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Your Money > Travel Finances Articles > Hidden holiday costs
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By Richard Evans
Unfortunately, it's not that simple. A bill demanding that you pay extra could drop through the letter box at any time up to 30 days before departure. And the right of holiday firms to impose these "surcharges" is not just theoretical - cruise company Noble Caledonia and Cox & Kings, the long-established tour operator, are among the companies to have levied them on some of their holidays this year. Both said currency movements had forced them to come back and ask customers for more. Why does the falling pound affect me? The pound has had a terrible time recently - it has dropped from a peak of over $2 against the American currency to about $1.50 now, while against the euro, it has fallen from about €1.50 a couple of years ago to €1.08. Last week the newspapers reported that £100 would only get you just €97 after commission costs are taken into account. What is worrying is that the companies who imposed holiday surcharges did so several months ago, when sterling was considerably stronger than it is now. A tour operator taking holidaymakers to Spain, say, will almost certainly pay for its accommodation in the local currency, in this case the euro. But if sterling loses ground against that currency, the company needs more pounds to buy the euros needed to pay the owner of the accommodation. If it has fixed the price it charges its customers - in pounds - it risks making a loss on every holiday it sells. As a result, holiday companies often include a clause in their terms and conditions reserving the right to impose surcharges if currencies move against them or the price of aviation fuel shoots up, for example. They are not allowed to levy these extra charges if they have not warned customers of the possibility in the terms and conditions. There are other rules they must obey when imposing surcharges. If the extra amount is more than 10 per cent of the original sum quoted, the customer has the right to cancel without penalty. If, however, the surcharge is less than this, the holidaymaker must pay it or risk losing his deposit. The tour operator must also absorb the first 2 per cent of any extra costs and must not impose surcharges within 30 days of the departure date. Members of Abta, the travel agents' and tour operators' association, have to inform the organisation of their intention to impose surcharges. How to find out if you will be asked to fork out So how can you find out if your holiday company intends to levy these charges? The Abta website has a list at www.abta.com/consumer-services/members_currently_surcharging. Abta will also give you advice if you want to question the invoice for the surcharges, a spokeswoman says. Given that sterling has weakened further since this year's surcharges were imposed, it's a fair bet that more are on the way. While the big tour operators often "hedge" their exposure to fluctuations in currencies and fuel costs, smaller ones are less likely to - and no hedge lasts for ever. If the pound fails to recover, there could be pressure on the holiday companies to raise their brochure prices as well, although competitive pressures amid an economic slowdown may work in the other direction. Thomas Cook, for example, said earlier this month: "We are negotiating with suppliers to ensure that accommodation costs are no higher than last year's levels despite currency movements … We have hedged 98 per cent of our dollar and 96 per cent of our euro requirements for winter 08/09 and summer 09." Where can you still go on the cheap? If you want to be sure of a cheap holiday next year, look at countries whose currencies have not risen significantly against the pound. Or try Iceland, whose currency has collapsed in the wake of its banking crisis. The pound has actually appreciated against the Icelandic kronur by about 25 per cent since January 2007, so holidays to the island tend to be good value for British holidaymakers at the moment. Against the Turkish lira, meanwhile, the pound has fallen by about 16 per cent since the beginning of 2007 - a less drastic decline than against the euro or dollar. Who else is affected by sterling's weakness? Expat pensioners. Another group to suffer severely from sterling's fall against other currencies are British pensioners living abroad. They receive a fixed amount in pounds - the basic state pension for a couple is £628 a month - but this has to converted into local currency for them to spend on their daily essentials. In January 2007 £628 yielded €961, according to HiFX, a currency broker, whereas it now buys just €716 - a fall of €245 a month. Overseas property owners. Anyone thinking of buying a second home in a country that uses the single currency will need more pounds to buy the euros required to complete the purchase, although property prices are falling in many countries, such as Spain. Those who already own a foreign property will, however, benefit if they repatriate their rental income or the proceeds of a sale, as their euros will buy more pounds. Any mortgage denominated in the single currency, on the other hand, will have got bigger in sterling terms, and people who meet their overseas mortgage repayments from sterling-denominated income will be paying more, disregarding any falls in interest rates. How did we get here - and will it get worse? "Part of the reason for the drop in sterling is the prospect of very low interest rates in Britain of 1 per cent or even zero, which reduces the incentive to hold sterling assets," says Vicky Redwood of Capital Economics, the consultancy. "So does the prospect of a deep recession in the UK." With sterling seeming to hit a new low every day at the moment, where will it find its floor? "The pound may fall a bit further but I suspect that the bulk of the adjustment is now over," Redwood adds. "Expectations for the economy and interest rates have already fallen a long way and fundamental valuation measures suggest that sterling is probably now 'fairly' valued or a bit cheap. "What's more, with economies slowing and interest rates falling everywhere, it is not clear which currencies the pound would fall significantly further against." How will a weak pound affect the economy? A fall in the value of the currency is not automatically a bad thing for economies. As Ms Redwood puts it: "We have long argued that a sharp fall in the pound was required to rebalance the economy away from its excessive dependence on domestic demand and the consumer sector in particular and back towards exports and the corporate sector." The drop in sterling does not guarantee that this will happen immediately, she says, as much will rest on the strength of overseas demand, which remains very weak. "Nonetheless, as and when the global economy starts to recover, there is now at least a chance of a period of well balanced, export-led growth like that seen in the mid 1990s after the pound left the Exchange Rate Mechanism in 1992." One concern is that a falling currency can boost inflation, as imports cost more. But Ms Redwood says: "The inflationary effects are likely to be fairly muted in the current economic environment. Retailers will have to absorb the higher import costs into their profit margins, given that consumer demand is so weak." In the face of such gloomy evidence, it is all too tempting to pack you bags and head for sunnier climes. Just be sure to check the small print before you do. Useful links: |
Have you booked your next holiday yet? If you have, you no doubt think that the price in the brochure is the final price - especially if you have already paid in full.
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