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1、Airline Payment Cost and Revenue Drivers StudySeptember 2022Table of Contents Airline Payment Cost and Revenue Drivers StudyPayment Cost DriversPayment Revenue DriversOpportunities2Payment is a key pillar to support the recovery of the airline industry and to“unlock value creation”The Covid-19 crisi
2、s had a significant impact on the travel industry across the globe and encouraged airlines to review their business models,including how they accept paymentsThe pandemic impacted the travel industry by significantly reducing activity and changing customer expectations,fostering digital innovation an
3、d influencing the exit or entry of players in the industryThe crisis has brought to light some of the internal challenges that airlines had to face related to payments,such as handling large volumes of chargebacks and refunds,addressing cash-flow issues,implementing new payment methods,reviewing con
4、tracts with payment providers,etc.IATAs Digital,Data and Retailing(DDR)Symposium in late 2021 identified three pillars to“unlock value creation”including“control of paymentDue to the important contributing role that payment can play in the recovery and in unlocking value creation,Edgar,Dunn&Company(
5、EDC)partnered with IATA to undertake an Airline Payment Cost and Revenue Drivers Study3Extract from IATAs DDR SymposiumIATAs Industry Recovery TrackingThe objective of this Study is to better understand the costs and revenues associated with payments for the airline industry globallyIn order to supp
6、ort the recovery and unlock value creation,having a good understanding of payment-related cost and revenue drivers is crucialThe airline payment ecosystem is highly complex due to the number of stakeholders involved in the value chain(see simplified diagram below)and due to the multitude of sales ch
7、annelsEDC undertook the Study to provide a baseline across four cost and two revenue drivers associated with payments*The Study leveraged IATAs data to estimate the relevant 2019 payment value and included bilateral interviews with 10 airlines across different regions(Americas,Europe,Middle East Afr
8、ica and Asia Pacific)to validate key assumptions for cost and revenue drivers4AirlinePayment GatewayMerchant acquirerCard IssuerNDCTravellerGDSTravel AgencyIATA BSP/ARCStakeholders in a Card Transaction(simplified view)Cost DriversPayment FeesFraud&LossesOpEx CostsCash-FlowRevenue DriversCustomer Re
9、achPayment ConversionAirlines Payment Cost and Revenue Drivers*The scope of this Study includes all sales channels and all forms of payment,but does notinclude costs/revenues associated with co-brand card programmesThe Study used a total payment value of$977 billion as a starting point to estimate t
10、he impact of payments for the airline industry The industry passenger payment value,used as a baseline for the Study,includes multiple elementsIATA developed an accurate total payment value that is based on the last“normal”full year,i.e.,2019For the Study,the total payment value accounted to$977 bil
11、lion:it includes elements such ancillaries,surcharges,taxes collected by the airlines and refundsIt is worth noting that airlines collected$93 billion in fees and taxes in 2019 on behalf of third parties(for which they are charged the related merchant fees)5Industry Passenger Payment Value 2019 Sour
12、ce:IATANote 1:Including fuel surcharges and other airline service feesNote 2:Taxes,Fees and Charges collected by Airline on the passenger ticket on behalf of Airport,local tax authorities etc.2019 Pax Payment Value12In summary,the Study estimated total acceptance costs of$20bn but could only qualita
13、tively measure the(positive)revenue impactBased on 2019 payment value,industry-level payment acceptance costs could be quantified at$20bn,but the revenue impact of payments could not be quantified as airlines were not able to provide the supporting dataNearly all interviewed airlines acknowledge tha
14、t optimizing payment acceptance can have a positive impact on revenuesWith the right data collection and analytics tools,airlines will be better equipped to measure this impact on passenger and ancillary revenues6Industry Payment valuePayment Cost and Revenue DriversInterviews with AirlinesCost&Reve
15、nue Sizing Results The baseline used in the Study was the 2019 total airline industry payment value This represents the total value paid by travellers to airlines(including$93bn of fees and taxes)The four cost drivers and two revenue drivers include a number of subcategories and key assumptions Thes
16、e cost and revenue assumptions were validated with the help of 10 airlines The Study included 10 bilateral interviews with airlines from different regions to validate the key cost and revenue assumptions The feedback from the airlines was anonymised and aggregated*Due to the lack of supporting quant
17、itative data from airlines,it was not possible to estimate the revenue impact Applying detailed cost assumptions to the total payment value,the Study estimated the total cost of payments for airlines:$977bn6 drivers10 airlines$20.3bn costs*EDC would like to thank these 10 airlines but can not mentio
18、n their names,as data was collected on an anonymous basis and aggregatedTable of Contents Airline Payment Cost and Revenue Drivers StudyPayment Cost DriversPayment Revenue DriversOpportunities782%9%5%4%100%Total payment acceptance costs for airlines are$20.3 billion,which is equivalent to 2.2%of ind
19、ustry payment valueFour main cost drivers were identified in order to size the overall payment cost for airlines.Overall,the total cost represents 2.2%of the total industry payment value,including payment fees representing 1.8%Payment fees include merchant fees for all forms of payment,payment gatew
20、ay fees and FX fees less any card surcharges.Payment fees account for the vast majority(82%)of the total payment acceptance costs for airlines,and represents 1.8%of total payment valueCash-flow related costs are the second largest element accounting for 9%of the total payment costs.They include the
21、cost of delayed settlement from acquirers and BSPs/ARC in addition to the cost of providing guarantees.These costs have increased due to the Covid crisisFraud&Losses include the value of all payments-related fraud losses incurred by airlines,as well as unrecovered receivables from BSP/ARC“Cash”or“on
22、 account”transactionsOpEx costs comprise internal airline resources involved in payment acceptance(e.g.,staff managing relationships with acquirers and gateways),chargeback costs and payment-related compliance costs Confidential8%of Total CostsAirline Payment Cost Drivers as%of Industry Payment valu
23、eAirline Payment Cost DriversPayment Fees accounted for a total cost of$16.6 billion for airlines,with card payments representing the vast majority(93%)9Card-related cost of acceptance,from both direct and direct sales channels,account for$15.5 billion representing the vast majority of the total air
24、line payment fees(93%).This is caused by card payments representing the majority of total payment value(72%)and higher fee levels in regions such as North AmericaIATA BSP and ARC“Cash1”account for 21%of the total payment value,while their processing fees only represent 0.2%of the total payment fees(
25、$16.6 billion),which is significantly lower than other forms of paymentAFOPs2continue to represent a small proportion of the total airline payment value(7%)and consequently a small proportion of total payment fees(6.4%)Airline Payment Fees by ChannelAirline Payment Value by Channel53%7%21%19%CardsAF
26、OPsBSP/ARC CashBSP/ARC Card%of Total Payment ValueDirect SalesIndirect Sales64.4%6.4%0.2%28.5%CardsAFOPsBSP/ARC CashBSP/ARC Card%of Total Payment Fees*Direct SalesIndirect Sales*This graph only includes merchant fees.Other types of payment fees represent 0.4%of total payment feesNote 1:“BSP/ARC Cash
27、”is the amount for transactions for which the Travel Agent received the payment from the customer,and then remitted the funds to IATA which in turns settled it to the Airlines.In the graph above,this category also includes other direct settlementsNote 2:AFOP=Alternative Forms of Payment(e.g.,bank tr
28、ansfers,wallets,buy now pay later)The Americas region accounts for 54%of global payment fees paid by airlines,followed by Asia and Europe The Americas region represents 54%of the total payment fees.This is due to large transaction volumes in North America,very high penetration of card usage,as well
29、as generally higher merchant feesIn Asia,the low proportion of payment fees among indirect sales(19%)is due to the high proportion of IATA BSP“Cash”,which accounts for the majority of total indirect volumesIn Europe,airlines recover 14%of the total payment fees through card surchargingIn Africa&Midd
30、le East,AFOPs account for 21%of the total payment fees,in particular driven by the volume of mobile money transactions1054%24%16%6%100%of Total Payment FeesAirline Payment Fees by RegionAirline Payment Fee Components by Region60%74%67%59%2%7%15%21%35%19%27%17%-5%-14%-7%3%5%4%10%of Total Payment Fee
31、By RegionDirect Sales-MSC CardsDirect Sales-MSC AFOPsIndirect Sales-FeesCard SurchargeOther*AmericasAsiaEuropeAfrica&Middle EastNote:MSC=Merchant Service Charge.In the case of card payments,the MSC includes acquirer margin,interchange fees and scheme fees.For Indirect Sales,Fees include MSC Cards pl
32、us processing fees for BSP/ARC CashFor AFOPs,MSC includes fees charged by the AFOP provider*Other=Other fees excluding MSCThe Study highlights the need for airlines to review their costs of payments and identify cost-reduction opportunitiesPayment fees are the largest payment cost,mainly driven by t
33、he cost of acceptance of card payments through the direct channel11Cost Drivers-Key FindingsBest Practices for AirlinesFull and granular visibility of the cost of acceptance(e.g.,by payment method,country,etc.)to make informed decisions related to the payment acceptance strategyThe payment fees in t
34、he indirect channel are driven by cost of BSP/ARC“card”transactionsClose and on-going coordination between Distribution and Finance(or the department that manages payment fees)to find the right balance for card acceptance through indirect channelsCash-flow costs have gained importance as a result of
35、 the Covid-19 pandemic and the structural risk associated with the airline industryAnalysis of risk mitigation options to address cash-flow issues caused by settlement delays(e.g.,connectivity to a broader set of acquirers,data sharing with acquirers,etc.)The payment costs for airlines need to be ca
36、lculated over the payment value paid by the passengers,monitored and managedAn internal payments team tasked with understanding how payment fees and other payment costs are applied and change over timeTable of Contents Airline Payment Cost and Revenue Drivers StudyPayment Cost DriversPayment Revenue
37、 DriversOpportunities12Airlines recognize the importance of payment initiatives to increase their market reach,however there is no quantitative evidence of the level of benefitAirlines recognize the importance of introducing relevant payment methods to meet the needs and preferences of customersCust
38、omers might not have or want to use a card to pay for airline ticketsMost of the airlines interviewed had already introduced at least one AFOP(e.g.,e-wallets,bank transfers,BNPL1)In comparison,online retailers accept an average of 4 different payment methods(source:Merchant Risk Council)The value of
39、 airline revenue paid with AFOPs via direct channels is estimated to be$54bn based on 2019 volumesAirlines rarely measure the impact on incremental pax revenues generated by AFOPsThe vast majority of airlines interviewed did not do A/B testing to measure the impact on revenues generated by the intro
40、duction of AFOPsSome of the airlines had identified a positive sales impact of AFOPs such as wallets in specific countries13Airlines recognize the potential positive impact driven by payment initiatives such as:Greater cross-selling enabled by“card on file”Additional revenue share from Dynamic Curre
41、ncy Conversion(DCC)/Multi Currency Pricing(MCP),gift cards,etc.However,only a minority of airlines have implemented these payment initiatives so farThe Study identified this lack of payment initiatives to support ancillary revenues as a major gap compared to online retailers in other verticalsNone o
42、f airlines interviewed had measured the correlation between these payment initiatives and ancillary revenue increasesAn airlines payment acceptance strategy can have a direct impact on value creation with initiatives such as the implementation of AFOPs or supporting ancillary sales via“card on file”
43、Incremental pax revenues thanks to AFOPsIncrease in ancillary revenues enabled by paymentsNote 1:BNPL=Buy Now Pay LaterSource:Airline interviews undertaken for this Study Approval rates and false positives are important KPIs when evaluating the payment conversion performance of an airlineAirlines ar
44、e generally aware of card approval rates for their direct channels,but would typically not proactively monitor or optimize themOn average the reported card approval rate for airlines is 85%(compared to 90%for best-in-class online retailers)Best practice amongst online retailers is to monitor card ap
45、proval rates on an on-going basis and by different cuts(e.g.,by country,by issuer)None of the airlines interviewed knew their card approval rates for their indirect channelsAirlines do not typically receive this information from GDSs,who process the authorisation request on behalf of airlinesThe Stu
46、dy identified this lack of data visibility related to indirect sales as a major gap compared to online retailers in other verticalsAirlines do not measure the impact on incremental pax revenues driven by higher card approval rates14Some airlines measured the proportion of declined transactions for d
47、irect channels due to fraud suspicionAccording to MRC,enterprise-size online retailers typically decline approx.15%of manually reviewed orders due to fraud suspicionBut none of the airlines measured how many of these declined transactions were false fraud positivesFalse positives are declined transa
48、ctions due to fraud suspicion that after revision are proven to be legitimate Airlines should monitor the level of false positives and their origin(e.g.,if the false positives come from a specific market,type of transaction,value of transaction,etc.)and adjust their fraud rules accordinglyBest pract
49、ices among online retailers include on-going monitoring of KPIs,such as the card approval rates,for all channels.Optimizing KPIs can have a positive impact on the revenue of airlinesIncremental pax revenues due to higher card approval ratesIncremental pax revenues due to lower false positive ratesSo
50、urce:Airline interviews undertaken for this Study Compared to online retailers in other verticals,airlines are currently less focused on monitoring/optimizing revenue drivers related to paymentsOnly a minority of airlines had undertaken payment initiatives to support ancillary revenueNone of them me
51、asure the correlation between an initiative and ancillary revenue increases15Revenue Drivers-Key FindingsBest Practices for AirlinesA 2-3 year payment roadmap and resources to implement relevant payment initiatives to support growth in ancillary revenuesAirlines do not proactively monitor or optimiz
52、e card approval rates for the direct channels and do not know approval rates for their indirect channels Working closely with payment partners(e.g.acquirers,GDSs)to monitor and optimize card approval rates on an on-going and proactive basisAirlines generally monitor the level of declines due to frau
53、d suspicion but none of the airlines interviewed knew how many of the declines were false positivesAirlines fraud team,tools and partners to find the right balance between low fraud rate and frictionMost airlines accept at least one AFOP on their direct channel but rarely measure the impact on incre
54、mental pax revenuesIT agility/flexibility to implement relevant AFOPs for online and offline channels in order to expand market reachTable of Contents Airline Payment Cost and Revenue Drivers StudyPayment Cost DriversPayment Revenue DriversOpportunities16A comprehensive payment strategy is a first s
55、tep towards improving customer experience and unlocking value creation17Payment is an important business topic for airlines and should be considered as a commercial enabler rather than just a cost elementThe payment value chain impacts multiple business areas within an airline,which has a direct eff
56、ect on the customer journey and experienceTherefore,it is important to define a comprehensive payment strategy that aims to reduce costs as well as generate revenues and is aligned with the sales and distribution strategiesPayment Vendors/PartnersPayment AcceptanceBack-end(Airline)Front-end(Customer
57、)Customer retention/LoyaltyTechnologySelection of payment vendors(e.g.,payment orchestration platform,acquirers)Negotiation of contracts and commercialsMonitoring of performanceRelationship managementPayment acceptance policy for consumers and corporatesAgent card policyCard surcharging policyADM po
58、licyPayment experience at the checkout page In-flight/ATO/CTO/airport payment experienceRange of currencies via MCP and DCCReporting from payment vendorsReconciliation processesData analysis(KPIs)Risk&fraud managementChargeback managementPayment acceptance architectureSplit of in-house vs.outsourced
59、 activities(e.g.,internal payment gateway)Co-branded cardsGift cards/gift registryExamples of payment topics to optimizeEDC has developed a four-phase framework that can be used by airlines to optimise payments18Key ContactsIf you have any questions related to the Study,please feel free to reach out
60、 to our experts19Pascal BurgDirector,PJulia CallejoConsultant,LFounded in 1978,the firm is regarded as a trusted advisor by its clients,providing a full range of strategy consulting services,expertise and market insight,and M&A supportEDC has been providing consulting servicesto a wide variety of cl
61、ients including:Stakeholders in the travel industry including airlines,IATA,hotels,travel agencies,GDSs,issuers and acquirers focused on travel,etc.BigTech,social media platforms,and marketplace facilitatorsEuropean banks,lenders,Fintechs,payment companiesAll major international card schemes and man
62、y domestic card schemes Influential payments providers and processorsLeading merchants across verticalsEdgar,Dunn&Company(EDC)Independent Global Financial Services and Payments Strategy ConsultancyEDC Key MetricsEDC Office Locations Fintech&Payments Strategy&M&ASeven officeslocations worldwideIndepe
63、ndent-owned and controlled by EDC Directors+1,800 projects completed+250 clients in 55countries and 6continents20LondonSydneyFrankfurtParisSan FranciscoEDC OfficesDubaiAtlantaThis document is protected under the copyright laws of the United Kingdom and other countries.This document contains information that is proprietary to Edgar,Dunn&Company,which shall not be duplicated or used in whole or in part by the recipient without the express written permission of Edgar,Dunn&Company.2022 Edgar,Dunn&Company(published).All rights reserved.22