Analyzing Hot Topics in Payment

With both regulatory and consumer-focused changes on the horizon in the payments industry, BTN sought opinions from four senior executives in the corporate payment space—Grasp head of product and innovation Michael Duffy; UATP president, CEO and chairman Ralph Kaiser; HRS Pay CEO Kurt Knackstedt; and ARC director of payments Jennifer Watkins—to gauge how those issues could shape corporate payment trends in the coming years. An edited transcript of their responses follows. Read the second installment here.

Pay-as-You-Fly Models

The “pay as you fly” model made news in recent months when the German state of Lower Saxony issued a call for airlines to make it the dominant model, abolishing advance payment on flight bookings. The German Business Travel Association has been pushing the model as well, and Lufthansa last year launched such a program for corporate customers on some flights within Europe. But could this become a more widely used model in the global airline industry?

Jennifer Watkins: Lufthansa was the first one to do it and is still doing it in some markets. Alaska Airlines does something similar, but it’s more like a subscription model where you can sign up and get access to certain flights at a set rate that is set at the beginning of the year, and it’s in specific markets. The big challenge always is, how does an airline manage their inventory in that environment? Corporates kind of have the same flexibility when they buy nonrefundable tickets. You don’t have anything to lose, basically, with a nonrefundable ticket, although with the refundable ticket situation, there’s a lot of refunding back and forth, which adds noise into the ecosystem that maybe people would like to get rid of.

Michael Duffy: It is a different way of looking at it. When I think about any time I’m buying goods or services, it is different when you pay and when you consume the service. A hotel, you pay after. You pay prior with air. Restaurants, you would pay after you’ve eaten. A concert you pay ahead of time. So, there is some variation. Lufthansa is certainly on the forefront. From a corporate travel point of view, would this possibly eliminate unused tickets, because if you’re boarding the plane, there’s no unused tickets? You’re paying as you’re consuming it, so it sounds really good. Would this eliminate fraud as well, because if payment is only supplied as the traveler flies, could fraud even be possible? So, from a corporate point of view, it sounds quite attractive. From the airline side, is it good for them? Think of their costs, when they’re putting up prices for airfare, they have a lot of future contracts for fuel, so I would expect buying a ticket now would align to purchasing a future contract and mitigating risk and volatility. If it’s pay-as-you-fly, I guess the airline would be taking on the risk of the volatility. I’m not sure where things will end up, but it’s quite interesting, and it might have some potential.

Ralph Kaiser: It’s a little bit of a headscratcher. The way the industry works today, the reason you have nonrefundable airfare is because you need a certain amount of base revenue every day, every week, every month to keep everything going, because there are a lot of mouths to feed in the airline industry. I could be sitting here and say, “Hey, I’d like to go to Hawaii for Christmas.” So, I’m going to book a flight and reserve my seat for the Dec. 22 to fly to Honolulu. Then, on the 20th, I decide not to go to Hawaii, so I cancel. If everyone did that, all this inventory opens up, and maybe consumers like flying on empty planes, but airlines don’t like it. How do you control that aspect of it? Corporate is a little different. Our book-to-fly time is on average 17 days for UATP corporate charge card, so that’s easier to manage. But maybe there’s a conference they want me to go to, so I book it 10 days out, but the morning of, I have too many things to do, so I can’t go. So, you drop the flight, and maybe it’s a business-class ticket, and there’s no way the airline is ever going to recapture that revenue. So, how do you do it?

Kurt Knackstedt: Payment for airlines has always been this challenging thing where you pay for it now and consume it later. Corporates by and large don’t like that, because it’s all about cash flow. The airlines that are experimenting are listening to some part of the market, because it’s difficult to pay for something so far in advance when you know that half the time something is going to change. It’s going to be hard to know whether buyers and suppliers and find a way to make it work, given the dynamic nature of corporate travel. All the infrastructure around airline payments has been around so long that it will be difficult to undo a lot of that stuff. I do think you’ll find buyers and suppliers willing to experiment and find use cases that would work. As long as the industry allows room for experimentation, I’m curious to see how it plays out.

Duffy: There’s probably some work for the airlines to do that and have the revenue management align with all that, and prices will likely be higher for that kind of model, but maybe there is a benefit for the corporation in not managing the unused ticket components. It’ll be interesting to see how that plays out and if it’s something desirable. The change fees, I wonder how long it will last. The pandemic was a trigger for that, but to say no to revenue, airlines may come back to that.

Watkins: Our entire infrastructure is really built on “pay now and fly later,” so there would be an infrastructure change. We have our eyes on everything that’s happening in payments and making sure that we’re in a position to support whatever new payments come up. From a corporate perspective, it’s pretty far out there, but it does have some applicability. For ARC, we would have to make some changes for our system, and it would be billing on the flight date, things like that. If an airline really wanted to do it, they could make it happen, but it is very different for them and changes their model with their acquirers as well, because acquirers are paying some—probably not the U.S. airlines—at the time of flight, so it could change that as well.

Kaiser:A lot of the infrastructure is there. If you’re paying on the day of your flight, you can still use traditional payment methods. A lot of the cool payment apps out there today – it’s all the same plumbing underneath, but it just has a new fancy cover on it. We do programs that are prepaid. A company can give an airline $50,000 and have a declining balance on a UATP account, and they can book the flight this morning for this afternoon, and it gets charged. The difference is the airline already has the money. So, even if I book five days ahead of time and cancel and get my refund, they have my $50,000 and have already allocated to their revenue projections for the year. If they don’t have it prepaid, that’s where it gets difficult. Probably the people who want the instant-pay option aren’t the ones who have $50,000 to give an airline.

Michael B. Baker  www.businesstravelnews.com