Over the past five years there has been increasing speculation that airlines will attempt to pass on or offset the merchant fees they pay for each booking made through a card. This is because merchant fees now represent the airlines’ single largest distribution expense – for some carriers, as high as 2.7 percent of the settled value of a ticket.

Mario Kriebel, vice president, credit card program for BCD Travel, offers some background: “In 2002, British Airways started to pass on its merchant fees for corporate net fares to its corporate customers but this was eventually stopped after litigation from American Express. However, it is now commonplace for both traditional and low-cost carriers to charge a card handling fee for direct sales to consumers via their websites.” Today, many airlines require tour operators and consolidators to be, in effect, their own merchants. The significant difference in this situation, compared to the corporate travel industry, however, is that these providers receive net rates from the airlines and are then able to mark up the rates to offset any associated distribution costs. 

Developments in 2009
This year, two major airlines have made moves to cover their card costs incurred through bookings by travel agents.

United Airlines
Earlier this summer, United Airlines announced that on July 20 it would discontinue access to its credit card merchant agreements for 28 travel agencies in the US.

Effectively, this would have meant the agencies would have to pay for the flights using their own merchant agreements, and inevitably they would have passed this cost on to their customers.

Additionally, the move did not take into account the complexity tied to forcing agencies to take on the role of merchants. One key concern, for example, is what financial compensation would be provided to ticket-holding customers in the case of a carrier bankruptcy, since agencies do not own the “product” being sold.

United stated that the move was “very limited in scope, confined to a small number of agencies,” and that the policy “in no way was intended to be a broad move in the marketplace, as has been misinterpreted by outside organizations.” After pressure from various travel industry groups and politicians in Washington, the airline deferred the discontinuation for 60 days.

KLM
On August 4, KLM introduced a credit charge fee of €7.50 for bookings on its most restricted ticket types made through travel agents in the Netherlands. Agents are passing on the €7.50 charge to customers, although corporate customers will only be affected to a limited extent because they are not major users of heavily restricted fares.

Will airlines increase efforts to reduce their merchant fees?
Yes, although it will not happen consistently or overnight. The approach taken by United, for example, may be tested legally, since there is an argument that the agent cannot become a merchant as it does not price or control the product it sells on behalf of the airline. However, it is harder to see a legal challenge to the strategy adopted by KLM.

Rose Stratford, senior vice president, global supplier relations for BCD Travel, observes that while discussion to date has tended to center on the increase in costs associated with TMCs taking over – and then passing back – merchant fees, the financial implications for corporate customers are multiple: “The reality is that airlines, with their higher volumes, are able to negotiate better terms with credit card companies than individual TMCs would be able to. Additionally, in the case of KLM, if customers simply elect to accept the fee, it is likely that other airlines will see an opportunity and follow suit.” 

Finnair and SN Brussels have recently indicated that they will soon take similar action to reduce their merchant fees. Other airlines have disclosed to BCD Travel that they are seriously considering following the same route.

How should corporate clients respond to the situation?
TMCs operate low-margin businesses and therefore they will be compelled to pass on any card fees they incur to their clients. Therefore, these moves by the airlines are effectively a price increase. It is a similar situation to the way airlines have shaken off their GDS fees, which they persisted with in spite of client protests.

To outsiders, the move makes little sense: why don’t airlines simply price their product to reflect their distribution costs, as do most other businesses? Judging by a comment from KLM in Business Travel News, the answer is that airlines believe they are not the major beneficiaries when a card is used as the payment vehicle. “Business-oriented travel agents and corporate accounts are encouraged to use credit cards, based on services  such as cash flow control, credit terms, management information, automated data feed, insurance, reward programs and kick backs,” said KLM. “Currently, these services are solely financed out of the merchant fee. In other words, KLM as the merchant is financing the added value services of the credit card companies towards the corporations and agents.”

Kriebel sees two options open to corporate clients:

Negotiate the increases back
Merchant fees have long been a cost of airlines doing business. Furthermore, in spite of what KLM says, airlines also benefit from using cards as a payment vehicle. Says Kriebel: “If the airline chooses to pass this cost on to the customer – albeit indirectly via the TMC – there is a very strong case for customers negotiating a corresponding discount in their preferred supplier agreements.”

Switch to settlement through invoicing
Initial feedback from customers in the Netherlands is that they will stay with cards, but in the long term some will be tempted to stop using them as the fees start to accumulate. Kriebel observes that this may be unwise: “The benefits of cards listed by KLM are all true. Companies with streamlined administrative processes and excellent management information underpinned by good card usage stand to lose more than they would gain.”

Kriebel adds that given the complexity of the issue and the speed with which it is evolving, BCD Travel has created an in-house panel, including experts from Advito, to monitor the situation: “We are currently in discussions with credit card companies, banks and airlines to determine the best path of action for our customers. Whatever direction the merchant fee situation takes, we are committed to helping clients navigate it with the least possible negative impact to their travel programs.”