Essay on The Fluctuation Of Exchange Rate Will Affect Travel Agency

Essay on The Fluctuation Of Exchange Rate Will Affect Travel Agency

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To further understand how and why the fluctuation of exchange rate will affect travel agency, in this section, the report will apply those three economic principles mentioned above to the issue.
As aforementioned, there are three market segments in travel agency industry, however, this analysis will focus only on outbound tourism which is the main stream of revenue for the industry. In light of above analysis of the principle and factors influencing demand, exchange rate can be classified as price in the short-run. Travel prices including the price of transportation and the prices of goods and services consumed at the destinations (Dwyer et al., 2016), will rise significantly, thus, lead to higher price of travel agency service. Classified as non-essential goods or services, tourism demand in generally is elastic and highly sensitive to the change in price (Dwyer et al., 2010). Hence, in this case, the quantity demanded will decrease, causing a movement along the demand curve.
In modelling outbound tourism from Australia, price competiveness has been used as an effective proxy for price and exchange rate is one of the key determinants in price competitiveness of destination (Dwyer et al., 2002; Dwyer et al., 2016). Tourism is an industry that is highly influenced by price, destinations with a high price competitiveness will certainly attract more tourists (Dwyer, Forsyth & Rao, 2002). When the exchange rate of Australian dollar is low, it will cost Australians more than before when they are travelling abroad, causing the overall price competitiveness of foreign destinations to decrease. The perception of a broad destination is expensive will more or less halt people from travelling there to seek for other domestic alternatives as...

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...ns, hence, it is not easy for firms to retain their customers. For example, when Australian dollar depreciates, it will generally cost the Australian more to travel abroad, at this situation, firms that can provide the cheapest travel package will certainly attract more customers. For big firms such as Flight Centre, they can achieve a relatively low price and make a profit at the same time through economy of scale, therefore lure the customers from other travel agencies especially small ones.
This section has identified how the exchange rate fluctuation acts as a price factor to influence demand and non-price factors including other products firms provide and future profit expectation. Meanwhile, the market structure of monopolistic competition allows firms to use cost leadership as product differentiation to attract more customers in case of falling exchange rate.

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