IATA’s financial settlement systems are essential to the industry’s cash flow in normal times, mission critical in these troubled times

In 2019, IATA’s financial settlement systems managed $450 billion of the industry’s money. Transactions were handled so safely and efficiently that the systems went largely unnoticed.

“But when the coronavirus pandemic started to spread, the systems suddenly took center stage,” says Aleks Popovich, IATA’s Senior Vice President, Customer, Financial and Digital Services. “Cash became the lifeblood of the industry and keeping it flowing was critical to survival.”

Processes in reverse

Sustaining cash flow was easier said than done, however. The cost of the financial settlement systems needed to be cut, essential staff couldn’t get into the office, and processes had effectively reversed with money flowing from airlines to agents as consumers awaited refunds.

Flexibility became the name of the game as the volume of transactions fell through the floor. This was particularly the case with the Billing and Settlement Plan (BSP), which facilitates and simplifies the selling, reporting, and remittance procedures of IATA-accredited travel agents.

The opposite happened in the Cargo Account Settlement System (CASS), which plays a similar role on the cargo side of the business.

Reflecting the collapse in the passenger business in the face of COVID-19-related border closures that applied to travelers but not cargo, volumes moving through the CASS were greater than those processed by BSP for the first time.

As airlines reeled from the impact of COVID-19, IATA immediately began working to reduce its operational costs and it is estimated some $20 million has been taken out of the year’s operational expenses through staff related cost and IT spend, and asking data processing centers for financial relief. Global Distribution Systems were likewise involved in important discussions and played their part in supporting financial liquidity for airlines.

Meanwhile, thorough risk assessments had to be carried out to ensure agent and airline needs were balanced and confidence in the systems maintained. Due diligence even had to be done on the 60-plus clearing banks used to process funds to rule out any future surprises.

Prior to COVID-19, the exposure to participants in the BSP was largely with the agents. A package of measures giving flexibility to agents was therefore quickly put in place to alleviate any problems they faced, including extending grace periods for payments and financial reviews, and a re-assessment of bank guarantee calculation formulas to adapt to the current level of sales. In many countries, it was simply impossible for agents to physically visit a bank to complete required documentation.

But by March 2020, it was clear that airline risk had come to the fore as carriers struggled to survive with far more cash going out the door in the form of refunds than was coming in through new ticket sales. “We worked with all IATA members in the BSP to do a risk assessment,” notes Popovich. “We needed to know how long each airline could survive. But we kept flexibility to the top of the agenda so perhaps a letter from a government was accepted in lieu of a cash security. There were many examples of such discretion based on risk assessment and it meant we actually provided a better service than simple reliance on cash securities.”

Airlines also had to work out how to get cash back to the agents so they could refund consumers. The level of this activity was beyond the usual parameters. In the second quarter alone, IATA estimated that airlines faced a $35 billion refund liability.  A Reverse Settlement process was implemented in a matter of days as the weekly settlement cycle could not be altered. By end October, IATA had managed around 100, 000 negative sales transactions worldwide, amounting to over $6 billion that has been settled to agencies through the settlement systems.

IATA supported airlines throughout the process to clear their refund positions as quickly as possible even though cash was in short supply. “The airlines recognized their obligation to keep the industry moving,” Popovich continues. “They have worked hard to process all requested refunds, which is good news for agents and consumers.”

IATA had an extensive business contingency plan that included staff working from home coupled with a crisis support team to redeploy staff within IATA to critical financial settlement system operations. The plan also included increasing the speed of communication. Daily bulletins were issued to the industry on BSP and CASS performance and a treasury dashboard was created for airline CFOs and their representatives, so they had the tools to keep updated in real time.

The way the virus spread also played a part. The China BSP was affected first, followed by Asia, Europe, Africa and Middle East, and the Americas. In effect, the coping strategy was road-tested by the China BSP from China and was fine-tuned as the crisis worsened.

15- As of October 2020, 15 airlines have been suspended from IATA financial settlement systems

Lessons learned

Managing the financial settlement systems through the coronavirus pandemic is still an evolving process but already lessons learned are being incorporated to further build the resilience of the BSP and associated services.

A case in point is a refined risk management service for the agency community. Rather than blanket measures, agencies can now take advantage of a targeted approach that aims to provide flexibility to agents. The change in rules would normally have been proposed at the next annual financial conference but the idea was put to a remote vote, passed and implemented in a matter of months.

Other work is ongoing. IATA estimated that without further government financial relief the median airline has about 8.5 months of cash left as of October 2020 so assessments continue to take place. Airlines that have filed for Chapter 11 or similar restructuring are contacted regularly to protect all BSP members.

“The bottom line is that the systems held up,” says Popovich. “We had excellent contingency plans in place. And even though we have cut costs and introduced greater flexibility, safety and efficiency have not been compromised. Everybody is still getting their money on time. Moreover, we are committed to keeping charges at the same minimal level even when the industry has fully restarted.

“But perhaps the biggest takeaway is that the collaborative work we have undertaken has created customer loyalty beyond the crisis,” he adds. “It was really gratifying to see that, even in the midst of the worst crisis in aviation history, a customer-centric strategy held sway.”

Image credit | Getty