Concerns for the US market

The rise of the Canadian dollar in relation to that of Uncle Sam has been truly spectacular over the past five years. In 2002, the exchange rate for US$1.00 was CN$1.57 (average annual rate). For many years, the exchange rate was one of the incentives used to attract our neighbours from the south with slogans like “Stretch your dollar!” Clearly, the dollar’s sudden parity is of great concern, given that stakeholders across the board are looking for ways to stimulate this declining market, so key to the health of our tourism industry.

Since 2002, a record year for the number of American tourists in Canada, the numbers have been falling steadily, apart from a brief respite in 2004. And yet, is the exchange rate truly the prime culprit? Have we overestimated its influence on the travel behaviour of Americans?

The situation elsewhere

To better understand and put into perspective how the exchange rate truly affects the travel decisions of Americans, we have compared changes in the value of the loonie with those of other currencies (see Figure 1). We have examined fluctuations in the US dollar since 1995 in relation to the Canadian dollar, the euro, the Mexican peso and the Japanese yen. At the same time, we have charted the annual number of US citizen international departures to Canada, Mexico and overseas. To make the data comparable, we have established 1995 as the reference year, with an index of 100. The lines in the graph below illustrate the increases and decreases noted in relation to the reference year.

This graph shows the decline of the US dollar in relation to the Canadian dollar (red line) is much more dramatic than the drop in the number of American tourists to Canada (broken red line). The departures in question refer to stays of one night or more, as day trips have, in fact. recently dropped more precipitously.

Venturing further afield

It is a mistake to believe Americans no longer travel due to a combination of factors like a weak currency, security concerns, a turning inward, etc. The line tracking the number of Americans travelling overseas (broken blue line) eloquently shows that Americans are more interested than ever in discovering new destinations. For example, according to a survey of AAA travel agencies, reservations for US travellers to Eastern Europe jumped 55% in the summer of 2007.

Though there was certainly a temporary drop in the period immediately following 9/11, interest in far-flung destinations rebounded as of 2003. In fact, the euro is the most relevant currency in the analysis of how exchange rates influence US travel abroad (though we have included the yen for information purposes). Like that of the Canadian dollar, the euro’s value has appreciated significantly (dark blue line) vis-à-vis the US dollar since 2001. And yet, during the same period, the number of international departures from the US increased dramatically.

The example of Mexico

Mexico is a very interesting case because its geographic proximity to the US is similar to that of Canada. Unlike the Canadian dollar, the Mexican peso has been falling steadily in value against the US dollar since 1995 (green line). However, this growing purchasing power has not affected the decision to travel to Mexico, with the number of US tourists to the country remaining relatively flat (broken green line).

A closer look at two other indicators

A basic notion in economics is the idea of “All other things being equal.” This is often used as a premise when analyzing economic phenomena. However, in real life, all other things are never equal, a caveat that must be kept in mind when referring to the analytical model presented in Figure 1.

The travel intentions of citizens are often tied to their country’s economic performance. For this reason, we felt it was interesting to compare the change in the number of American tourists travelling to Canada and overseas with two other economic vectors: the level of personal consumer spending (purple line) and the price of gas (yellow line).

Without doubt, skyrocketing gas prices do nothing to encourage proximity tourism among Americans who usually travel to Canada by car. Over the past few years, the drop in the number of these travellers has been much more pronounced than the decrease in air travellers.

The change in US personal consumer spending is another interesting indicator of Americans’ ability and desire to spend. In fact, the graph shows that the significant increase in international departures is more or less in step with the spending indicator. Though our analysis may not be truly scientific, it does illustrate that Americans’ travel interests are evolving to the detriment of Canada.

Better understand the impact

Surveys show that the exchange rate can influence travel intentions, particularly among certain customer segments. When it comes to international travel, Americans demonstrate a lower sensitivity to currency fluctuations than Canadians.

Certain outside factors can enhance the potential impact of currency fluctuations. One such factor in particular is the media coverage lavished on the phenomenon; it would seem the Canadian media is more interested than the American media in the rise of our dollar.

It is also true that although Americans may not be very aware or influenced by the loss of their purchasing power, they definitely feel it once they reach their destination. The firm Moneris Solutions has studied US credit and bank card transactions at Canadian merchants. Total transactions in US dollars dropped in July and August 2007 compared to the same period in 2006.

This study did not take into account the number of visitors involved. Nonetheless, the numbers do indicate that spending budgets have dropped in a greater proportion than the number of American tourists. Other factors like falling room prices in 2007 also had an affect on the expenditure base. The study reveals the sectors most severely affected: specialized retailers (-35%), campgrounds and trailer parks (-22%), public golf courses (-14%), hotel reservations (-13%), bus travel (-13%) and restaurants (-8%)

A major challenge

Canada’s current difficulty recovering its share of the American market is deep-rooted and not due solely to economic factors. Other studies have reached the same conclusion: Americans no longer find Canada as attractive as they once did and would prefer to set their sights on new destinations. An unfavourable exchange rate and high gas prices are merely additions to the list of deterrents, particularly when it comes to proximity tourism. Now that our currency has reached parity, we must use innovation and an enriched tourism supply to change their minds!

Sources:
- Montet, Virginie. “Les touristes américains découvrent l’Europe de l’Est,” La Presse, September 26, 2007.
- Office of Travel & Tourism Industries.
- Turner, Riva. “US Spending in Canada Sees Significant Decline,” Moneris Solutions [www.moneris.com], September 24, 2007.
- US Census Bureau.

• Climate of uncertainty
  The political, economic, climatic and health crises of the past few years have shown us that the travel industry, particularly the airline sector, can become very vulnerable and that no destination is immune from these threats.
• Rising oil prices
  More gas price hikes are expected in the next few years. Since the price of oil affects tourism-based businesses in myriad ways, travel costs will rise. This situation, coupled with risk factors, could lead to an increase in intra-regional travel. Poorer countries will be hurt by higher transportation costs and require special assistance.
• Security procedures to facilitate travel
  A country’s methods of providing security and protection for travellers play an important role in its position in the global tourism marketplace. In the coming years, these methods should be harmonized.
• Increased wealth in both existing and emerging markets
  Economic prosperity drives tourism growth. Existing markets will continue to increase their wealth. Among emerging markets, China and India will experience the most growth. Experts anticipate problems due to overcrowded airline routes.
• Development of both multilateralism and regionalism
  South-South alliances will develop and create more equitable relations. The current trend towards political and economic consolidation in major global regions will restructure the overall globalization movement. Asia will become an economic centre to watch. As a result, tourism, as well as transportation structures and costs, will be profoundly affected.
• Technology in the forefront
  Whether we are talking about developments in communication, the convergence of the Internet, cell phones and television or the rollout of new aircraft models, technology will continue to play a primary role in the evolution of the tourism industry.
• Demographic changes
  Concentrated urban populations and family/work dynamics continue to modify travel behaviour. The populations of large industrialized countries are aging, meaning that more baby boomers will have the time and money to travel. However, some experts have reservations about the amount of discretionary income available to retirees for travel.
• Increased consumer power, thanks to the Internet
  When it comes to accessing information, prices and reservations, the centre of power has shifted from tourism professionals to travellers themselves. Consumers are very comfortable with the Internet and the decisions it enables them to make.
• Improved quality of life as a travel incentive
  Travel is seen as an element that can help improve one’s quality of life, whether it is used for adventure and discovery, personal growth, relaxation or to get a new lease on life.
• Heightened competition
  In an attempt to stimulate economic growth, every city, region and country will be looking for a piece of the tourism pie, creating a context in which branding strategies are key.
• Promotional strategies involving public-private partnerships
  These types of partnerships are especially common in countries with federal or highly decentralized political systems.
• Ongoing mergers and acquisitions
  The hotel industry, airlines, distribution network and tour operators will continue their trend towards consolidation.
• Infrastructure deficiencies
  When it comes to infrastructure, the major Western countries lack the planning needed to respond to the coming international growth. It requires several years’ lead time to expand airports and build more hotels.

• Booming products
  Green tourism, spa tourism and health tourism (surgery and convalescence) are becoming increasingly popular. Although these are examples of segmentation and specialization, mass tourism is in no danger of disappearing.

Flirting with China and India

Even though China and India are enormous potential markets, there is a long list of countries competing for their business. Over 170 destinations are using their charms to attract Chinese and Indian travellers. Despite these efforts, travellers from emerging markets often follow the same pattern as they start to venture outside their country. They begin by traveling in groups and are most likely to visit neighbouring countries. Afterwards, Europe and North America (particularly the West Coast) are added to the list of destinations and the number of individual travellers increases.

Not everyone behaves the same, however. Chinese travellers like to feel safe by finding people who speak their language and can provide familiar food. As a result, they will be attracted to foreign countries that boast major Chinese communities. As for travelers from India, their travel experiences have made them more likely to travel alone, anywhere in the world.

All the same, those who wish to appeal to these travellers are well-advised to get busy.

Tourism in general likely to continue its upward climb

If we look at the past fifty years or so, although its growth curve may have had a few blips, tourism is not ready to collapse. And yet, even though international demand is expected to grow by 4.2% annually, there are also more and more regions vying for travellers.

Sources:
- Baumgarten, Jean-Claude. President of the World Travel & Tourism Council (WTTC) and a guest lecturer for the Cercle de tourisme du Québec, April 20, 2006.
- Désiront, André. Interview with Jean-Claude Baumgarten following his remarks to the Cercle de tourisme du Québec, April 20, 2006.
- Frangialli, Francesco. “Défis pour un nouveau millénaire,” Le Devoir, April 1 and 2, 2006.
- Sarrasin, Bruno. “Temps de ruptures et continuités,” Le Devoir, April 1 and 2, 2006.

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