Though much has been made digital, the back-office processes have remained largely unchanged for decades and manual intervention is the norm in many instances.
But as airlines strive to meet demand in the post-pandemic world, payments have become a key performance driver. Alongside controlling distribution and an offer and order environment, improving the payment sector is key to unlocking value for airlines.
There are two aspects to consider: controlling costs and increasing revenue. Two studies, one undertaken by Edgar, Dunn & Company (Airline Payment Cost and Revenue Drivers) and the other by McKinsey & Co (Payments Value Opportunity in Airline Retailing) explore the costs and revenues associated with payments for the airline industry globally.
The headline finding is that airlines took in $977 billion in 2019, including $93 billion of fees and taxes on behalf of third parties such as infrastructure providers and tax authorities. The payment acceptance cost was $20.3 billion or about 2.2% of total payment amount.
Pascal Burg, Director at Edgar, Dunn & Company, says there is a reliance on card transactions in aviation, and card payment fees represent the largest component of the total acceptance costs. “But also, airlines are paying fees on $93 billion that they don’t even get,” he says. “They’re just collecting that money for somebody else.”
Burg notes that cards represent over 90% of transactions for some airlines. But they also come with several advantages. Payment is quick and secure, and they are often tied to loyalty-related bonuses, which makes them popular with customers.
Nevertheless, alternative payment methods are gaining traction. Integrating them isn’t cheap or easy as aviation is a complex, global business. But Burg believes the benefit would be seen in the mid-term. “Wallets are gaining traction in markets such as China,” he says. “Also, Buy Now Pay Later is working well in markets, such as the United States. And real-time bank transfers will likely be a major development in a few years.”
IATA Pay is an enabler of this latter trend and is already becoming established in a number of markets with several airlines.
“There is no doubt that payment has been undermanaged in aviation, but interviews have confirmed that airlines not only focus on controlling costs but also are increasingly starting to leverage payment on the revenue side,” says Burg.
Indeed, new payment methods offer airlines an opportunity to increase revenues. This is an area that is generally poorly understood by airlines, however, and is rarely measured.
If an e-commerce retailer introduces PayPal, for example, it routinely measures the impact of the new payment method across a range of indicators. After all, online payment is at the core of their business. But information regarding the effect of new payment methods on revenue is difficult to find among airlines.
Similarly unappreciated by airlines is the payment conversion rate—those payments that are successfully fulfilled. Most often, this means whether a card is approved or declined. E-commerce is obsessed by this key performance indicator and usually monitors it in real time. A high approval rate is vital to a successful business. However, for air travel purchases this rate typically is about 85%, which is considered to be in the lower range. And it appears that few airlines monitor it closely.
Aside from measuring and monitoring the conversion rate, airlines need to understand that the way card approval is processed can affect the result. There are different routes to approval and options to retry card payments that are under airline control. Increasing the conversion rate by just a few percentage points can make an enormous difference to the bottom line.
“Payment must be viewed as part of the transaction and not just the end of it,” says Nina Wittkamp, Partner, McKinsey & Co. “That makes it part of the customer experience and airline engagement with the customer.”
McKinsey’s own report, Payments Value Opportunity in Airline Retailing, suggests that a focus on the revenue potential of payment could play a major role in unlocking about $40 billion of retailing potential by 2030. Also available is an additional $14 billion directly related to payment strategy.
Payment should be seen as a way of differentiating an organization, but all airlines have been hampered by a lack of innovation in this area. McKinsey reveals that out of more than 12,000 fintech companies, fewer than 50 are focusing on aviation, a result of the complexity of the industry. If airlines lose control of the customer relationship to new travel platforms, then the retailing revenue potential drops more than 50%.
There are multiple touchpoints in the passenger journey for payment options to be offered. The revenue potential therefore comes from a variety of sources. There will be an increase in ancillary service purchases, an enhancement in loyalty activity, improved sales, and growth in emerging markets.
Wittkamp says airlines must put in place a detailed payment strategy. Establishing a baseline is essential, as is constant monitoring. “This cuts across departments, including commercial, loyalty, distribution, and finance,” she says. “All have to get together to examine the impact of different payment types, how each customer segment approaches payment, and much more.”
The payment methods airlines choose will vary according to circumstance. The United States is card centric, for example, due to the benefits associated with card use. Parts of Asia and Latin America, on the other hand, still live by ‘the cash is king’ principle. In China, offering wallet payment alternatives such as Alipay and WeChat Pay have become a requirement.
Whatever options make sense must be prioritized. Wittkamp says payment options are subject to diminishing returns so five or six alternatives is plenty.
Beyond customer expectation, airlines should consider cash flow. Post-pandemic, all companies are holding on to cash and that means airlines are getting paid later. Payment terms must be carefully considered as does the payment methodology. When will airlines see the money?
Ease of use and world-class security are self-explanatory. More challenging is deciding where and when to offer a payment opportunity. It’s an important decision as payment should create customer engagement and form part of the customer relationship.
Backing up these considerations is an expert airline payment team. How many people and the reporting line should form part of the payment strategy. Will the team sit in the finance or distribution department, for example? Certainly, there is the possibility to better integrate payment strategy and commercial operations.
Both the Edgar, Dunn & Company and McKinsey studies show that to take advantage of retailing, airlines must first innovate in payment options. That is easier said than done but, with $40 billion up for grabs, it is a challenge worth undertaking.
“Payments must be seamless,” Wittkamp concludes. “The aim is to give the customer choice and trust in the transaction. Then you look to keep costs to a minimum and measure the impact of each option on your revenue potential.”