Yes, the price of raw materials and currency fluctuations impact the travel industry but just how much?

Hands up all those who rushed out to buy on-line travel shares when the oil price fell! So, you thought they’d be a good punt on a rush of new business as airfares went down! Well, you know better now!

Lesson – no company cuts product (or ticket) prices when raw material costs fall. Not unless they absolutely have to – say, if they are threatened by the industry regulator. Flights are full so there’s no pressure to cut to pull in business. 

Instead, airlines are using any savings to cut debts accumulated in the financial crisis rather than ticket prices. Anyway, airlines don’t buy their fuel like the rest of us, shelling out money to fill up when we need it. They hedge – that is buy their oil a long way forward in time, maybe as much as 18 months, so that they can predict costs. So, most are locked into oil at higher prices, probably until later this year. 

In December, the International Air Transport Association (IATA) predicted the average return airfare, excluding taxes, would fall by 5.1% in 2015. Is that going to be enough to make consumers cram in a few more holidays? Probably not! Yet it is good to see an end to oil surcharges – some of the Asian airlines have set the ball rolling.

Currency focus

Forget the price of oil – currency is the market to watch. This week the Euro has been down 10% against sterling on 12-months ago and that much against the dollar just this year. It’s also several percent down against the yen and renminbi. Again, the need for business predictability means travel companies will be hard pushed to offer cheaper European hotels. They’ll also have booked blocks of rooms well in advance.

Having said that, cheap Euros are more useful more quickly to travel companies than cheap oil; psychologically they’re a better spur to holiday booking. With more money in tourist pockets, chances are they may spend more in resort helping to boost ancillary revenues.  

But neither oil nor Euro weakness is what’s being reflected in shares of the over-crowded online travel booking sector this week. It’s the strength of the dollar, a final straw for some in this highly competitive market.

Online travel agency Orbitz Worldwide is exploring a sale, according to market gossip. The operator of Orbitz and CheapTickets websites is said to be talking to its advisers. It had already signalled that profits were being squeezed as cutthroat operating conditions forced it and major rivals, Expedia and Priceline, to step up marketing. Orbitz’s marketing bill rose 26% in the third quarter.

The dollar is now, apparently, hurting Orbitz’s international business, discouraging tourists. “The primary headwind that we're seeing is with regards to the currency, with the dollar running up relative to other currencies, particularly in Europe," Reuters quoted Orbitz’s Chief Financial Officer Mike Randolfi as saying. 

The shares have leapt on rumours that both rivals and private equity groups are knocking at its door. The company has had private-equity owners in the past. It was part of Travelport, which Blackstone Group acquired in 2006 for about $4.3 billion. Orbitz went public in 2007.

When the story broke on Bloomberg the shares jumped as much as 15% in New York, trading at $10.23. The company wouldn’t comment so momentum has tailed off a bit but they are still trading at just below $10. That looks promising!

Last year mergers and acquisitions soared across the travel industry. Already this year Expedia’s purchase of Travelocity has gone through (at last). Another bonanza deal year seems to be starting.