The revenue side of traditional payments, including from lucrative co-branded credit cards, must not be ignored and must be balanced against lowering payment costs.

Responding to this market feedback, we have put together the first dedicated Airline Payment Summit to take place in Toronto 9 - 10 April 2008. Our research for the Summit has uncovered many gems from a fast developing field and we would like to share some of them with you.

Please take a look at the research from the Federal Reserve Bank of Kansas, which has been looking into how the payment market has been developing in the U.S.

For a summary of the new, low cost, alternative payment providers (and this is not just about debit cards, but a whole new list of companies offering non credit card ways to pay), the research firm Celent has produced a report on new online payment providers. Their press release below contains a link to a white paper covering this issue in more detail.

UATP, a major innovator in this field, is saving its airline clients upwards of $200 million dollars a year, made even more important in these days of $100 oil. This research will give you insights into how your business could also benefit.

Finally, the payment experts at Cybersource have produced an excellent white paper with superb insights into innovative strategies in the payment field. There is a link on our site to the paper which as it is intended for a select audience requires registration. However, the information contained within the document is worth the couple of steps needed to sign up for it.

I hope that you will find the papers and information included here give you some insights into how you can drive your payment costs lower and your revenues higher. There will be even more insights at the Summit and I look forward to meeting you in Toronto!

Bankers reading about the airlines' woes should think twice before turning the page.
After labor and fuel, the passenger airline industry's largest expenses involve distribution costs. These are comprised of travel agency commissions, fees to global distribution systems such as Sabre and finally, the merchant discount rate paid to their banks.

Already, the airlines have effectively slashed their distribution costs through hard negotiations with travel agencies and the global distribution systems, yielding a 26 percent decrease in average annual distribution costs from 1999 to 2002, according to Edgar, Dunn & Company (EDC, Atlanta), a financial-services and payments consultancy.

Now, the airlines are targeting the estimated $1.5 billion it spends on accepting credit cards from its customers. "The airlines definitely have payments on their radar screens," says Pascal Burg, a San Francisco-based director at EDC. "They used to look at accepting cards and paying merchant fees as the cost of doing business, and now they're trying to proactively manage the cost associated with doing payments."

The first approach is for an airline to have a friendly chat with its affinity card co-brand partner. But that's often a difficult conversation to have, both for the bank and for the airline. "Traditionally, the co-brand relationships have been managed in the marketing department, while the acquiring merchant side has been handled through the corporate treasury," says Thad Peterson, also a director at EDC.

In the case of American Express (New York, $175 billion in assets), which also operates a travel agency, the relationship becomes even more complicated. Nevertheless, there are possibilities for common ground. Since the airlines can make a healthy profit by selling frequent flyer miles to the banks, it's in their interest to encourage the use of the co-brand card.

Similarly, the issuing banks depend on mileage rewards to retain their points-hungry customers, and could be willing to make a deal. "If the issuing bank is the same as the acquiring bank for the airlines, the acquiring bank might charge a lower merchant fee when the co-brand [card] is used," suggests Burg.

Other possibilities could include opt-in marketing programs through which airlines and banks could discover cross-sell opportunities between their respective customer bases. "You need to look at this holistically and strive for a win-win," observes Peterson.

Another approach is to optimize the payments mix by providing airline customers with alternate payment mechanisms.

On the consumer side, Continental Airlines and America West have joined the Bill Me Later Network, a service offered by CIT Bank, a Utah-based subsidiary of CIT Group (Livingston, N.J., $46.3 billion in assets). These transactions are routed outside of the traditional credit card networks, thus offering more advantageous terms to the airlines, if not to the customer. Also, British Airways has begun to accept debit cards online, again to reduce reliance on credit card transactions.

For corporate customers, Northwest Airlines plans to issue Universal Air Travel Plan (UATP) accounts, which are used as a payment mechanism for corporate travel. The benefit of UATP over bank charge cards is the ability for corporations to receive extremely detailed information about their employees' travel expenses, above and beyond what the card companies currently provide. Settlement occurs at the end of the month, between the corporations and all of the participating airlines.

High-Flying Payments: Key statistics:

Percentage of reported airline ticket sales paid for with a payment card = 83%
Estimated average fare = $500
Amount of estimated average fare paid to merchant bank = $12.50
Estimated annual cost of accepting payments by card = $1.5 billion
Source: Edgar, Dunn & Company, Airlines Reporting Corporation

Online Payment Providers: Disrupting the Status Quo
Report Published by Celent

Credit cards are the most popular means to pay for online goods and services, but alternative online payments will account for 26% of e-commerce volume by 2009.

A sea change is underway in the online payments world, with credit cards losing dominance as new payments options emerge. Credit cards accounted for over 90% of online payment volume in 2000, but will only account for a minority of e-commerce dollar volume by 2009. This shift will have significant implications for banks, merchants, and service providers supporting card-not-present risk for online merchants.

Today’s online payment options (such as PIN debit, alternative credit, email, and ACH consumer push) will also offer cross-channel solutions for merchants that operate in the physical and digital world, threatening the traditional brick-and-mortar turf of card issuers. The significantly enhanced consumer and merchant value propositions associated with the next wave of online payment options are making payments strategic assets that can contribute directly to a merchant’s top and bottom line growth if implemented and marketed appropriately.

"There is growing recognition among the online community that online payment alternatives to the credit and debit card can do far more than lower costs," says
Dan Schatt, senior analyst in Celent’s Banking group and author of the report. "They can serve as allies to merchants in their quest to convert more prospects into sales in a way that contributes positively to the customer experience and actually lowers risk. As merchants search for any edge that can increase loyalty and lower shopping cart abandonment, they will enlist new providers that can do more to increase their profitability."

In this report, Celent profiles alternative online payment companies and initiatives with the highest potential for growth and adoption. Celent also examines the alternative online payments market by providing a ranking relative to specific merchant and consumer criteria. The report also examines the positioning of specific payment providers and provides a glimpse as to how the US online payments market will evolve in the next few years.

UATP EXPANDS ASIA-PACIFIC REACH; ADDS KINGFISHER AIRLINES AS NEW MERCHANT - UATP Expands into Premium Indian Market

 

Washington, DC – Indian giant, Kingfisher Airlines, Mumbai, is the latest airline to join the UATP network as a new Merchant, effective immediately. To meet corporate customer demands, Kingfisher chose UATP as a form of payment while expanding its global corporate market share in the airline industry.
“Kingfisher’s success is based on offering the best service and experience possible,” said Dr. Vijay Mallya, chairman and CEO, Kingfisher Airlines Limited. “We are actively expanding our corporate client base and accepting UATP is a natural course of action to offer the corporate clients their preferred form of payment to gain market share.”

Kingfisher Airlines, recently awarded the Skytrax Excellence Award, and voted the “Best New Airline of the Year” within months of its launch offers unique opportunities for flyers. It is the only airline to offer premium first class service on domestic routes and offer special programs for its corporate flyers including dedicated relationship managers that offer solutions for corporate client needs.

“Kingfisher is quickly becoming a major player in the industry and has smartly positioned itself by accepting UATP to grow its corporate market share,” President and CEO, UATP, Ralph Kaiser stated. “The Indian market is one of the fastest growing arenas and Kingfisher is positioned to garner a large percentage of the corporate market share; UATP corporate clients will be able to profit through the Kingfisher – UATP relationship.”

Besides being the first and the only airline to offer in-flight entertainment on every seat in the domestic skies, Kingfisher Airlines is the only one to offer LIVE TV with 16 channels of live & exciting content. Kingfisher Airlines is the largest airline in India offering 570 flights a day with a fleet of 80 aircraft.

Source: UATP Press Release

Optimizing Airline Profits: Payment management strategies for airlines

by Dave Glaser VP Professional Services CyberSource Corporation

Every airline I’ve worked with is trying to shift more customers to direct sales channels in an effort to lower their distribution costs and increase revenue. In doing so, more emphasis is being placed on payment management, particularly in four key areas:

Adding new payment types

Automating the booking review process (fraud management)

Simplifying reconciliation

Streamlining security compliance

However, making these improvements can initially seem quite daunting because of the operational complexity of the business, coupled with the limitations of existing legacy systems. The big questions become what to do business-wise, and how to marry new and existing technologies with the least amount of pain.

In my experience, you can achieve some early success by implementing a point solution to address a specific payment need (for instance, adding new payment types or improving the booking review process). But as direct channels become more sophisticated, the most successful airlines are moving to a more integrated, centralized approach to payment management that can scale to support current and future needs while leveraging existing technology.

Click here to Read full white paper

Airlines tackle card fees

But will customers be the losers?

Originally published in: InMotion by BCD Travel

www.bcdtravelinmotion.com

Carriers want to reduce the expensive fees they pay to card companies – and they could make their move this year. If they do, corporate clients may be the ones to pick up the bill.

One key development in business travel many observers believe could happen in 2008 is airlines starting to avoid or pass on the fees charged to them by card companies.

Card fees are under fire because they represent the next logical target in the carriers’ war on costs. “Labor is expensive but the airlines have done a good job in reducing their costs there,” says Rose Stratford, senior vice president of industry relations for BCD Travel. “Fuel costs are volatile and cannot be controlled, so airlines are focusing on what they can reduce, which is distribution costs.”

In recent years, carriers have largely eliminated the commission they pay to travel agents and started work on reducing their global distribution system costs. That means, in the U.S. at least, their highest distribution cost has become the merchant fee they pay to card companies, usually amounting to 1 percent to 3 percent of the air fare. According to one estimate, this equates to a $3 billion annual bill for the world’s carriers.

Airlines are unhappy about this, but it is not yet clear how they are going to solve the problem. Some, especially low-cost carriers, have started charging handling fees for payment by card through their websites. A small number of traditional carriers are also doing this, including Qantas, Singapore Airlines and the UK trio of British Airways, Virgin Atlantic and bmi British Midland.

Most corporate travelers do not book air tickets through websites. Instead, they use their company’s travel management company (TMC), such as BCD Travel, which generally makes reservations through a GDS. Airlines are therefore considering passing the card merchant fees incurred for these transactions on to TMCs.

As was the case with the GDS surcharges introduced in the U.S. in 2006 and the UK in 2007, TMCs would inevitably have to transfer these costs in turn to their corporate clients. “If airlines pass on their card fees, it would ultimately lead to a cost increase to the consumer,” says Stratford.

Yet if it were as simple as that, the airlines would probably have done it by now. There are considerable complications, as British Airways discovered when it tried this strategy earlier in the decade. One problem is that it would severely antagonize the card companies, with whom airlines have lucrative partnerships to provide frequent-flyer mileage for card loyalty programs.

Another option for airlines is to promote alternative forms of payment. Southwest Airlines, Northwest Airlines and several smaller carriers have introduced the electronic system PayPal, which charges much lower merchant fees than the card companies. The disadvantage is that this is only for bookings through websites. It works well for leisure travelers but not for business travelers because it does not cover bookings through GDSs.

Furthermore, corporate cards are very important to the running of managed travel programs. “Corporations consolidate their payments and their management information through a corporate card,” says Stratford. “It will fragment their programs if they have to use different payment methods.”

Another option is to switch to corporate cards which charge lower merchant fees. In particular, cards based on the Universal Air Travel Plan payment network are much lower because the network is owned by airlines. “Some airlines are promoting them as an alternative form of payment for that reason,” says Stratford.

The catch is that the card companies which charge higher fees are often the ones that offer airline mileage and other rewards to travelers. If airlines start incentivizing corporate clients to use cheaper payment methods, procurement departments will want to move away from cards with expensive reward programs – and of course that would lead to the airlines indirectly hurting themselves.

Alternatively, mounting pressure could force card companies to reduce their merchant fees to airlines. However, even this solution is not as simple as it sounds. If that were to happen, card companies might make good their losses by increasing subscription fees to cardholders and reducing the substantial rebates they pay to larger corporate clients.

The money flow between card companies, airlines, TMCs and corporate clients could well start to change in 2008, but the many complexities of these relationships makes it difficult to predict what form change will take.