Partnerships between airlines and payment providers that undercut traditional corporate card merchant fees are giving travel buyers opportunities to leverage less costly forms of payment in exchange for deeper discounts and rebates.
Several recent developments show an increased interest among airlines to cut the costs of processing payments.
In recent months Universal Air Travel Plan—a centralized payment processor primarily used for airfares—has gained acceptance by more airlines, including JetBlue and Ryanair, bringing the total number to more than 200. The payment company also found a new issuer in Varig Brazilian Airlines, which last month began issuing UATP cards with the caveat that all corporate clients must use the account for airfares.
Continental Airlines, which perhaps more than any other carrier has explored charge card alternatives, has brought on new payment providers for both consumers and corporate customers while offering incentives to those who take a closer look at various payment models. Meanwhile, central payment provider and UATP issuer Airplus International this week is expected to announce a partnership with a U.S.-based carrier to offer a corporate payment product mirroring previous agreements with Continental and British Airways.
Amid these developments, a few corporate travel managers have been successful at bringing the concept of payment to the airline bargaining table.
"The airlines are getting more and more interested in reducing these costs that they used to see as just the cost of doing business. Whatever Amex or Visa or MasterCard or the banks were charging was just whatever you had to pay to accept credit cards," said Pascal Burg, a consultant with payment industry consulting firm Edgar, Dunn & Co. "It really came up on the radar screens over the past two or three years, especially after 9/11, when they were trying to reduce any cost they could."
In a forthcoming white paper, Edgar, Dunn & Co. will discuss the overall costs incurred by airlines in processing credit card payments.
Despite alternatives, 83 percent of sales reported by ARC in 2003 was paid for with a charge card or credit card, translating into high costs paid by airlines. Assuming merchant fees average 2.5 percent—a figure that varies depending on issuer, card type and merchant agreement—the Edgar, Dunn & Co. white paper said airlines are paying $12.50 for each $500 airline ticket processed through cards. The report said "accepting payments by card is a $1.5 billion expense for the airlines."
The paper argues that after years of airline focus on reducing other distribution costs—namely GDS fees and travel agency commission and overrides—the next frontier for reductions is the cost of payment. In many cases in the corporate market, vendor savings can be shared with the customer.
One travel manager whose company books less than $5 million annually in U.S. air told BTN on the condition of anonymity that using the company's primary air carrier's preferred mode of payment has contributed both to rebates and corporate discounts on airfares.
UATP vice president of marketing Ken Murphy said such incentives are not uncommon among UATP airline issuers, which in the U.S. include American Airlines, Continental Airlines, Delta Air Lines, United Airlines, and US Airways.
"It's often a combination of both: it's a negotiated net fare and a cash rebate," he said. "Each product is different and you can negotiate with each of the airline issuers. Some of our U.S. issuers give an automatic rebate and that is generally a little lower than a negotiated one based on volume. Some do an automatic 1 percent, then other things factor into that for further negotiations."
Unlike UATP's U.S. issuers, Varig's decision to require such an account uses sticks as opposed to carrots. "With any kind of corporate deal they require that they get a corporate UATP account," said UATP's Murphy. Yet, U.S.-based carriers can't afford to risk such an assertive proposition for buyers, given the dramatically different competitive climate. "There's a different dynamic in countries that have a flag carrier. Whether it's LanChile or Varig or JAL, those guys have a different position with corporate clients than anyone in the U.S. does," Burg said.
However airlines decide to promote their UATP product, there is a cost benefit. Not only does an airline-issued UATP account deflect higher fees charged by other card vendors, but UATP airline issuers can earn merchant fees when an account they issue is used on another airline.
When clients use a UATP account for airfares, the issuing airline pays no merchant fees, compared with charges of up to 3 percent on other cards.
Backlash against merchant fees among air carriers is nothing new. Yet, spats between card companies and airlines have been more prevalent outside of the U.S.: Ryanair in 2003 stopped accepting American Express citing "excessive charges;" Qantas earlier that year began levying a 1 percent surcharge for all card transactions in Australia
(BTN, March 10, 2003); and British Airways, which in June 2002 stopped absorbing credit card merchant fees on U.K. corporate net fares.
While such attempts to challenge merchant fees overseas have effectively reduced costs, airlines in the U.S. are taking a more cordial approach. "From an airline perspective it always sounds better if they say we'll give you a discount if you use payment type A or B rather than saying we'll surcharge you if you use C or D. The net impact might be the same, but the discount for using something they'd like you to use sounds much better than the penalty for using something they wouldn't like you to use."
Continental last year even extended payment alternatives for targeting consumer business. In October the carrier's website began accepting deferred payments via Bill Me Later, TeleCheck's online check payment services and cash payments through Western Union. The carrier through the end of last year offered a 5 percent discount on a future flight to customers opting for these types of payments. "Continental.com is the first travel Web site to offer the payment options of cash, check or deferred payment in addition to credit and debit cards, making the purchase of tickets online easier than ever before," said a spokesperson.
"In the next year or two it goes without saying that options such as bill me later and PayPal will be used predominately by consumers as well as small businesses," Burg said. "For the large corporate travel companies, they're not going to use PayPal but eventually that's where they might be going. From the airline point of view they'll be pushing and promoting whatever the lowest cost of payment there is."