Risky Business: Payments in the Airline Industry06th February 2019
The airline industry can be volatile. Currently, U.S. airlines are experiencing relatively benign conditions, especially when compared to the challenges of over-capacity faced by their European counterparts. However, it doesn’t take a long memory to understand that circumstances in the industry can change rapidly and a key “Achilles heel” for many airlines is their payments arrangements. Why? Because no matter which geographical markets they operate in, all airlines juggle a unique combination of payments complexities and risks that are simply not prevalent in most other sectors.
The results often leave carriers facing very high, overly complex payments costs plus a dangerous risk of triggering large-scale security deposits or “holdbacks”, demanded by their acquirers, when times get tough. Indeed, we find that agreements reached with acquirers when things are going well, often come back to bite airlines in downturns. As Warren Buffett puts it “…you only find out who is swimming naked when the tide goes out…”. So, is now the time to fix the roof while the sun is shining? We think so.
The time taken between the customer purchasing a ticket and the flight means that airlines present risk to card acquirers. Acquirers seeking to mitigate the uncertainty associated with airline relationships attempt to limit this risk exposure in different ways.
Most acquirers choose to minimise the number of airline clients on their books and include the option to trigger large holdbacks into their contracts. These holdbacks act as collateral for the acquirer, should the airline run into financial difficulty and be unable to deliver services to their customers. Few would dispute the right of acquirers to apply such triggers to their contracts, and recent airline collapses such as Monarch appear to vindicate this approach. However, what is the correct level of security? How can you be sure that the trigger calculations and the holdback amount calculations are fair? After all, a holdback that is too high can contribute to the very squeeze in liquidity it is supposed to protect the acquirer from. In such circumstances, everyone loses.
When you consider the size of these holdbacks (for example, Flybe had to provide its card acquirer with a £9.4 million deposit as part of their card acquiring arrangements, 1.3% of the airline’s total reported revenue in 2018) they can become huge burdens to companies already fighting to stay afloat. In the case of Flybe, its card acquirer deemed the risk too high, and additional funds were withheld.George Willis | Head of Global Sales Operations
CMSPI benchmarks financial triggers and holdback arrangements across our client base. Every client is different and will therefore have differing risk profiles. However, it is fair to say that variations in credit arrangements between carriers cannot be put down fully to variations in risk and there is often scope to adjust triggers and holdbacks, in order to create a fairer balance of risk between carrier and acquirer, something that is in the interests of both parties long-term.
Risk premiums – what can airlines do?
1 | There are several ways acquirers use triggers built into card acquiring contracts for airlines that mean if certain metrics are hit, the acquirer has the right to withhold funds to cover risk and potential losses. It’s important for airlines to assess whether these triggers are reasonable and set at levels in-line with the rest of the industry. We find large variations.
2 | These triggers can require complex, labor-intensive data gathering and reporting when simpler, more transparent arrangements would be more effective, better understood, and save considerable time for all parties.
3 | Assess whether your holdback calculations are fair and truly reflect inherent risk; be careful that acquirers don’t overstate the risk and the consequent holdbacks set too high can result in an unnecessary downward spiral when times get tough. A number of airlines have addressed these issues, and as a result, are in a far stronger position to withstand pressure should trading deteriorate.
4 | Contracts should avoid giving processors arbitrary rights to set holdback levels once triggers are activated. Instead, there should be structured, transparent calculations of holdback levels covering all eventualities. This means an airline facing liquidity challenges can plan without fear of a sudden negative shift in attitude to risk from the acquirer.
5 | Airlines should carefully audit payments arrangements to determine whether there are any miscalculations by the acquirer. This is especially the case if arrangements are complex, resulting in too much holdback being held. Making sure you regularly audit your arrangements and monitor these calculations means airlines minimise the risk of having funds unfairly withheld.
6 | Airlines should always ensure they are not being penalised twice. Many airlines bearing the burden of holdbacks can also find themselves paying significantly higher transaction fees than they should. There is no justification for this. Indeed, where a acquirer has adequate security, fees ought to be lower than for other merchants where risks are unsecured. By making sure arrangements are benchmarked, airlines can ensure their fees are in-line with industry best practice.
At CMSPI, we’ve partnered with some of the biggest airlines in the world – both domestic and international carriers – and have helped unravel their payments complexities. We’ve helped strengthen our clients and saved millions annually by reducing risk premiums and optimising arrangements and will be sharing our knowledge in our upcoming webinar: Navigating the Unique Complexities of Payments in the Airline Industry.
Join us on Wednesday, February 13th, 2019 from 7pm – 7:45pm GMT as we discuss airline card acceptance nuances including: large volumes of international transactions, high levels of credit card spend, co-branded rewards cards, perceived risks, chargebacks, and more. Please note this webinar is for merchants only.