With a projected value of $40 billion by 2030, retailing presents a massive opportunity for airlines in the years ahead.
But to fully realize that potential, carriers must get the payment component right, according to a new report from McKinsey & Co.
In a study titled “Airline retailing: How payment innovation can improve the bottom line,” McKinsey outlines how innovation around payments can help airlines improve the customer experience, grow revenue and decrease costs.
As it stands, approximately 2.9 billion airline booking payment transactions - valued at about $1 trillion - take place around the world every year.
However, the transactions come at a cost: According to a McKinsey analysis, the airline industry spends more than $20 billion per year on payment costs, amounting to around 3% of airlines’ total revenue and approximately 78% of the industry’s net profit.
While much of the expense is due to travelers’ dependence on credit cards, airlines also collect revenues on behalf of other parties in the value chain, such as airports and tax authorities, and forward about 10% of the total value of their transactions, while still incurring payment costs for the total transaction value.
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Some intermediaries, such as Hopper and Booking.com, have recognized payments as a differentiating factor and have invested in fintech solutions accordingly. For airlines, by improving payments and embracing retailing, they have the opportunity to prevent further disintermediation.
“In general, airlines have yet to leverage the link between payments and customer experience; these are often viewed as separate concerns. But payments are an important element of the customer journey - each touch point presents an opportunity to capture additional revenue,” the report states.
“The ease of making a payment is often a key decision criteria for customers when it comes to booking on an airline website as opposed to an online travel agency or booking platform and is a crucial factor in selling ancillary services along the payment journey. Improving ease of payments, and improving the sales conversion rate, has potential to boost sales.”
Value creation
According to the report, airlines stand to earn an additional $14 billion on top of the $40 billion airline retailing opportunity by strategically addressing payments.
To capture the $14 billion payments opportunity and realize the $40 billion value of airline retailing, McKinsey has identified six value-creation levers airlines can act on:
- Increase customer reach and conversion: Airlines should look to attract new customers – particularly in emerging markets – as well as improve the user experience in direct booking channels. This helps increase usage and prevents customers from abandoning the sale amid the booking process.
- Grow ancillary services: By improving the overall customer experience, airlines have the potential to grow ancillary services and increase revenue. For example, introducing “micro-redemptions,” such as miles for flights or lounge entry, could help increase the number of customers using ancillary services. Airlines should also consider enabling all relevant payment methods throughout the customer journey to make it easier for travelers to use their preferred payment methods.
- Enhance loyalty programs: Payment methods such as co-branded cards are key to an attractive loyalty program, the McKinsey report states. By analyzing consumer data around card usage and engagement at payment touch points, airlines can learn more about their customers and tailor loyalty program offerings to traveler preferences.
- Provide flexible exchange policies and easier refunds: Airlines that offer flexible fares and easier access to refunds not only give travelers more options, but also build loyalty and boost sales. Airlines can also incentivize customers via coupons or perks to use the carrier’s preferred refund method.
- Become part of the corporate payment ecosystem: To reduce costs in the corporate realm, which tends to prefer more expensive payment methods, airlines could become part of the financial automation ecosystem and provide more integrated solutions, such as introducing account payable automation and increasing digitization for corporate transactions. They could also expand their acquirer base to improve foreign exchange terms and review co-branded card terms.
- Reduce working capital costs and payment costs: Airlines can reduce overall costs by encouraging customers to use payment methods that have shorter settlement times, which helps reduce payment costs across the value chain. In addition to negotiating lower fees and better payment terms with payment providers, they can also take steps to shift travelers to more cost-effective booking and payment methods, such as through direct channels.