ASAC 2002 Tania Spoljaric-Sherwood Winnipeg, Manitoba Stephen ...

ASAC 2002
Winnipeg, Manitoba
Tania Spoljaric-Sherwood
Stephen Gismondi
School of Hotel and Food Administration
University of Guelph
A PRELIMINARY EMPIRICAL STUDY OF ONTARIO TRAVEL TRENDS TO THE U.S. SOUTH
ATLANTIC FROM 1990 TO 1998 AND CANADIAN/U.S. EXCHANGE RATES
This empirical study provides useful information for both Canadian and
American Travel and Tourism Industries and illustrates to what extent currency
exchange rates may have influenced Canadian travel trends to the U.S. South
Atlantic region. These results provide evidence to suggest that U.S. tourism
stakeholders should develop and implement incentive programs for Canadian
tourism to the U.S. or that they re-examine current Canadian target market
strategies altogether, given existing Ontario / U.S. South Atlantic travel trends.
Introduction
The South Atlantic region of the U.S. includes the states of Virginia, North and South
Carolina, Georgia, and Florida. This region has traditionally been an attractive and popular
destination for Ontario vacationers due to its warm weather, sandy beaches, and exciting
nightlife. Accustomed to long and cold winters in addition to variable short summers, many
Canadians have traditionally chosen to plan their vacations south of the border in this region. The
Canadian/U.S. exchange rate (exchange rate) has continued however, to broaden since September
1990, when the exchange rate was 1.15 (Bank of Canada, 2001). The result of this has had
obvious implications for Ontario travellers vacationing to the U.S. South Atlantic region who
eight years later in September 1998, had to face an exchange rate of 1.52 (Bank of Canada, 2001).
Through the use of the Statistics Canada International Travel Survey dataset, this paper
develops indicators and provides evidence to confirm existing studies that a weakening Canadian
dollar has negatively impacted total person visits made by Ontario travellers to the U.S. South
Atlantic region from 1990 to 1998. These results support McCool’s work (1994) that suggests
increased exchange rate has resulted in decreased total spending by Ontario travellers. Regression
analysis follows resulting in two models that determine the outflow of Canadian currency from
Ontario for use in tourist expenditures in the U.S. South Atlantic region and the inflow of U.S.
currency to businesses in the U.S. South Atlantic region expended by Ontario tourists as a
function of exchange rate. In summary, this study addresses the following issues:
$ Definition of peak travel period indicators including determination of frequency of
Ontario travel to the South Atlantic region of the U.S. from 1990 to 1998 for the peak
travel months of January, February, March, April, and May
$ Existence of a linear relationship between exchange rates and travel indicators
$ Comments on the impact of Ontario tourist accounts to the U.S. South Atlantic as a
function of exchange rate.
$ Comments on the need for U.S. South Atlantic businesses reliant on Canadian tourism
accounts to develop travel incentive packages to create additional value for customers or
to formulate new target market strategies away from the traditional Canadian focus.
In the 1980s and early 1990s, the United States was a popular and viable tourist
destination for its Canadian neighbours. A decrease in Canadian tourism to the United States
however, began to occur in the early 1990s and continues to persist present day. The articles
discussed below support a common view that a decline in Canadian tourism to the United States
has indeed occurred over the past decade primarily due to the weakening value of the Canadian
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dollar compared with that of the American dollar. Evidence exists to support the idea that
exchange rate is a key factor in decisions that Canadians make when planning vacations to the
United States. For the sake of brevity, only a small set of articles are discussed. But it’s
important to point out that there exists an abundance of information in this area.
Chadee and Mieczkowski (1987) discussed how the Canadian tourism industry
experienced slow growth when the Canadian dollar depreciated in value by approximately 35%
between 1976 and 1985. In their study, Chadee and Mieczkowski stated the main determinants of
tourism demand as price, income, availability of substitute goods, and exchange rate. In addition,
they further suggested that the depreciation of the exchange rate has had positive influences on
the Canadian tourism industry.
Di Matteo and Di Matteo (1993) also studied Canadian travel expenditures to the United
States on a quarterly basis over the years 1979 through 1989. They suggested that both real per
capita same day trips and one or more night trip expenditures were positively and significantly
related to the real exchange rate expressed as Canadian dollars per U.S. dollar. In their regression
analysis study, Di Matteo and Di Matteo suggested that one or more night automobile trip
expenditures were positively and significantly related to exchange rate based expenditures. In
addition, they suggested that same day automobile trip expenditures that could be taken as a
proxy for cross-border shopping exhibited a real exchange rate elasticity of –2.31%.
The question of what emphasis hospitality business owners and operators should place on
fluctuating exchange rates may appropriately be considered at this point. According to Wilson
(1992), foreign currency exchange rate fluctuations could result in adverse changes upon balance
sheets, reported profit and loss, cash flows, and the cost of new asset purchases, unless managed
properly. Wilson further indicated that to maximize revenue, hotels might have to re-consider
yield management systems, computer systems, and sales incentive programs.
In the late 1980s and early 1990s, several articles written during and after 1994, further
suggested that a decrease in Canadian tourism to the United States was the result of a weakening
Canadian dollar. According to the monthly average exchange rates provided by the Bank of
Canada (2001), the exchange rate increased to $1.318 in January 1994 up from $1.277 in January
1993, $1.156 in January 1992, and $1.156 in January 1991. These articles are: The Globe and
Mail (1994), McCool (1994), Crouch (1994), and Webber (2001).
Data and Methodology
Secondary data has been acquired from the Statistics Canada micro dataset entitled
“International Travel Survey- Canadian Resident Trips Abroad”. The dataset contains
information on the travel habits of Canadian residents travelling abroad. The original dataset
includes the results of 1,350,000 surveys conducted from 1990 to 1998 at Canadian/U.S. border
crossings, a randomized sample from a population estimated to be at least 100 times larger (Tri
University Data Resource, 2001). A subset of 3885 surveys were studied, according to the
constraints outlined in the following paragraph. All computations are performed using Statistical
Packages for the Social Sciences for Windows, V10.05. Daily exchange rates for the years 1990
through 1998 have been acquired from the Bank of Canada exchange rate database accessed
through the Tri University Data Resource Centre (2001).
A subset of data has been selected regarding Ontario travellers to the U.S. South Atlantic
region including the states of Virginia, North and South Carolina, Georgia, and Florida which has
been refined to account only for those individuals travelling to the U.S. South Atlantic region for
vacation purposes and residing in hotels and/or other paid accommodations. Following a
frequency analysis, the data was further refined to include only the five most frequently travelled
months in the year, according to the results illustrated in Table 1. These months were determined
to be January, February, March, April, and May. Note that individuals traveling from Ontario to
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the U.S. South Atlantic region for business-related or other non-vacation purposes have been
eliminated from the sample. The actual number of visits per person are not studied.
The data is analyzed in three distinct parts referred to as parts I, II, and III.
$ Part I is a frequency analysis based upon person-nights, across the entire sample, used to
help determine what time of year is most active for Ontario tourists, although any number
of measures, like total monthly spending, are just as useful.
$ Part II examines a set of four indicators 1) total spending, 2) total per person spending, 3)
total person nights and 4) total per person nights. These variables are defined below.
$ Part III investigates two models:
Model 1: y = mc + b + e, where y = total spending represented in Canadian
currency (per annum) and c = exchange rate (mean per annum). This model
attempts to measure Canadian currency leaving Ontario for use in tourist
expenditures in the U.S. South Atlantic region, as a function of exchange rate.
Model 2: y = mc + b + e, where y = total spending divided by exchange rate
represented in U.S. currency (per annum) and c = exchange rate (mean per
annum). This model attempts to measure the Canadian tourist impact in terms of
revenue generated by businesses in the U.S. South Atlantic region, as a function
of exchange rate.
The following variables are defined in this study.
$ Total spending: Total amount of money declared as ‘spent’ - often categorized on a per
annum basis. Canadian dollars.
$ Total per person spending: The mean value of money declared as ‘spent’ per person -
often categorized on a per annum basis. Canadian dollars.
$ Total person nights: Total number of nights declared as visiting the U.S. - often
categorized on a per annum basis.
$ Total per person nights: The mean value of nights declared as visiting the U.S. per person
- often categorized on a per annum basis.
$ Exchange: Exchange rates for the years 1990-1998 (Bank of Canada, 2001) Example:
1.40 means $1.40 Canadian = $1.00 U.S.
$ Canada (= Total Spending): Represents Canadian currency that will leave Ontario for use
in tourist expenditures (total spending) in the U.S. South Atlantic region - often
categorized on a per annum basis.
$ States: Represents the buying power of Ontario tourist expenditures (total spending
divided by exchange rate) in the U.S. South Atlantic region - often categorized on a per
annum basis.
Results
The five most frequent months for Ontario travel to the U.S. South Atlantic region are
January, February, March, April, and May, as inferred by Table 1 below. There are a variety of
reasons for making this particular choice and a future study is planned to investigate November -
May, a seven month period.
Recall that absolute counts regarding person nights, and all financial figures that follow
are based upon a restricted sample as outlined in the Data and Methodology section, five months
of each year and are estimated to be less than 1/100 th of the actual number of Ontario tourists
during the period 1990 through 1998. These figures are not indexed to inflation, although this is
planned in future studies. A set of indicators are now investigated, presented as graphs.
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Table 1
Part I - Percentage of Person Nights in the U.S. South Atlantic Region
Month Percent Month Percent Month Percent Month Percent
January 10.8 April 14.3 July 2.6 October 5.1
February 13.3 May 8.4 August 5.5 November 7.3
March 18.7 June 3.2 September 4.4 December 6.4
Figure 1
Part II - Total Spending (Canadian Currency) by Year
Figure 2
Part II -
Per Person
Spending
(Canadian
Currency)
Year
Total
by
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Figure 3
Part II - Total Person Nights by Year
Figure 4
Part II - Total Per Person Nights by Year
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A summary of the data prepared for linear regression is shown below in Table 2 and is
graphically illustrated in Figures 5 & 6 below. Recall that variable ‘Canada’ represents Canadian
currency that leaves Ontario for use in tourist expenditures (total spending) in the U.S. South
Atlantic region. Variable Canada was regressed against exchange rate independent of year, called
model 1. Recall that the variable ‘states’ represents the buying power of Ontario tourist
expenditures (total spending divided by exchange) in the U.S. South Atlantic region. Total
spending divided by exchange (States) was regressed against exchange rate independent of year,
called model 2.
Table 2
Part III - Ontario Tourist Expenditures
Year Exchange Canada ($1,000s) States($1,000s)
1990 1.18 1264.00 1071.86
1991 1.15 1005.00 873.91
1992 1.18 715.00 605.93
1993 1.26 737.00 584.92
1994 1.35 215.00 159.26
1995 1.41 243.00 172.34
1996 1.37 391.00 285.40
1997 1.37 533.00 389.05
1998 1.43 319.00 223.08
Figures 5 & 6
Part III - Outflow/Inflow from/to Ontario to/from
U.S. South Atlantic Region (Canadian/U.S. Currency)
Figure 5 Figure 6
While the data points from Table 2 are joined together in Figures 5 and 6, this merely
suggests linear interpolation. The results of the regression analysis are shown below.
Model 1 is significant, p = 0.002, r 2 = 0.88, given by: total spending (per annum) = -
2949.4c + 4435.7. (Canada versus Exchange). Model 2 is significant, p = 0.001, r 2 = 0.90, given
by: total spending (per annum) = -2716.7c + 4015.9. (States versus Exchange)
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Note that regression coefficients for these models are computed based upon aggregated
per annum exchange rates rather than daily rates.
Discussion
Figure 1 suggests that total spending by Ontario tourists in the U.S. South Atlantic
decreased during the years 1990 through 1994, improved slightly from 1995 through 1997, and
dropped in 1998. These results may indicate that Ontario travellers spent less money per year in
the U.S. South Atlantic region from 1990 through 1994, during which time the difference in the
exchange rate began to increase. This result supports the study of Canadian travel expenditures to
the U.S. by DiMatteo and DiMatteo (1993), who suggest that same day trips and one or more
night automobile trip expenditures are positively and significantly related to exchange rate based
expenditures. Moreover, while Ontario travellers to the U.S. South Atlantic region spent more
each year from 1995 through 1998, total spending was less than it had been in the early 1990s.
Figure 2 suggests that the total per person spending of Ontario travellers increased in the
U.S. South Atlantic region during the years 1990 through 1998. This may imply that while the
sum of all spending by Ontario tourists has decreased in this region (Figure 1), those who are
coming to the area are spending more per annum. These results are consistent with another idea -
that individuals who are travelling to the U.S. South Atlantic region may be part of an affluent
demographic segment and as a result can afford to travel to the region despite large fluctuations in
the exchange rate. This brings into account the question of whether a vacation to the U.S. South
Atlantic region is an affordable trip to other Ontario demographic segments such as middle-class
salary earners when the exchange rate is minimal and if the same vacation package becomes a
luxury good when the exchange rate increases.
Figure 3 suggests that the total person nights of Ontario travellers in the U.S. South
Atlantic region decreased during the years 1990 through 1998. Notice the similar trend in the
results of this graph and those of total spending illustrated in Figure 1. Similarly, between the
years 1990 through 1994, total person nights spent in the region decreased, followed by a slight
increase between 1995 and 1997, and a drop again in 1998. These results may suggest that as the
comparative value of the Canadian/U.S. dollar broadened from 1990 through 1994, Ontario
travellers spent fewer overnight stays in the U.S. South Atlantic region, consistent with the above
noted trend. Although total person nights increased from 1995 through 1997, they were
considerably fewer than the region had experienced in the early 1990s.
In Figure 4, the total per person nights of Ontario travellers appears to decrease in the
U.S. South Atlantic region during the years 1991 through 1995. Total per person nights however,
appears to increase in 1996, more dramatically than a trend might seem to indicate in other graphs
depicting total spending, total per person spending, and total person nights. Overall it does not
appear that exchange rate has had a large effect on the length of time that Ontario travellers
stayed in the U.S. South Atlantic region, about three weeks. It appears as though Ontario
travellers to the U.S. South Atlantic region have continued to plan the same length of vacation,
despite the finding that fewer Ontario travellers are vacationing in the region.
Recall regression models Model 1 and Model 2. While these results are over-simplified,
and do not account for the variety of reasons that Canadians might vacation in the U.S. South
Atlantic region, these ideas should be further studied given such high degree of model fit. These
models may also be useful to help predict demand, assuming they are further developed. For
example, the U.S. South Atlantic region has traditionally been a popular vacation destination for
Canadians who have desired a warm climate with ocean and beaches in a familiar neighbouring
country. For this reason, targeting Canadian vacationers has traditionally been a viable strategy
for many U.S. businesses. These models may help provide insight to U.S. businesses that depend
upon Canadian tourists for generating a percentage of revenues because they illustrate a
capability to determine the inflow of U.S. currency to their businesses given a certain exchange
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ate. While these businesses are limited by knowledge of future exchange rates, they can
however study past and present trends in the economy and associated exchange rates to estimate
future exchange rates for use in forecasting measures or at least use the model to gain an
appreciation of Canadian sensitivity to exchange rates.
The following discussion now focuses on the need for U.S. South Atlantic region
businesses, which have traditionally targeted Canadian vacationers, to develop value-added travel
incentive packages to compensate for perceived lost value if exchange rate continues to increase.
In light of the unpredictability that exists with respect to exchange rate fluctuations, the need may
exist for some businesses to re-examine their target market strategies and consider other
international market groups who do not experience similar events with respect to exchange rates.
The increasing difference between the value of the Canadian and U.S. dollar has affected
Ontario travel accounts to the U.S. South Atlantic region since the early 1990s. In light of these
findings, one must consider the cost/benefit implications for U.S. businesses to continue their
traditional (and once successful) market objectives in acquiring and maintaining Ontario tourist
accounts. In the late 1980s and early 1990s, many U.S. businesses were able to accept Canadian
money at par (Flanagan, 1995). The difference between Canadian and U.S. currencies was small
and accordingly, U.S. businesses could absorb the incurred difference or increase the price of the
good to U.S. residents, resulting in both countries paying more for the product or service. With a
growing difference however, in the value of the two currencies since the early 1990s, ability to
offer U.S. goods and services at par has become an increasingly difficult feat for U.S. businesses.
Incentive package deals consisting of complete travel packages including transportation,
accommodation, activities, etc., as proposed by Flanagan (1995), attempt to provide Canadian
travellers with value-added incentives for travel. But the success of this approach depends upon
the perceived value of bundled products and actual costs of these products - an entire study of its
own. Exchange rate alone raises the question of value as perceived by the tourist. In the mind of
the Canadian traveller or any individual from a country who possesses a weaker currency than
that of the travel destination country, the value associated with pursuing a travel experience can
be related to the extra money paid in currency exchange to acquire a particular experience. In this
scenario, in order to capture Ontario travellers, they need to be convinced that they will aquire
greater value in the vacation experience to the U.S. than by travelling in Canada or elsewhere
where the currency exchange is minimal. Although most individuals may not analyze a travel
destination decision like the above example illustrates, this study might be viewed as evidence
that Ontario tourists indeed share this viewpoint and are no longer convinced that a U.S. South
Atlantic vacation offers sufficient value - sun and sandy beaches aside.
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References
Bank of Canada., Bank of Canada: Monthly Average Exchange Rates. 2001.
Available: http://www.bank-banque-canada.ca
Canadian Press Newswire, “Americans Flock to Canada in July”, Sept. 16, 1998.
Chadee, D., & Mieczkowski, Z., “An Empirical Analysis of the Effects of the Exchange Rate on
Canadian Tourism” Journal of Travel Research, 26(1), 1987.
Crouch, G., “Demand Elasticities for Short-Haul versus Long-Haul Tourism” Journal of Travel
Research, 33(2), 1994.
Di Matteo, R., & DiMatteo, L., “The Determinants of Expenditures by Canadian Visitors to the
United States” Journal of Travel Research, 31(4), 1993.
Flanagan, W., “Streeeetching It” Forbes 155(10), 1995.
Globe & Mail Metro Edition, “Sun Seekers Flee Canada” Toronto, Ontario, 1992, B1, B3.
McCool, S., “Issues in Tourism” Montana Business Quarterly, 32(1), 1994.
Strizzi, N., & Bailie, G., “The Evolution of Canada’s Travel Account” Journal of Travel
Research, 39(03), 2001.
Tri University Data Resource, International Travel Survey: Canadians to U.S. 1990-1999, 2001.
Available: http://tdr.uoguelph.ca
Webber, A., “Exchange Rate Volatility and Co integration in Tourism Demand” Journal of
Travel Research, 39(4), 2001.
Wilson, R. (1992). “International Acquisitions and Foreign Currency Exchange Risk
Management” Journal of Hospitality Financial Management, 2(1), 1992.
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