Now that global distribution system costs have been redistributed, airlines have set their sights on lowering the cost of accepting credit cards. But how this effort will impact corporations in 2007 is up for debate.
Sounding the alarm, BCD Travel executive vice president of global sales Travis Tanner this month told an Association of Corporate Travel Executives forum in Chicago, "Over the next 12 months, there is going to be an absolute battle over credit card fees. No one wants to talk about it--especially large travel agencies. But corporations need to hear about it and ask, 'What has happened in distribution that hasn't been passed on to you as a customer?' Nothing! Anytime the airlines want to take costs out of distribution, travel agents don't have room to do anything. Over time, what really happens is that they just raise your airfares. I wish people would be honest with you."
Of bigger financial concern to corporations that rely on credit card rebates to fund operations is Tanner's warning that those revenues could be at risk if airlines lower their fees. [Rebates typically offered to large customers are tied to speed of pay and other factors, and can reap from 10 to 100 basis points--or one-tenth of 1 percent to 1 percent of dollar volume--sources told Management.travel.]
Not so fast, advised Consulting Strategies principal David Hillman, a travel and expense management consultant, and Edgar, Dunn and Company director Pascal Burg, who consults for payment providers and travel industry suppliers.
Hillman notes that credit card fees have been on the airlines' radar for several years. "But why would the corporation choose a direct bill option, when they currently not only don't pay for using corporate cards, but get a rebate, insurance, loyalty programs for travelers, reporting and risk mitigation?" Hillman asked. "The alternatives would need to provide corporations with all the data-related services that they currently get--hotel, car and restaurants and some of the other bells and whistles associated with these. That's not an easy thing to do. Certainly, you could dream up ways of doing this. One is for airlines to incur a cost, providing airline-related benefits to the corporation [where] at least they're getting a relationship for their money, as opposed to just paying the credit card fees, but this has to be net zero cost to the corporation."
Burg and the International Air Transport Association reported that with the decline of GDS fees, visibility of the cost of payment solutions has spiked. "Card fees are more visible as other distribution costs are successfully reduced," moving "from 10 percent of distribution costs to 25 percent," said IATA's Donovan Stenning during a presentation last month.
Exact percentages are negotiated and confidential, but airlines pay around 2 to 2.5 percent to accept American Express, Visa, MasterCard and Diners. On a $500 ticket, Burg estimated a $12.50 fee, and said that the U.S. airline industry pays about $1.5 billion in credit card fees. IATA reported total annual card volume of $140 billion and costs of $3 billion globally. Northwest's vice president of distribution Al Lenza has recently said at industry events that his company's payment bills exceeded its GDS bills.
Added Universal Air Travel Plan president, CEO and chairman Ralph Kaiser, "No one believes that airlines are going to stop taking credit cards. We just need to rationalize those costs. Why should someone pay 2.5 percent on a $5,000 ticket that provides no benefit to an airline and establishes loyalty to the credit card company?"
Burg said airlines are trying several tactics to lower costs, including "optimizing the payments mix that includes offering alternative forms of payment," such as PayPal and electronic check; reducing the cost of card fraud; streamlining internal billing processes such as the handling of chargebacks and reconciliation; renegotiating merchant fees; becoming an issuer through UATP, or partnering with other credit card companies; and maximizing the revenues generated by airline co-branded cards. American Airlines last year introduced its own gift cards. Internationally, some carriers such as Ryanair and KLM are even adding surcharges to accept credit cards and expanding use of Internet banking.
The trick is to act without upsetting buyers, Burg said.
According to Continental's John Slater, "We've had some discussion with some customers about direct settlement, but I don't know that it would dominate our distribution strategy." For customers who have an interest, Continental is willing to talk, said Slater, managing director of distribution planning and e-commerce. "There are some hurdles to overcome--people are more in an exploratory mode right now," he summarized. "We're not on a quest to radically change this."
Continental is an "active proponent" of the UATP platform. On its Web site, Continental offers alternative payment options including Bill Me Later, TeleCheck and Western Union. UATP and its international partner, AirPlus International, are actually owned by the airlines and provide carriers with a low, or even no-cost means to efficiently process charges. To help spur use of alternative payment forms, UATP earlier this year partnered with both PayPal and CheckFree to manage back-end processing.
Unlike the GDSs, which are really transaction providers, credit cards are not a pure expense, Slater said. Continental is focusing its attention on "who really are our card partners--Chase and American Express," and then all the rest. The airline has a co-branded relationship with Chase and offers incentives to use that card.
Burg said some airlines are interested in conducting pilots with large agencies and buyers to trial non-card payment options "and share the cost savings across stakeholders. It might be a useful conversation to have between a travel department and some of their travel suppliers," he added.
BCD's Tanner urged travel managers to query suppliers about broad distribution issues as part of negotiations in 2007. "Don't just talk to them about airfares, but talk to them about distribution and what they're doing to you," Tanner said.
Highlighting the international interest in this topic, Crum noted that the Australian government has capped the rates that credit card companies can charge. At an IATA meeting last summer, several airline CEOs asked the board of governors to develop a proposal to reduce credit card costs, a spokesperson said. The topic is to be discussed at an IATA meeting next month.