Top Dollar

Top Dollar

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The strong US dollar is having a significant impact on the European aviation market, which is both good and bad news depending on your position. What is clear is that understanding currency fluctuations and knowing how to benefit from them is more important than ever. P1 asks the experts.

Currency prices are in a constant state of flux and, with an increasingly global economy, whether it is businesses unwilling to operate in a particular country, difficulties with price stability or consumers having less choice, these fluctuations can have considerable effects on both large and small businesses.

According to the quarterly Duke University/CFO Magazine Global Business Outlook Survey, released 11 March, over the past six months the US dollar has appreciated against most major currencies. The strong dollar has hurt US exporters, with approximately two-thirds of firms with at least a quarter of their total sales overseas noting a negative impact. Nearly one in four of these big exporters say they have reduced capital spending plans due to the strong dollar.

In the survey, Campbell R. Harvey, professor at Duke University’s Fuqua School of Business and a founding director of the survey highlighted the volatility in the market: “We are in the midst of an ugly contest to see whether the Eurozone, Japan or Canada can depreciate the most against the US dollar, and China is probably next.”

These unstable currency fluctuations are particularly important for aviation businesses where transactions are primarily made in US dollars. Businesses based in countries such as the UK need to convert their earnings to sterling in order to fulfil operational costs on home ground.

In response to the risks the industry is facing, Smart Currency Business, a London-based international payment specialist, has launched a service dedicated to handling foreign exchange for the business aviation community. The division aims to use its expertise in understanding the international currency landscape of the aviation market to mitigate financial losses during the currency exchange process.

The US dollar has soared against the Euro in the last six months
The US dollar has soared against the Euro in the last six months

Heading up the aviation division, as well as the corporate sales team is business aviation specialist, Alex Bennett: “Having worked with a number of leading Business Aviation companies since inception six years ago we noted that the sector has its own unique requirements and there was a growing demand for our specific knowledge,” said Bennett.

The dedicated division will work closely with finance directors, offering a clear line of contact to ensure the full implications of currency conversions are fully understood, and will work to alleviate risks associated with currency transactions, which can significantly minimise losses.

“The minute money is exchanged is the moment that there is potential exposure to market fluctuations. With its regulatory complexities and financial mazes we aim to use our know-how to support the Business Aviation market as it begins to show growth again after the recent economic challenges,” says Bennett.

Alex Bennett
Alex Bennett

“Most aviation companies deal with international trade, which is typically billed in US dollars, so it is more important now than ever that aviation companies address the impact of currency costs on their bottom line.”

Businesses that fail to consider the full implications of currency fluctuations put themselves at risk of suffering large financial losses. Over the past 12 month the US dollar has strengthened significantly, and the euro has worsened so buyers in the Eurozone will find that aircraft, usually priced in US dollars, are more expensive per euro. The sterling has weakened against the US dollar on the whole, and strengthened against the euro.

The weaker sterling will come as a relief for UK aviation businesses selling abroad as they will tend to receive payments in US dollars. “A strong sterling is unfavourable for UK companies that charge for products and services in foreign currencies, as this means that there is less income when converted back to sterling, due to losses caused by sterling strength. Sterling strength in 2014 meant unfavourable effects on profits for companies like BAE Systems and Rolls Royce,” Bennett explained.

British_Airways_Airbus_A380-841_F-WWSK_PAS_2013_03_Trent_970_engine

Fluctuations in currency can also have a tremendous impact on aircraft pricing strategies and purchasing. An unfavourable currency rate could significantly alter the income, which a company receives for selling an aircraft, if they keep it at the current price.

“If, for example, a UK business is selling a private jet for £10million, it could earn $1.48million given a sterling-US dollar exchange rate of 1.48. If US dollar strengthens to, say, $1.58 against sterling, that same aircraft would bring in £1.58million if the seller adjusts the price to remain at the equivalent to £10million,” explains Bennett.

“In reality, however, it isn’t easy to sell an aircraft if you’re charging more for it, so the business may have to still sell it at the original price of $14.8million, which would mean that the UK company receives under £9.4million on an aircraft that they’d ideally want to sell for £10million – that is almost 10% less income than desired in this case. This figure could be less than 10% – or even more, depending on the currency fluctuations.”

To see how fluctuations play into today’s market, you need only to look to the current situation across Europe where American buyers are taking advantage of the region’s sinking currency and strong US dollar.

In a report by Bloomberg, Kevin McCutcheon, founder of Flight Solutions, said that due to slow growth in Europe he has bought six aircraft to resell in the US and is negotiating for a seventh, in less than two years. “The US has a stronger economy and a strengthening dollar,” McCutcheon said. ‘‘That all provides for more opportunity for guys like me. Thanks to the strong dollar, American buyers pay about 25 percent less for a used jet in Europe than one in the US.”

According to data from Flight Solutions the average asking price for second hand private jets fell to $4.5million in 2014, which is 10.4% less than in 2013 and of the 48 European used-jets sold between December and February, nearly half were bought by US buyers.

“The euro is currently trading at its weakest levels against the US dollar in around 13 years. Given that most aviation companies deal in US dollars, a stronger dollar is good news for the European market,” Bennett said.

“Given that the dollar is also the strongest it has been against sterling in the past five years, UK and European businesses that are repatriating the profits back to sterling will reap the benefits from getting more in pound sterling per dollar.”

However, Bennett warns that the strong dollar has a flipside for UK and European aviation companies as they will now have to spend more on fuel, given that oil is priced in US dollars. Clients might also find that they wont immediately see the effects of the savings:

“It is important to note that, given the recent fall in commodity prices, it might be expected that aviation companies can start passing on the related savings to clients. In reality, many aviation businesses hedge their currency and oil exposures more than a year forward. As a result, it is when these contracts come to maturity that clients will start seeing the effects of the drop in oil prices.”

Currency flows are complex within the aviation industry which makes it all the more important that they act to have some form of protection from currency risk, money and time lost in poorly timed currency conversions could have a major impact on the company and have consequences on the running of other aspects of operations such as expanding or generating new business. As Bennett advises, companies need to plan ahead and ensure they have a clear strategy in place:

“I would urge business aviation companies to fully review the impact of unfavourable currency costs on their bottom line. Aviation companies need to have strategies in place to mitigate risk related to currency market fluctuations, such as by monitoring markets constantly, and setting a budget rate.”

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