Euro's advance leads to margin decline

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NEW YORK -- Buoyed by a comparatively weak U.S. dollar, the euro has soared in value this year, and some peddlers of Europe product are feeling the pinch.

While travel agents and their clients, distracted by economic woes, terror threats and health scares, may not have clocked a negative "euro effect" on transatlantic travel, many tour operators aren't so lucky.

In fact, operators -- particularly smaller ones and those that published prices for 2003 last year or earlier, at better exchange rates -- are bearing the brunt of the euro's rise, whether their bookings are up or down.

For example, I.T.S. Tours in College Station, Texas, published a two-year Europe brochure for 2002-2003, with pricing, just after 9/11, according to Michael Barszap, president.

"We assumed we could absorb the difference if the euro fluctuated, but now it's about 25% higher," Barszap said. "We thought the euro might rise 3% to 5%; little did we know."

At press time, the euro -- common currency in 12 of the 15 members of the European Union -- was trading at $1.17, which was the high at which it debuted as a "virtual," nonpaper currency in 1999.

There was a time when the dollar was stronger: In October 2000, the euro was worth just $0.82, and when actual euro bills and coins hit the streets of Paris, Rome and Berlin on Jan. 1, 2002, the European currency had risen to only $0.89.

But it's been on an upward surge back to its opening price ever since, despite weak Europe economies, largely thanks to worse times in the U.S. and Japan.

In short, skittish investors are stocking up on euros instead of dollars and yen.

Analysts at Deutsche Bank Research in Frankfurt predict this "bandwagon" effect could lead to an overvalued euro eventually trading at up to $1.30.

Now U.S. operators -- especially those who sell traditionally less-expensive southern Europe destinations -- face a triple threat.

Triple ripple

First, the price transparency lent by a common currency has led to a leveling of prices across the "Eurozone," meaning costs have jumped in Italy and Spain to approach those in, say, the Netherlands and France.

That's affected Italy operators such as Dawn Bosco, president of Amelia International in Hicksville, N.Y.

"Compared with 16 months ago, there's been a major rise in hotel rates, and restaurant meals are more expensive," she said. "I'm sure tourists who buy vacation packages without meals are going to feel it."

That's because, secondly, the dollar's fall has eaten into U.S. buying power in Europe, bad news for the majority of operators that negotiate rates with suppliers in euros, rather than in greenbacks.

And third, some tour operators feel pressure to put already heavily discounted product on sale yet again, to convince travel-wary Americans to consider booking, further aggravating losses.

At Globus & Cosmos in Littleton, Colo., director of marketing Steve Born said the last thing the worldwide tour operator would consider is a price hike; in fact, the opposite is the case.

"Anytime we face currency changes, it's a cost to us," he said. "But we're offering additional incentives and discounts ... because the marketplace still needs a deal. We can't afford to be passive."

Of course, Globus & Cosmos, which sells 70 destinations worldwide, is better positioned than smaller, more-specialized competitors to absorb blows on the European front.

"We're not the victims of one particular market or currency," said Born.

The honor system

Most operators agree that passing on price hikes to consumers is a last resort, but Bosco of Amelia International -- which published a brochure featuring Italian product for all 2003 last November -- is finally considering such a move.

"We've been honoring our published prices, but we're seriously going to have to reconsider that for the second half of the year," said Bosco, adding that Amelia might have to raise its rates by 5% to 10% on fall departures to Italy.

And although bookings at Amelia are brisk, they're not enough to make up for losses, she said.

Barszap at I.T.S. Tours -- which is honoring those 2001 rates through Dec. 31 even though bookings are off 15% to 20% from "normal" years -- said he "can live with this until our next brochure comes out in August."

EuroBound in Los Angeles is getting the short end of the stick with group bookings, such as the imminent 80-person jaunt to France it contracted six months ago, but the operator -- like higher-end Abercrombie & Kent in Oak Brook, Ill. -- is honoring all agreed-upon prices.

"We're going to lose a bit of money on that transaction, but we'll eat the loss because it's a good incentives group and we know next year we'll get two or three of their tours," said Alfonso Barquin, national sales manager. "Would we really want to charge them extra now?"

Other operators are getting creative. Austria specialist Smolka Tours in Tinton Falls, N.J., sometimes tinkers with itineraries to reconcile bad exchange rates with promised pricing.

"We sometimes take one restaurant meal out or downgrade a hotel in one city to a lower category to make up the difference," said president Doris Percht Clark.

"Then agents don't have to go back to clients and tell them final payment is the 'x' amount, plus another $100."

Are prices right?

Now operators are left to wonder whether publishing prices in advance is a wise policy.

I.T.S.' Barszap said the agents he deals with expect printed rates to be a rough guide to cost, even though the bulk of their bookings are FIT, so prices will appear in his 2004 catalog.

And what about the fine print in those price disclaimers you find in the back of every tour operator brochure -- don't they help?

"Even though most operators have a disclaimer in their conditions, clients don't like to hear it -- though they know it's there," said Bosco.

There are other options: Luxury specialist JDB Associates in Alexandria, Va., prints all prices in euros, skirting exchange surprises.

And other operators are rethinking their publishing schedules, putting out smaller, thinner brochures more often or mailing out addenda with existing materials.

What hasn't happened yet, say operators, is a downturn in bookings specifically due to the poor exchange rate.

"I don't think the [strong] euro is a deterrent to travel," said Barszap of I.T.S. "Most Americans are not even aware of it; it's been camouflaged by other problems."

And United Vacations has not seen "any impact in regard to the rise of the euro," according to Rob Betz, director of marketing, thanks to "current affordable prices."

Smolka's Clark agreed, adding that if anything's keeping U.S. vacationers on this side of the Atlantic, it's the economy. "The exchange rate is not a factor," she said.

The European Travel Commission in New York is betting on that status quo, even if the euro continues to pummel the U.S. dollar.

Conrad van Tiggelen, director, North America at the Netherlands Board of Tourism, said the dollar never has significantly influenced U.S. arrivals in Europe.

"In the early 1990s, when the dollar was low, we saw more Americans visiting each year."

And operators' now-underpriced packages are shielding clients from exchange rates.

"We suggest people book though operators because they get a set package and won't have too many surprises when they see their credit card bills," said van Tiggelen.

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