Airlines seek lower-cost alternatives to credit cards
Nadine Godwin, Travel Weekly, 7/30/2007 (excerpted)
Three billion dollars in expenses is enough to get the attention of most anyone except maybe the U.S. Congress and the Blackstone Group.
It certainly has the attention of airlines, because $3 billion is what they cumulatively spend worldwide each year on credit card merchant fees, said Ralph Kaiser, president and CEO of the airline-owned UATP corporate travel payment network.
ARC estimates that carriers pay $1 billion annually just on corporate air sales processed by ARC. Throw in leisure sales, and ARC-processed sales probably account for more than half of airline credit card fees worldwide.
So, having already cut labor, commissions and GDS costs, the carriers now see credit card fees as the next opportunity for meaningful savings, particularly since credit card fees are trending higher. Kaiser said some card companies had recently hiked rates to 3%, well above the historic averages of 2.2% to 2.5% for carriers.
Airline officials report there is no negotiating with credit card companies.
That leaves two options: finding lower-cost alternatives to credit card payments or foisting off credit card fees on someone else -- ultimately, the customer, which could violate contracts with credit card companies and might even be illegal in several states.
Alternatives
Against this backdrop, ARC devised a plan to persuade corporations or their agents to convert larger accounts to cash payments.
UATP is trying to steer more business to UATP cards, which save airlines one-half to one point on fees, Kaiser said.
And this month, Southwest and Northwest introduced the PayPal service on their Web sites. The 140 million consumers with PayPal accounts can pay with credit cards, debit cards or cash in the form of bank drafts. PayPal averages out its costs, enabling it to charge a lower fee than credit cards.
Southwest predicted its savings on PayPal would be less than half a point. Al Lenza, Northwest's vice president for distribution and e-commerce, said he expected unspecified but "significant" savings.
Lenza said Northwest was also looking at CheckFree as well as Bill Me Later, Gratis Card and Western Union.
He added that there was "some potential for straightforward funds transfers" with some customers. He was supportive of ARC's project, saying that he expected ARC "to play a role in making life easier."
Lenza said Northwest spent equal amounts on credit card fees and GDS fees three or four years ago; now credit cards cost twice as much. "It is critical to reduce our dependence on credit cards," he said.
But that's easier said than done.
"Some of our best customers are big users of these cards," Lenza said. "We have our own bank affinity card... and some of our important customers issue their own card. We care about these relationships."
He said the issue was "not an indictment" of credit cards, which offer "structural advantages, fast settlement and low fraud."
The alternative to reducing fees is to shift the fees to someone else. The possibility that "someone else" could be travel agents concerns ASTA. Earlier this year, Paul Ruden, staff senior vice president for legal and industry affairs, attended the Airline Distribution 2007 conference. When talk there turned to credit card fees, the something-must-be-done tone of the conversation "parallels the kind of talk heard in 1994," just prior to the introduction of commission caps, Ruden said.
MasterCard and Visa prohibit merchants from passing on credit card charges to customers. American Express prohibits merchants that accept MasterCard or Visa from doing so.
In addition, is it illegal to assess a credit card surcharge in 10 states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas). However, those laws do not prevent merchants from offering discounts to customers who pay with cash, which is the group that ARC's project would target.
It is less clear how credit card contracts and state laws would apply if a carrier passed its credit card costs to agents.
It is already happening on a small scale. Travel lawyer Mark Pestronk said that when carriers have caught an agent charging cash sales on an agency card, they have obtained reimbursement for the card fees.
Pestronk said he knew of nothing that would prevent an airline from charging agents for its merchant fees, even though those costs would almost certainly be passed on to customers.
Travel lawyer Jeff Miller interprets matters differently. He said he expected that agents would raise fees only for clients using plastic while explaining the extra fee was an airline surcharge. "If a carrier tries to implement this without credit card issuer approval, it will not get far," Miller said. No one is going to want to be first to try this anyway, he added.
The most unsettling possibility is that a carrier might require that agents be classified as merchants in a ticket transaction and therefore be the party responsible for paying the credit card fee.
Making agents the merchants is "debated every so often," Lenza said, but he added that such a shift could be "very complicated." For starters, some agents might find it difficult or too costly to qualify.
Richard Lawson, a marketer of merchant plans who specializes in travel, said there once were more than a dozen banks willing to qualify agents as merchants but that now there are only two.
Lawson, based in Windsor, Conn., said if agents were the merchants, the fees they would be charged would be higher than the fees airlines pay. "The banks will benefit and consumers will lose," Lawson said.
Typically, he said, a merchant receives payment two days after making a credit sale, but if a bank's risk manager suddenly becomes concerned about something, the bank can withhold payments for as long as it wants.
"The banks could squeeze merchants out of business at any time," Lawson said.
The only certainty is that financial pressures will eventually -- probably sooner rather than later -- push the airlines to cut or shift their credit card fees.
"I have no insight about when carriers will do what," Ruden said. "It is like hurricane season: You don't know when, but you know it will come."