Five risk management essentials for the travel sector

A travel company can sell a holiday at an apparently healthy margin and still earn far less than expected when its overseas suppliers are paid. The problem is rarely one bad exchange rate. More often, it is the absence of clear rules between pricing the product, taking the booking and settling the cost.

That risk is visible in today’s headlines. UK travel demand remains resilient, but customers increasingly expect value and flexibility. Later bookings, geopolitical disruption and higher operating costs are also putting pressure on margins. EasyJet recently reported a 70% fall in quarterly profit after fuel costs rose and customers booked later, while Deloitte’s 2026 travel outlook describes robust demand alongside fragile confidence and changing consumer behaviour.

A good hedging policy does not try to predict sterling. It establishes how the business will protect its margin when markets move.

1. A complete view of the exposure

Start with the commercial reality: which currencies the business receives, which currencies it pays, when payments are due and how certain each amount is.

A tour operator might collect deposits in pounds months before paying hotels, ground handlers and transfer companies in euros. A long-haul specialist may have substantial US-dollar costs. Exposures should be separated into contracted payments, highly probable forecasts and less certain pipeline business.

This also helps identify natural offsets, such as euro income that can be matched against euro costs.

2. A budget rate and agreed risk tolerance

Every product should have an exchange-rate assumption behind its selling price. The policy should record that budget rate, the minimum acceptable margin and the amount of currency movement the business can absorb.

This turns foreign exchange risk into a commercial measure. A movement of a few cents may appear small, but across a large seasonal supplier payment it can remove much of the margin built into a package.

The policy should also recognise that covering every forecast immediately can be as problematic as leaving everything open. If bookings disappoint, the company may hold more currency than it needs.

3. Layered cover linked to booking confidence

Confirmed costs and forecast costs should not be treated identically. Contracted supplier payments can be protected more heavily, while anticipated requirements are covered gradually as booking confidence increases.

A business might secure an initial proportion when prices are launched, add further cover as deposits arrive and complete the programme as supplier-payment dates approach. The percentages should reflect its own booking curve, cancellation terms and seasonality.

That matters while booking windows are changing. Recent airline reporting suggests many customers are waiting until closer to departure, even though overall demand remains relatively strong. A policy based on last year’s booking pattern can therefore create an over- or under-hedged position.

4. Clear rules for the tools being used

The policy should state which instruments are permitted and what each is intended to achieve. Spot transactions meet immediate requirements. Forward contracts can secure a rate for a future payment. Options may provide protection while retaining some scope to benefit from favourable movements, although their structure and cost need to be understood.

The tool should always follow the exposure. Hedging should not become a market bet or an attempt to generate additional profit. Every transaction should link to an identifiable commercial requirement.

Cashflow matters too. Deposits, credit terms, collateral requirements and early drawdowns can affect liquidity even when the exchange-rate outcome is protected.

5. Governance, reporting and review

A policy is only useful when responsibilities are explicit. It should identify who prepares the exposure forecast, who approves transactions, who executes them and who checks that the hedge still matches the underlying requirement.

Management reporting should show exposure by currency and payment month, current cover, the protected rate, remaining risk and the effect on expected margin. Stress tests should model what happens if sterling moves sharply, bookings arrive later than planned or supplier costs change.

The policy should be reviewed at least annually and whenever the company changes its destinations, supplier terms, product mix or booking model.

Protecting margin through process

The travel sector’s current challenge is not necessarily weak demand. It is that healthy sales can coexist with rising costs and thinner margins. IATA’s latest outlook highlights severe pressure from fuel and wider operating expenses, while ABTA and Deloitte point to resilient demand but evolving travel patterns.

A hedging policy cannot remove uncertainty. It can stop currency decisions being made late, inconsistently or separately from pricing and cashflow.

For a travel business, that is what good looks like: margin protected by a repeatable process rather than a favourable market guess.