Case Analysis - Voyages Soleil

Case Description1

Problem Explanation2

Alternative Solutions4

Evaluating Alternatives5

Alternative 1 - Do Nothing5

Alternative 2 - Hedge via forward contract6

Alternative 3 - Borrow CAD to invest in USD6

Recommendations6

References8

Case Description

Voyages Soleil (VS) is one of the seven tour operators in Quebec, Canada. The president of the company is Jacques Dupuis. Since 1975, it has been serving travelers in Quebec. The company had been leading in comparison to its competitors. It enjoyed a high reputation amongst its customers and clients as well as hoteliers. This can be proven by the fact that the company saw a sales growth rate of about 50% in the 1997-2001 period. The company had been serving clients in 8 destinations: French Caribbean (Martinique and Guadeloupe), Cuba, Costa Rica, Florida, Dominican Republic, Venezuela, Nicaragua, and Mexico. It had been serving over 35 hotels in these destinations. However, the 9/11 attacks in the United States led to an economic crash, which (due to obvious fear of travelling in customers) hit the travel & tourism industry badly (Makinen, 2011). Volumes decreased between 30 to 50%.

The company, however, faced a comparatively lesser decline (5%). Trips to USA after the 9/11 attacks decreased by 25%, although part of it was also due to the depreciation of the Canadian Dollar in terms of the US Dollar. Trips to Mexico decreased by 12% while those to Florida fell by 15%. Two of its six competitors went bankrupt; the others were barely struggling in order to survive. The company started recovering from the red in 2002. As it saw the progress, Dupuis reserved more rooms than the previous years for winter 2002-2003. This was to return back to the previous sales and volumes that were there before the 9/11 attacks.

The reservations were made on April 1, 2002, and the bill was a total of US$60 million. Canadian customers make their payments in Canadian Dollars but the US hotels do not accept foreign currency. This was a major problem as it exposed Voyages Soleil to foreign exchange risk. Any increase in the price of US Dollar would mean that the company's payables due increase.

In such a case, it is pertinent to review the stock market fluctuations in the recent past.

Source: Datastream

As shown, the Canadian Stock Market TSE Index had been swinging rapidly in 2001. This is an indicator of market volatility. Such a volatile market is highly unpredictable due to its inconsistent nature. This presents a threat that is certain.

Problem Explanation

Dupuis could lose the chance of earning an increase in profit by avoiding the risk. The profit also has a considerable likelihood to incur, since the company had been seeing growth since the end of 2001, and also the peak of the Index in July 2001. Also, the forecast for the next three months was a steady growth of 3%.

This presented Jacques Dipuis with a difficult decision to make: whether to take the risk of an increase in US Dollar and gain a high reward by earning a high margin, or to mitigate the risk of an ...