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Airlines Aim for Expense Reduction in Payments

Airlines are targeting the estimated $1.5 billion it spends annually on accepting credit cards from its customers.

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

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