Airlines and profitability: where do payments fit in?

Payments are, obviously, an essential component of any business transaction. Every company needs to be remunerated for its goods or services, and payments are the vehicle by which this happens. Everything else an organisation does, from developing its core offering to marketing and selling and delivering its solutions to servicing its customers, is all essentially done to solicit and accept payment.

The reason we’re talking about payments in a conceptual, elementary-business-school way is that despite their vital importance to the viability and profitability of any company, payments often feel like an afterthought. Resources and investments flow to operations and capital improvements, while insufficient efforts are dedicated to optimising payment processes.

Yet there is a direct link between payments and profits, and the cost of payments has a significant, one-to-one impact on an organisation’s bottom line. And nowhere is this truer than in the airline industry.

Airline payment costs outpace other industries

While the average business across all sectors spends about 2% of total sales on payment costs*, the airline industry’s payment cost rate runs at 3% of revenue.
McKinsey puts that total at more than $20 billion annually, amounting to nearly 78% of the industry’s net profit. With IATA now projecting global airline industry revenues to top $803 billion this year, airlines’ payment costs could exceed $24 billion.

It’s hard to believe that airlines would consider numbers so large to be negligible compared to other operating costs - yet their actions often indicate exactly that. Many stay with legacy payment service providers (PSPs) that offer limited flexibility and static fee structures, pull together acquirer relationships out of necessity when they enter new markets and rely on outdated routing strategies that yield suboptimal transaction margins.

This is not to say that all airlines (or all businesses, for that matter) are indifferent to the cost and complexity of their payment processes. Sixty-six percent of companies surveyed by 451 Research said that keeping payment acceptance costs as low as possible is a high priority for their business. And 41% of travel firms say the biggest source of financial stress is the complexity of managing payment systems.

Recognition of the relationship between payments and profitability does exist.

Finding another path to profits through Payment Orchestration

But to make a substantial difference industry-wide – and to address those outsize figures suggested by McKinsey – there needs to be a much broader adoption of proactive payment strategies that leverage agile technologies, AI and machine learning and sophisticated transaction routing to minimise costs, maximise acceptance rates and create more seamless payment experiences for end users.

There’s a term for these forward-thinking payment strategies: Payment Orchestration

Payment Orchestration is a blanket concept that describes the end-to-end management of all components of a payment, from authorisation to routing to settlement to reporting. In practice for the airline industry, it creates a more transparent, flexible payment ecosystem that can easily accommodate multiple PSPs and acquirers, route transactions intelligently to boost acceptance, integrate multiple payment methods, and facilitate more conversions in direct and indirect sales channels.

Most importantly, Payment Orchestration helps airlines reduce the cost of payments across global operations

At a time when 42% of business leaders polled by PwC said they felt strongly that there would be an acceleration of cross-border, cross-currency instant and B2B payments in the near future, investing in Payment Orchestration is a solid strategic initiative for airlines operating in multiple international markets.

Narrow margins demand better ways to drive down costs and unlock revenues

There’s another advantage for airlines: this is the first year since 2019 that airlines’ net profit margin is set to exceed 1% (precisely 1.2%, according to IATA data).

Those narrow airline profit margins are driven by the historic surge in demand for air travel that has so far proved firmly resilient to growing macroeconomic headwinds. But when the travel tide recedes, where will airlines turn to shore up their profitability? Payment Orchestration can be the pathway to maintaining margin even as demand declines.

The link between payments and profits is undeniable. Because they’re directly associated with a central component of every transaction, every point saved on payment costs accrues directly to an airline’s bottom line.

With their proliferation of cross-border transactions, large customer bases and complex legacy systems, airlines spend a higher percentage of revenue on payment costs than companies in other industries and therefore have a greater opportunity to boost their profits by making incremental improvements to their payment processes.

Payment Orchestration represents a viable path to those improvements and driving profitability, making it a critical business and operational strategy that every airline, regardless of size or structure, should explore.

*PYMNTS and Deluxe analysis