Having cut ticket distribution costs, airlines are turning to the money they, as merchants, pay to charge card companies. Known in the payment industry as the discount rate, such fees range from 1 percent to 2.5 percent of a sale.
Northwest Airlines vice president of distribution and e-commerce Al Lenza in February said his airline now pays twice as much to credit card providers than it does to global distribution system firms. Continental Airlines president Jeffrey Smisek at an April UATP event said his airline's payment bill would be $100 million higher this year than it was in 2004. Delta Air Lines director of domestic sales development and strategic planning Chris Phillips called tackling credit card costs "priority number one for 2007-08."
The implication? Expect downward pressure on payment expenses following GDS cost reductions between 2003 and 2006 and the 2002 eradication of base travel manage- ment company commissions on domestic tickets. But how are payment costs different from GDS fees or TMC commissions? And what should travel buyers ask about payment alternatives when talking with suppliers?
MERCHANT FEES ON CORPORATE CARDS FOR AIRLINE, HOTEL AND CAR RENTAL TRANSACTIONS | American Express | 2.0% - 2.5% | | | | Visa/MasterCard | 2.0% - 2.4% | | | | UATP* | 1.0% - 1.65% | | |
Source: AirPlus International *Typically for air only |
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First, the similarities. Described by airlines as distribution expenses, payment costs accrue with volume and are higher for some providers than for others. As with TMC commissions and GDS expenses, they also contain built-in elements that many airline managers feel they should not be funding. Some payment company income can be passed to corporate clients as incentives based on volume, speed of pay and other factors; these rebates are usually less than 1 percent of charge volume. When airlines first floated the concept of ending the
TMC commission pass-through, they offered corporate clients lower, "net" rates. "Net net" rates became the norm as fares were constructed to also exclude bonus commissions. Even if the fare savings equaled the commissions they gave up, corporations came out ahead because of lower taxes on lower fares. With GDS expenses--the third net--airlines say corporations received access to lower fares in return for a roughly $2 per-ticket increase in most TMC fees (which paid for higher GDS bills).
Theoretically, airlines could offer corporations a still-lower fare, or fourth net, if buyers select a cheaper payment option. But here the challenges are greater and the airlines' power is weaker. Overcoming the card firm's rebate is only part of the story. In general, payment systems are further entrenched than GDSs or TMCs. The corporate travel industry increasingly is recognizing that data generated by expense management systems is as good as it gets for comparing "spent" with "booked" information, and these systems increasingly depend on charge card feeds for automated data entry.
The payment system remains the most fundamental building block of travel management programs, the supplier category that generally garners the highest traveler compliance and the one most likely to be sourced to just one vendor. Quite simply, it's hard for an airline to come between a corporation and its plastic.
Moreover, airlines drive a far smaller portion of credit card revenue than they do GDS revenue. Examples of carriers successfully declining to accept or placing surcharges on a given credit card are few, far between and outside the United States.
Major bank and network payment providers also have marketing deals with carriers. How aggressive can American Airlines be in an initiative that pushes alternatives, when the airline co-markets cards with Amex and Citibank?
"It is quite difficult to reduce those costs," admitted Smisek, whose airline has a co-marketing deal with Chase. "Credit cards do provide value and are quite creative with rebates. We are clearly focused on it, but it is difficult."
Suppliers may attempt to speak quietly to corporations about such alternatives as airline-owned card firms, electronic payment and direct settlement. While travel buyers generally see payment fees as a cost of doing business for suppliers, an offer to help cut that cost may be worth exploring, assuming sufficient response to a number of questions: How will the company get its purchasing data, locally and globally? Do the alternatives feed expense management systems? What reporting tools are available? What would be used for lodging and other categories, and is level-three data available? What will travelers use to buy travel on the road? What insurance coverage and loyalty programs are in place?
Perhaps most importantly, how much of the savings does the corporation earn, and is it an overall better deal?