Airline retailing—essentially selling new products in new ways, either directly to customers or via intermediaries—could be worth $40 billion by 2030.1 And payments, as a critical link between airlines and their customers, are a vital component of retailing. But if airlines are to realize the full value of retail, it is imperative that they get payments right.
A new report, Airline distribution and retailing: How payment innovation can help airlines improve customer experience and the bottom line, highlights the relatively unexamined area of payments and how innovation in this area can help airlines to improve customer experience, grow revenue, and decrease costs.
Every year, approximately 2.9 billion airline booking payment transactions take place across the world—valued at around $1 trillion. And while these payments represent valuable business transactions, they come with a price. In fact, the airline industry spends over $20 billion a year on payment costs.2 This amounts to around 3 percent of airlines’ total revenue, and approximately 78 percent of the industry’s net profit. Payments also incur substantial short-term financing costs—$2 billion’s worth in 2019, representing 9 percent of airlines’ total payment costs.3
Much of this expense is due to the high use of credit cards (around 70 percent of retail transactions) which, while convenient for customers, are costly for airlines.
On top of this, airlines collect revenues on behalf of other participants in the value chain—such as airports and tax authorities—and forward around 10 percent of the total value of their transactions, while still including payment costs for the total transaction value. Several stakeholders are involved in the payments value chain, across both B2C and B2B payments. Each of these participants plays a different role and takes a different share of the payment fee value pool. Airlines are secondary beneficiaries in the value chain, along with online travel agents (in the case of B2C payments from retail travelers), and travel management companies (for B2B or corporate transactions). The primary beneficiaries of the payment costs, paid by airlines, include payment issuers, schemes, gateway providers, and payment acquirers.
Intermediaries such as booking platforms and online travel agencies have identified payments as one of their biggest opportunities for differentiation, with some larger players already investing in fintech solutions to make the end-to-end payment journey seamless. Airlines can move strategically to improve payments to prevent further disintermediation and realize the value of airline retailing.
Payments represent a $14 billion opportunity
In addition to the $40 billion retailing opportunity, airlines could potentially reap a further $14 billion in value through strategically addressing payments. This figure comprises revenue from payments ($8 billion), which could be generated by increasing sales of ancillary services, enhancing loyalty programs, and giving customers more flexible exchange and refund processes. A further $2 billion in value lies in reducing payment cost, particularly for B2B or corporate sales, while $4 billion could be generated through putting payment enablers in place to increase direct channel usage, and improve payment conversion (Exhibit 1).
Payments are at the intersection of five key trends affecting the industry, each of which provides opportunities for airlines to realize value.
First, customer expectations are shifting. For instance, retail customers have become comfortable making high-value transactions digitally, while corporate travelers tend to value end-to-end solutions. Airlines can increase value for customers, and meet their expectations, by making the payment journey more convenient. Second, while credit cards remain the most-preferred payment method, alternative payments such as digital wallets or bank transfers are on the increase, and airlines can test and onboard new payment methods to respond to this trend. Third, innovations such as mobile point-of-sale devices can offer customers an improved payment experience while providing airlines with an opportunity to get to know their customers better through analyzing their data. Fourth, support from various government initiatives is driving the emergence of alternative payment methods such as e-wallets and local debit cards, and airlines could build operational models that are flexible and take local financial players and regulators into account. Finally, the payment value chain is evolving toward a far more integrated and consolidated market, opening opportunities for airlines to forge strategic payment partnerships and lower costs.4
Payments have not yet been fully addressed by the industry
Despite the significant upside, its associated cost, and its general importance in the customer journey, the area of payments as a strategic topic has often been unaddressed the industry. Generally, there is little transparency or engagement with the topic, and many airlines do not strategically monitor payment and transaction data, and there is an absence of defined roles or KPIs in the area.
Furthermore, many airlines have yet to leverage the link between payments and customer experience; these are often viewed as separate concerns. But payments are an important element of the customer journey—each touch point presents an opportunity to capture additional revenue (see sidebar, “Payments are a significant element in the customer journey”).
Opportunities exist to increase revenues and lower costs
Payment methods can unlock revenue opportunities, mainly from retail travelers, while improvements in corporate travel payments could help to lower costs.
Opportunities exist for airlines to improve the retail customer payment experience, particularly in direct channels, to reduce dropouts. Airlines could also re-evaluate all the payment interactions throughout the customer journey, make these easier, and perhaps grow engagement and ancillary sales at these points. And as more consumers become comfortable with using alternative payment methods, airlines can take steps to test and onboard new payment options too.
Corporate credit cards, which are widely used for corporate travel, are relatively more expensive for customers—and for airlines. But more cost-efficient corporate payment methods are available. For instance, between 25 and 35 percent of corporates with external revenues greater than $300 million have implemented fully digital financial automation and B2B payments software, and this is expected to increase over the next few years.5 Providing process efficiency can benefit all parties and lower airlines’ costs.
Airline bookings and transactions are largely digital, so adopting account payable automation should be actionable for most companies. In addition, there are already relevant providers operating in the market, offering airlines the opportunity to adopt financial automation and B2B software.
Airlines could define differentiated strategies for retail travelers and corporates, and ensure specific customer needs are satisfied, for instance by leveraging different payments methods for each customer category, or collaborating with local payment providers to define an operating model that best suits local customers.
Realizing value through six key levers
Moving forward, six value-creation levers could help airlines to seize the opportunity to capture the $14 billion payments opportunity and realize the $40 billion value of airline retailing. These levers may differ depending on the type of carrier, as well as the regional and global scale of the business—there are likely to be bigger opportunities for individual airlines than for the overall industry. Airlines looking to realize the payment opportunity could consider taking the following actions:
- Increase customer reach and conversion, by improving the user experience when it comes to booking through direct channels, and improving payments conversion by minimizing technical issues. Airlines could also look to attract new customers, especially in the growing customer segments of emerging markets.
- Grow ancillary services, and make them easier to purchase throughout the touchpoints on the customer journey, thereby increasing incremental revenue. Airlines could also introduce micro-redemptions such as miles or cash for flights, lounge entry, or on-board Wi-Fi.
- Enhance loyalty programs, by analyzing customer data, providing convenient payment options, and offering co-branded cards with associated rewards.
- Provide flexible exchange policies and easier refunds, for instance by providing automated refunding, the need for which has surged since the start of the COVID-19 pandemic.
- Become part of the corporate payment ecosystem, and explore ways to reduce costs for instance by offering digitized solutions and account payable automation, particularly for B2B or corporate travelers.
- Reduce working capital costs and payment costs, for example, by encouraging customers to use payment methods which help reduce payment costs’ and optimizing fees and payment terms with payment providers, such as schemes and acquirers.
Finally, to help bring this journey to life and to make it sustainable, the industry could consider developing a “reference blue-print” for payment. This could be the cornerstone for the planning of any airline that wants to embark on this journey of value creation and customer centricity, through payment.