation. Typically airlines generate most of their revenues in their home market. They also tend to generate higher yield in their home markets too.

Foreign reservations are ticketed and cash reconciled through the IATA BSP process.

"A truly worldwide system: there are BSP operations in some 181 countries and territories. The system currently serves approximately 400 participating airlines with an on-time settlement rate of 99.99%. In 2015, IATA's BSP processed $230.3 billion."

http://www.iata.org/services/finance/bs ... index.aspx

Airlines also use foreign revenues to pay for overseas expenses too.
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mjoelnir
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 2:39 pm

The question can only com from somebody not used to operate in a multi currency environment. It is easier to operate in one currency and it cost something to operate in a multi currency environment, but that is about it.
The distribution of revenue currencies and cost currencies usually do not match up. But you start with paying as much costs using the right currency from revenues as possible. For the rest you have to exchange currencies. You have to be a bit nimble to not loose money on currency exchange, by keeping amounts in a "wrong" currency. It pays to keep a big amount in the currency you have your major cost in. For example even if your company operates in EUR, it pays to keep a good amount in USD if you pay your fuel in USD.
You hedge or do not hedge. Hedging cost money, nobody does it for free. Hedging the wrong way, costs lots of money, there are no safe bets.
Both ways it pays to be nimble with currencies.
 
vv701
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 2:49 pm

BA obtains a very large proportion of its revenue in foreign currency. For example at the last IAG Markets Meeting on 4 November it was stated that 60 per cent of BA's long-haul passenger revenue was obtained outside the UK. It was also stated that while 40 per cent of revenue on services to the USA was in Sterling, slightly more than that was in US $ with the remaining 18 per cent being fairly equally divided between euros and other currencies.

Yield can be very significantly impacted by currency fluctuations. Sudden changes can be very problematic. An example was the sudden devaluation of Sterling from about US $1.40 to about US $1.20 after the UK voted to leave the EU last June. This had the positive impact on BA of increasing in Sterling terms the revenue obtained from every ticket sold in the USA (and in all other countries). On the other hand it increased the Sterling cost of every litre of aviation fuel used as well as nearly all costs incurred outside the UK.

As all airlines will try to remain price competitive. So a change in exchange rates like the above is unlikely to result in changes in local currency prices. This leads to differential ticket pricing. For example when Sterling has been strong we get media stories about 'rip off Britain' because at that exchange rate the British customer is likely paying more than his overseas counterpart.
 
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LTU932
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 3:23 pm

aemoreira1981 wrote:
JetBuddy wrote:
I don't understand the question. They follow exchange rates, and sell tickets priced accordingly.


Not every country is good at following the exchange rates. Notorious for not doing so are countries like Nigeria and Venezuela, which is why airlines have fled from there.
If I recall correctly, one of the probems with Venezuela is that not just the exchange rates don't really work, the government is very hesitant in releasing any hard currency, so the airlines cannot exchange their Bolívares into US Dollars or Euros. Which was why AA eventually had to write off that money. Correct me if I'm wrong though.
Sometimes the only thing more dangerous than a question is an answer. - Ferengi Rule of Acquisition 208
 
PanHAM
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 3:39 pm

For the last couple of years Britain has benefitted from a strong Pound, until the majority of the British People made a decision to leave the EU. No one else but the British themselves are responsible for the lower outside value of the Pound.
To use the term ripped off, they did that themselves. Actually, if someone got ripped off it is the foreign carriers operating from Britain who get less $$$ or €€€ for their earnings in the UK and cannot raise fares due to local competition.

For Airlines, it is important to stay flexible. and manage their foeign currency receipts. There are casesm where corrupt foreign regimes like Venezuela embezzle such receipts by ignoring international treaties about traffic rights and operations in fporeign countries.

The most important part of such Agreement is, that receipts earned locally are not subject to taxation.
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Planesmart
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Re: How do airlines make profits when they sell tickets for different currencies?

Sat Jan 14, 2017 11:29 pm

Ultimately, they all aim to sell tickets for more than cost.

In respect to currencies, there is a difference between what the largest, global airlines do, and the smallest.

The international currency for airline settlements is the USD.

Bigger airlines use natural hedging, as well as financial tools to hedge currency exposure. For example, paying local costs in local currencies.

Where legal, some airlines will pay staff in one or even multiple currencies.

If leasing an aircraft, the funding syndicate can be composed of different nationalities, requiring payments in different currencies.

Airbus will price in a basket of currencies reflecting a customers natural currency exposures, whereas Boeing still remains reluctant.

For the really big airlines, the card companies and PayPal, perform currency gymnastics behind the scenes, sharing currency margins, sweeping accounts based on time and balances, and all manner of other wonders.

Joint ventures also often extend beyond simply settling for tickets and freight.
 
VolvoBus
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Re: How do airlines make profits when they sell tickets for different currencies?

Sun Jan 15, 2017 10:16 am

flyingturtle wrote:
QANTAS747-438 wrote:
What does it mean for airlines to hedge exchange rates?


In the simplest way, they contract with a bank to buy 1'000'000 USD a month - for several years - at a fixed price in EUR. Then, the bank has to care about the currency risk. Converting a variable rate into a fixed rate is called a swap.

More famously, they buy fuel the same way.


David


Swaps are generally converting variable to fixed INTEREST rates - what you describe with currencies is a Forward Contract. Together with spot deals, these probably comprise an overwhelming majority of currency 'hedges'.

For those who consider hedging gambling ,it can be the actual opposite by providing certainty. Consider a business importing a product priced in USD, but payable 90 days after delivery. That product is sold for cash in Euros. That business can purchase the required USD for delivery to meet the import cost when it is due. Therefore they know their Euro cost and can price accordingly. If they did not and ,for example ,an increase in US interest rates or the collapse of a major European bank had a negative effect on the exchange rate,their profit would be reduced,or possibly eliminated,by having to buy USD at the new rate.

I am intrigued as to how airlines convert multiple currency assets and liabilities etc. for balance sheet purposes. Do they prepare individual balance sheets based on individual currencies and then convert to the reporting currency, or is that too simplistic? I wonder whether IAG will get a nice boost to profit, as BA pension fund deficit will be reduced by the drop of £stg against the Euro?
 
Planesmart
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Re: How do airlines make profits when they sell tickets for different currencies?

Sun Jan 15, 2017 7:25 pm

VolvoBus wrote:
Swaps are generally converting variable to fixed INTEREST rates - what you describe with currencies is a Forward Contract. Together with spot deals, these probably comprise an overwhelming majority of currency 'hedges'.

For those who consider hedging gambling ,it can be the actual opposite by providing certainty.

Yes. The vast majority of so-called foreign currency hedging, are Forward Exchange contracts.

Hedging, in all it's forms, is gambling when the customer has no policy or strategy, and makes the decision to hedge based on whim.
Some businesses hedge all foreign currency exposure. Some a percentage of exposure. Some just specific currencies.

One of the key questions international credit rating agencies ask, is please show us the latest policy document, when was it last changed, and the related monitoring, management, peer review and audit processes.
 
notconcerned
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Re: How do airlines make profits when they sell tickets for different currencies?

Sun Jan 15, 2017 9:22 pm

While forward contracts are effective tools to manage currency fluctuations, but I would imagine that the airline would be earning the majority of its revenue in local currency, enough revenue in local currency that sales in foreign currency would have minimal effect on its financials, especially profit. (Forward currency contract on fuel - or cost- is another matter since fuel is purchased in USD)

In accounting terms, the financial statements will be in local currency, and any fluctuations will be reflected as a translation gain/loss in foreign currency, and broken down into realized and unrealized. Notes in the financial statements should have breakdown on the forward contract positions and maybe notes and assumptions on how they translate to local currency.

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