A customer-focused roadmap to digital airline payments

A customer-focused roadmap to digital airline payments

This is our last article before the World Aviation Festival in Amsterdam in a couple of weeks. We will end the series of articles with a reflection on airline payments, like a shopping experience usually ends with a payment transaction. Bref.

Should airline payments come as an after-thought of a retailing strategy, as a cost of doing business? What is the strategic dimension of payment for travel suppliers? As payment costs have grown bigger now than distribution costs for airlines, is there any new capability that could both enhance the customer experience and reduce costs?

The airline payment topic is closely related to the customer confidence topic and to the retailing topic which we discussed earlier. We also highlighted payments in our White Paper in proposal #6 (vouchers & e-money) and in proposal #16 (customer accounts). So what will digital airline payments look like?


A world of credit cards

Credit cards are still the ubiquitous method of payments for travel purchases, both in the leisure and corporate worlds. Notable exceptions, such as payment apps like WeChatPay and AliPay in China, or e-wallets like PayPal in the US or Lydia in France, show what the future of digital will look like.

The concept of linking a bank account to a 16-digit number was revolutionary when it was invented about a century ago… by airlines. Credit cards have improved a lot, for example in the physical card experience with the contactless payment, which became the norm during the pandemic. Mobile wallets, like Apple Pay, add an authentication layer on top of the card and enable contactless payment… without entering a PIN.

In the online world, paying with a credit card stored on a website is relatively seamless (as long as the real-time check on the card mobile app works smoothly). The issue remains when dealing with a new website, entering all the card payment details. The entire payment process, including the authorization, may still result in poor conversation rates.

If credit cards still work well, why change? It is a mix of convenience for customers and cost reduction for merchants (estimated at $20.3bn or 2% of the $1trn sales by McKinsey), with an evolution of technology.


The combined effects of Uber, Fintech and the pandemic

In the past few years, the perception of airline payments evolved from tactical considerations (credit cards work well, why bother?) to strategic thinking (payment options are a key differentiating factor for a travel business).

The Uber “seamless payment” experience, whereby the customer does not need to worry about paying a cab driver, was a catalyst in the change of perception. It became even more relevant and obvious for e-scooters, because users would not enter their credit card details for each ride, as there is no card reader on the e-scooter.

The Hopper “peace of mind” proposal, where customers don’t need worry about finding the cheapest fare or making changes to their bookings, extended the payment discussion to financial services. Indeed airlines imposed those constraints (non modifiable tickets, non refundable tickets, 10x price variation on one route…) with their revenue management practices, and it took the likes of Hopper’s fintech to compensate for the constraints and restore the confidence.

The Covid pandemic added uncertainty to travel planning and to health, with the effect of boosting travel insurance for changes and health. Insurances and other financial services have complemented the simple payment transaction, which would otherwise be definitive and risky from a customer perspective.


A customer-focused roadmap

The last decade has seen consumers opting for a variety of forms of payment (FOP) beyond credit cards. Airlines have faced at least three options: 1) adopt as many FOP as possible 2) steer customers to use cheaper FOP 3) promote their own FOP.

The proliferation of new FOP makes the payment market more fragmented. Airlines willing to reach more customers in every market need to support these FOP, without bearing the cost and complexity. Payment gateways enable airlines to reach customers in all markets.

Payment is not limited to the ticket purchase. It covers all the transactions during the booking process and the journey. What if a passenger could enter a lounge or go through a security fast track like they enter the subway (In London, not Paris)? The FOP should be convenient for customers’ online use as well as for a physical use, like access control.

If some FOP are cheaper for airlines to accept, it should be up to them to incentivize customers in using them. Indeed customers tend to have their preferred methods of payment (e.g. a bank credit card, a neobank card, a mobile app) which come with perks, and the perks are funded in part by merchant fees. Airlines have perks too (e.g. seat selection, priority boarding, loyalty points) which may be attractive to customers.

Promoting the airline’s own FOP may sound ambitious. Retailers like Amazon do it with Amazon Pay, or Alibaba with AliPay. In a corporate sale environment, the adoption of the FOP can be part of the airline’s contract negotiation. However in a leisure world, FOPs are ubiquitous and used by consumers daily, not only for air travel. Unless the airline can propose the same value as online retailers, they won’t be customers’ preferred option.


The future of digital airline payment

Air Asia is a pioneer in building a lifestyle brand, not only an airline. Many airline brands are household names, offering co-branded credit cards and loyalty programs, with the potential of becoming a “wallet”. The airline wallet can be used as a payment method for any type of physical and online purchases, while giving access to airline perks and other special offers.

Going one step further, airlines may reach out to communities that have moved beyond credit cards. For example Web3 communities in the metaverse may use crypto-currencies within their own environment and for the payment of physical goods and services.

While credit cards will continue to serve the airline industry for the coming years, digital payment alternatives pave the way to a more convenient and integrated experience for customers, and to more cost effective and flexible solutions for airlines.

Buy Now Pay Later Flights?

Buy Now Pay Later Flights?

Buy Now Pay Later Flights?

The vast majority of flights currently follow a pay up front model. However, there are rising speculations that this could shift to towards a buy now pay later (BNPL) approach. Why?


Rising flight cancellations

This summer has been chaos for flights. On one day in July alone, London Heathrow cancelled 60 flights. According to FlightAware tracking data, that same day there were 1,700 flight cancellations around the world.

Demand for flights has grown as revenge travel moved the top of people’s lists but demand has proved hard to keep up with especially with current staff shortages.

A cancelled flight leads passengers down a tricky path of long call queues, bureaucracy, and sometimes months of waiting before payment is refunded. In the US, airlines are not even legally obligated to issue compensation. This summer, more than ever, has highlighted the shortcomings with the pay at booking system.


Following suit with the rest of the travel industry

According to Skift new forms of payment including BNPL are “empowering consumers” and “making travel more accessible.”

In the last few years, platforms including Booking.com and AirBnB offer their customers the option to reserve the service but differ full payment until arrival upon the property.

BNPL is standard practice in many retail settings, and it provides an opportunity for brand differentiation as the trend spreads further throughout the travel industry.


The Lufthansa precedent

Lufthansa introduced a ‘Pay As You Fly’ model in 1997, expanding this to their corporate customers in early 2021. This model ensures passengers are not charged until the last minute once there is a guarantee the scheduled flight will leave as planned. Departing from the pay at booking norm, the airline distinguishes itself from competitors and receives a little more per trip per customer.

The airline cancelled 800 flights on 2 September, impacting 130,000 passengers due a pilots’ union strike.

Representatives from Lufthansa will be speaking at this year’s World Aviation Festival on panels including: “How can airline CX teams keep up with the increased need for flexibility, sustainability, personalization, digital differentiation to create superior end-to-end experiences?” Additionally, Kai Schilb, Head of Payments at Lufthansa Group will be responding to questions such as “How can we adapt BNPL schemes to the needs of different countries and regions?”


A growing shift?

Responding to the increase in flight cancellations, the state government of Lower Saxony in Germany is calling to abolish prepayment for flights. Transport Minister Bernd Althusmann is advocating a ‘Pay As You Fly’ model for airlines insisting this is in line with consumer interests and will streamline the current refund process.

The evolution of payment systems especially after the sea of cancellations this summer is one to watch in the near future. BNPL will be discussed in the payments agenda at this year’s World Aviation Festival.


Article by Jess Brownlow