Payments: airlines’ under-appreciated, under-leveraged asset

Payments are one of the airline industry’s most potent tools to increase direct distribution, grow revenues and reduce costs. And yet, based on proprietary research conducted by Atmosphere Research on behalf of Datalex, it’s clear that airlines don’t fully utilize payments as the strategic asset and enabler of creativity that they are.

NB: This is a viewpoint by Gianni Cataldo, VP of product strategy at Datalex. It is based on research undertaken by Atmosphere Research.

Datalex commissioned Atmosphere Research Group to carry out research to better understand how payments might enable airlines to become better merchants, and to determine how alternate currencies could impact their business.

The research sought to understand:

  • whether airlines view payments as strategic tools or tactical instruments
  • which forms of payment airlines utilize now, and what is their ‘market share’
  • whether payments enable or inhibit airlines from introducing new products
  • whether ‘virtual currencies’ (e.g. loyalty program credits and travel vouchers) offer airlines opportunities to both reduce costs and improve passenger preference and retention.

Payments strategy is increasingly important to the business

In almost all the interviews conducted, payments were either strategically important to the airlines or were ‘increasingly’ being considered as such. According to one North American network carrier, 80% of growth over the past few years came from new markets, with payments having become a necessity to drive growth. Payments played a crucial role in helping the airline to extract value across the board.

However, considering payments as a strategic function is not a universally-shared perspective.

One LCC respondent said that they lacked a clear strategy for payments, with payments being viewed from the perspective of cost minimization, sales conversion, and so on.

Another respondent said that they would like to do more, but senior management would only act if the objective was to reduce costs, ignoring the opportunity to grow revenue.

Ownership of payments

Payments ‘ownership’ is fragmented. The survey routinely heard how multiple departments, including accounts payable, revenue accounting, loyalty marketing, finance, digital commerce, distribution, treasury, sales, and others are involved with payments. As complex enterprises, this is expected within an airline, where many departments have a natural need to interact with payments.

However as one executive described it, control over payments “waffled back and forth” between ecommerce and finance. There is an apparent lack of ‘ownership’ of payments, with no one department tasked with the responsibility of the function.

Payments accepted

While airlines may talk about payments’ strategic importance, few appear to act on it, evident by the limited types of payments airlines accept for ticket sales compared to travel agencies and other third-party retailers.

The survey asked airlines whether they accepted 12 forms of payments; on average, the airlines accepted just 4.4, led by credit and debit cards. Credit cards accounted for 74% of the transactions at the airlines interviewed, followed by cash and cheques at 12%.

None of the airlines interviewed could accept multiple forms of payment for a single transaction – a capability that might be appreciated by passengers who have credit card limits, who might like to divide payment between a bank transfer and a credit or debit card, or where the passenger and a family member, friend, or employer may share paying for a reservation.

Few of the airlines interviewed had gift card programs or accepted online payment services such as PayPal.

‘Installment’ payments, popular in several Latin American countries and Israel, were not accepted for ticket sales by any of the airlines interviewed.

Airlines know that, because travel agencies are more likely to accept a wider mix of payments, agencies enjoy a tangible local market advantage.

Future use and adoption

The survey asked airlines to rate the perceived importance of 12 forms of payment three and five years from now. Airlines were asked to rate each payment on a 10-point scale, with 10 being the highest possible score. The three highest-scoring payments are all in use today:

Credit cards remain on top, but decline in importance. Credit cards snagged the top spot three years from now, with a score of 9.8. But airlines see them becoming less important five years out, with a score of 8.8.

Debit cards remain number three. Debit cards are envisioned to remain a consistently important form of payment to airlines three and five years from now, scoring 7.3 and 7.1 respectively.

Virtual currency: Second-most important, but lowest level of sales – today. Airlines are their own treasuries. Airlines issue millions, sometimes billions of dollars of their own virtual currencies in the forms of loyalty credits and travel credits, such as promotional and service recovery vouchers.

Despite this, virtual currencies produce an almost-invisible amount of revenue – just 3% (airlines excluded the value of loyalty program award travel).

Looking ahead, airlines see virtual currency’s importance magnifying, earning a score of 8.0 in 2020 and 8.8 in 2022, making virtual currency the second most important form of payment.

New-Gen forms of payment

Airlines anticipate a mix of both known and emerging forms of payment playing larger roles three to five years from now:

  • Passenger-paid bank transfers will become modestly more important, rising in importance from 4.5 in 2020 to 5.0 by 2022. Airlines like bank transfers for their lower costs, near-real-time access to cash, and reduced risk of ‘chargeback’.
  • Gift cards, though sold by a minority of the airlines interviewed, are liked for their potential to introduce new consumers to an airline and to stimulate incremental purchases among existing customers. Like passenger-paid bank transfers, airlines rated gift cards’ importance 4.5 for 2020, and 5.0 in 2022.
  • Mobile money, such as M-PESA, is a new form of payment taking hold in emerging markets. None of the airlines interviewed accepts mobile money today. However, they did anticipate a growth in their importance by 2022, as ‘mobile money’ becomes increasingly useful for mobile-based travelers in the future.
  • Blockchain and digital tokens are considered to be the most important emerging form of payment. Airlines don’t believe blockchain or digital tokens will be very important three years from now; they score it just 3.4. By 2022 however, airlines believe these tools will be ‘ready for prime time’, scoring them a healthy 6.3.

Future focus

The research concludes that airlines need to pay more attention to the role and value that payments play within their organizations. For too long, payments appear to have been treated as a ‘passive’ function, one managed with a “don’t break it, just keep everything working” mindset.

This robs airlines of the potential added value payments can create, whether through enhancing their existing direct channels’ capabilities, anticipating new-gen channels (e.g., mobile, conversational commerce), product development, improved customer service and loyalty, or cost reduction.

Further reading

“Payments: Airlines’ under-appreciated, under-leveraged asset” is a research paper by Atmosphere Research Group, sponsored by Datalex. To read the full report, click here.

SC APRIL17 DATALEX logo 450w

This is a viewpoint by Gianni Cataldo, VP of product strategy at Datalex. It is based on research undertaken by Atmosphere Research.. It appears here as part of Tnooz’s sponsored content initiative.
NB2: Image by BigStock

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