By Aran Brown, CEO of travel payments optimisation innovator, Ixaris
Given the industry’s ever-tightening margins and the uncertain economic picture more widely, most travel sector executives will be approaching 2020 with a degree of trepidation. The recent collapse of UK tour operator Thomas Cook, which folded under a weight of debt in September, drew national attention to many of the issues OTAs face, from diminish ingrates of return and intense sector competition to macro changes in the wider economy.
The bad news is that the root causes of low margins in the industry are not going away. OTAs will continue to be squeezed by airlines and hotels investing in their direct channels on one side, and price comparison and meta search sites on the other. At the same time, executives will continue to feel limited in how they can further reduce costs and overheads – including a heavy and necessary marketing burden –to combat these pressures.
Look outside the industry and the next 12 months appear full of uncertainty, from the political unknowns of Brexit and the US presidential election to the very real prospect of recessions in various parts of the world. As if to underline the mood, September’s OECD interim economic outlook forecasts this year’s global GDP downwards to 2.9%, and its growth view for 2020 was down 0.4 percentage points to 3%. The 2020 projections show a general slowing from 2018’s 3.6% global growth and would represent the weakest annual growth rates since the financial crisis.
Despite all this gloom, OTAs shouldn’t just throw their hands up and accept a role as passive players in the face of difficult sector and macro factors. There are process efficiencies that can be unlocked across the supply chain for businesses of all sizes and from all sectors, and optimising supplier payments stands out as one particular area where OTAs can increase control, rather than drift at the mercy of events. Through digitisation, automation and optimisation, they can alleviate the external pressures they face and grasp some much-needed certainty in an unpredictable world.
By focusing attention on payments performance – an area that’s been overlooked by most of the sector so far – OTAs have a huge opportunity to dramatically improve their margins. This in turn will free up cash that can be invested in marketing or improving price competitiveness, helping companies steal a vital march on the competition. According to a recent Ixaris survey, 85% of travel industry executives think payments has a strategic role to play in their business, but only 36% are actively measuring their payments performance, let alone doing anything about optimising it.
Addressing payments performance can have a positive impact on payment fees, FX costs, reconciliation costs and rewards from card spend. Roll all these improvements together and a business can transform payments from a pressure on profit to a much-needed boost.
This isn’t tinkering around the edges for small gains – this is transforming payments in a way that means the function can make a huge positive impact on an OTA’s margins. For low-margin/high-volume OTAs in particular, payments performance can have such a profound effect that payments strategy needs to be a board matter and a board-level KPI.
For a typical OTA, revenue comes from a small percentage of its booking value. Even though the net cost of a payment is relatively low– often around 1.4% of the value of the payment itself – when the payment is optimised this cost can be transformed into revenue. This revenue could equate to, for example, 0.1% of the value of the payment – and the resultant impact on margins adds up to a game-changing 26% improvement.
After making the decision to focus on payments optimisation, the business needs to understand what success looks like for them. OTAs stand to benefit from working with partners that can get under the skin of their business model, develop a deep understanding of their payments landscape and, taking a consultative approach, determine a solution unique to the requirements of the OTA.
If there is a gap between where the OTA currently stands and what its best-practice payments picture looks like (and it’s likely there will be), it will need to build a comprehensive payments strategy to achieve the necessary optimisation. This strategy will require the board’s buy-in to secure the investment to make it happen, as well as the drive that will ensure implementation is carried through to the end.
We’re now deep into the 2020 planning season – boards are setting their goals for the year ahead, allocating budgets and finalising KPIs. Now is therefore the time to be securing budget for payments optimisation, making the case for investment and outlining its ability to help travel companies strike back against uncertainty. Doing this will help make sure that the business is in the best possible shape for 2020 and has the security and confidence to both weather external storms and achieve lasting growth.
Oil extends losses as Texas prepares to ramp up output
By Ahmad Ghaddar
LONDON (Reuters) – Oil prices fell from recent highs for a second day on Friday as Texas energy firms began to prepare for restarting oil and gas fields shuttered by freezing weather.
Brent crude futures were down $1.16, or 1.8%, to $62.77 per barrel, by 1150 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell $1.42, or 2.4%, to $59.10 a barrel.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, according to analysts.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
However, firms in the region on Friday were expected to prepare for production restarts as electric power and water services slowly resume, sources said.
“The market was ripe for a correction and signs of the power and overall energy situation starting to normalise in Texas provided the necessary trigger,” said Vandana Hari, energy analyst at Vanda Insights.
Oil fell despite a surprise fall in U.S. crude stockpiles in the week to Feb. 12, before the freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about both nations returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons.
While the thawing relations could raise the prospect of reversing sanctions imposed by the previous U.S. administration, analysts did not expect Iranian oil sanctions to be lifted anytime soon.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” StoneX analyst Kevin Solomon said.
(Additional reporting by Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; editing by Jason Neely)
Analysis: Carmakers wake up to new pecking order as chip crunch intensifies
By Douglas Busvine and Christoph Steitz
BERLIN (Reuters) – The semiconductor crunch that has battered the auto sector leaves carmakers with a stark choice: pay up, stock up or risk getting stuck on the sidelines as chipmakers focus on more lucrative business elsewhere.
Car manufacturers including Volkswagen, Ford and General Motors have cut output as the chip market was swept clean by makers of consumer electronics such as smartphones – the chip industry’s preferred customers because they buy more advanced, higher-margin chips.
The semiconductor shortage – over $800 worth of silicon is packed into a modern electric vehicle – has exposed the disconnect between an auto industry spoilt by decades of just-in-time deliveries and an electronics industry supply chain it can no longer bend to its will.
“The car sector has been used to the fact that the whole supply chain is centred around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor makers actually do have an alternative.”
Automakers are responding to the shortage by lobbying governments to subsidize the construction of more chip-making capacity.
In Germany, Volkswagen has pointed the finger at suppliers, saying it gave them timely warning last April – when much global car production was idled due to the coronavirus pandemic – that it expected demand to recover strongly in the second half of the year.
That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery.
“Last year we had to furlough staff and bear the cost of carrying idle capacity,” said a source at one European semiconductor maker, who spoke on condition of anonymity.
“If the carmakers are asking us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”
The auto industry spends around $40 billion a year on chips – about a tenth of the global market. By comparison, Apple spends more on chips just to make its iPhones, Mirabaud tech analyst Neil Campling reckons.
Moreover, the chips used in cars tend to be basic products such as micro controllers made under contract at older foundries – hardly the leading-edge production technology in which chipmakers would be willing to invest.
“The suppliers are saying: ‘If we continue to produce this stuff there is nowhere else for it to go. Sony isn’t going to use it for a Playstation 5 or Apple for its next iPhone’,” said Asif Anwar at Strategy Analytics.
Chipmakers were surprised by the panicked reaction of the German car industry, which persuaded Economy Minister Peter Altmaier to write a letter in January to his counterpart in Taiwan to ask its semiconductor makers to supply more chips.
No extra supplies were forthcoming, with one German industry source joking that the Americans stood a better chance of getting more chips from Taiwan because they could at least park an aircraft carrier off the coast – referring to the ability of the United States to project power in Asia.
Closer to home, a source at another European chipmaker expressed disbelief at the poor understanding at one carmaker of how it operates.
“We got a call from one auto maker that was desperate for supply. They said: Why don’t you run a night shift to increase production?” this person said.
“What they didn’t understand is that we have been running a night shift since the beginning.”
NO QUICK FIX
While Infineon, the leading supplier of chips to the global auto industry, and Robert Bosch, the top ‘Tier 1’ parts supplier, both plan to commission new chip plants this year, there is little chance of supply shortages easing soon.
Specialist chipmakers like Infineon outsource some production of automotive chips to contract manufacturers led by Taiwan Semiconductor Manufacturing Co Ltd (TSMC), but the Asian foundries are currently prioritising high-end electronics makers as they come up against capacity constraints.
Over the longer term, the relationship between chip makers and the car industry will become closer as electric vehicles are more widely adopted and features such as assisted and autonomous driving develop, requiring more advanced chips.
But, in the short term, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time it takes to deliver a microcontroller has doubled to 26 weeks and shortages will only bottom out in March.
That puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. European chip industry executives and analysts agree that supply will not catch up with demand until later in the year.
Chip shortages are having a “snowball effect” as auto makers idle some capacity to prioritize building profitable models, said Anwar at Strategy Analytics, who forecasts a drop in car production in Europe and North America of 5%-10% in 2021.
The head of Franco-Italian chipmaker STMicroelectronics, Jean-Marc Chery, forecasts capacity constraints will affect carmakers until mid-year.
“Up to the end of the second quarter, the industry will have to manage at the lean inventory level,” Chery told a recent Goldman Sachs conference.
(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; Additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; Editing by Susan Fenton)
Aussie and sterling hit multi-year highs on recovery bets
By Tommy Wilkes
LONDON (Reuters) – The Australian dollar rose to near a three-year high and the British pound scaled $1.40 for the first time since 2018 on optimism about economic rebounds in the two countries and after the U.S. dollar was knocked by disappointing jobs data.
The U.S. currency had been rising in recent days as a jump in Treasury yields on the back of the so-called reflation trade drew investors. But an unexpected increase in U.S. weekly jobless claims soured the economic outlook and sent the dollar lower overnight.
On Friday it traded down 0.3% against a basket of currencies, with the dollar index at 90.309.
The Aussie rose 0.8% to $0.784, its highest since March 2018. The currency, which is closely linked to commodity prices and the outlook for global growth, has been helped by a recent rally in commodity prices.
The New Zealand dollar also gained, and was not far off a more than two-year high, while the Canadian dollar rose too.
Sterling rose to $1.4009 on Friday, an almost three-year high amid Britain’s aggressive vaccination programme.
Given the size of Britain’s vital services sector, analysts say the faster it can reopen the economy, the better for the currency. Sterling was also helped by better-than-expected purchasing managers index flash survey data for February.
The U.S. dollar has been weighed down by a string of soft labour data, even as other indicators have shown resilience, and as President Joe Biden’s pandemic relief efforts take shape, including a proposed $1.9 trillion spending package.
Despite the recent rise in U.S. yields, many analysts think they won’t climb too much higher, limiting the benefit for the dollar.
“Our view remains that the Fed will hold the line and remain very cautious about tapering asset purchases. We think it will keep communicating that tightening is very far off, which should dampen pro-dollar sentiment,” said UBS Global Wealth Management strategist Gaétan Peroux and analyst Tilmann Kolb.
ING analysts said “the rise in rates will be self-regulating, meaning the dollar need not correct too much higher”.
They see the greenback index trading down to the 90.10 to 91.05 range.
The euro rose 0.4% to $1.2134. The single currency showed little reaction to purchasing manager index data, which showed a slowdown in business activity in February. However, factories had their busiest month in three years, buoying sentiment.
The dollar bought 105.39 yen, down 0.3% and a continued retreat from the five-month high of 106.225 reached Wednesday.
(Editing by Hugh Lawson and Pravin Char)
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