The impact of the coronavirus disease COVID-19 on the travel industry is widely reported. Images of empty airports and aircraft, and abandoned tourist sites, accompany articles highlighting suspended routes and deep discounts on ticket prices.
With bookings significantly reduced from the seasonal norm, there is an immediate and obvious financial impact on airlines, and the travel agencies that they rely on to distribute their seats. Flybe is the first airline to cease operations as a result of COVID-19, but is unlikely to be the last.
Financial shocks are not new to the travel industry. The immediacy, depth and likely duration of the impact of COVID-19 does, however, demand urgent action from airlines and online travel agencies (OTAs) to limit its financial repercussions.
Both OTAs and airlines have three critical financial levers that payments tactics can help adjust, that will help contribute towards financial survival: the cost of transacting, working capital pressure, and exposure to airline and OTA failure.
Competing priorities at the heart of payments
Airlines and OTAs are long accustomed to balancing competing financial needs as they transact.
Higher-interchange virtual cards provide OTAs with a revenue stream in the form of rebates, which, critically, contribute to better margins. However, higher-interchange virtual cards are comparatively costly to airlines – and airlines seek to protect their own margins by disincentivising or even blocking their use.
On the other hand, non-card payment methods such as BSP Cash offer OTAs more time to make their payment, to the benefit of their working capital requirements, but this comes at the expense of the airline's own working capital needs.
Crucially, virtual card payments - whether higher or lower interchange - also carry built-in protections for both airlines and OTAs: the guarantee of payment, and the chargeback guarantee. These two guarantees are effectively a form of insurance in this current economic climate – and given the challenges being faced by participants in the travel industry, this form of insurance is priced significantly below what the risk would suggest. It therefore represents extremely good value for money.
A call for co-operation
The status quo is an ongoing game of cat and mouse, as airlines and OTAs chase competing financial needs in order to preserve margins that, on both sides, are already precariously tight. And yet, despite this, airlines and OTAs are mutually reliant on each other's financial health for their own survival.
The severity of the impact from COVID-19 demands a different approach: one where airlines and OTAs co-operate and collaborate to enable payments to be made in a way that preserves margins, and protects both sides from continued financial stress.
To reduce the impact on the wider industry of failure – whether of airlines or OTAs – both airlines and OTAs should look to increase the proportion of bookings paid for by card. The question then is how to balance out the interchange applied to card payments.
Rather than lose bookings, airlines who need to fill seats should consider allowing OTAs to use higher-interchange virtual cards. This provides a clear incentive to OTAs, and therefore likely drives more business towards that airline. OTAs benefit from improved revenue from rebates, and airlines benefit from the resultant bookings.
Where an airline has the market power to dictate terms to an OTA, though, they may wish to encourage the use of lower-interchange virtual cards rather than alternative payment methods. This is on the basis that card payments provide the OTAs with protections that help strengthen their ongoing financial position.
When it's the OTA that has sufficient buying power to dictate terms to an airline, though, they in turn may wish to approach airlines to agree a shift to virtual cards that offer a mutually acceptable level of interchange.
This helps to balance out the cost/rebate equation on either side of the transaction, whilst retaining the protections that virtual cards offer.
This collaborative approach does rely on the ability of both parties to communicate, agree and execute mutually acceptable arrangements. We have often argued for a rebalancing of the cost of travel payments to reflect the underlying risk and benefits to buyers and sellers. This time, though, the risk equation has changed - these are exceptional times and the cost of cards is worth paying. If you are an OTA or an airline and would like any support with this, please come and talk to us. We're here to help.
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We have often argued for a rebalancing of the cost of travel payments to reflect the underlying risk and benefits to buyers and sellers. This time, though, the risk equation has changed - these are exceptional times and the cost of cards is worth paying.