It's no doubt a hot topic with the latest findings coming from a recently published report from McKinsey titled Airline retailing: How payment innovation can improve the bottom line.
The report estimates airline retailing — which it classifies as directly or indirectly selling new products in new ways — to be worth $40 billion by 2030 and points out that nearly 2.9 billion global airline booking payment transactions valued at $1 trillion take place each year.
Given this tremendous opportunity, lives dive into the most notable findings.
Payments Represent a Major Cost
Before we get to the opportunity, let's highlight some of the challenges the industry currently faces. Payments represent a major financial investment for airlines.
The industry spends over $20 billion on payment costs, amounting to about 3 percent of airlines' total revenue and 78% of the industry's net profit. This is largely because of credit card transactions which are costly for airlines and make up about 70% of retail transactions.
Furthermore, several stakeholders are involved in the payments value chain which complicates matters and can lead to additional transaction costs.
According to McKinsey, "Each of these participants plays a different role and takes a different share of the payment fee value pool. Airlines are secondary beneficiaries in the value chain, along with online travel agents, and travel management companies."
According to McKinsey, airlines forward about 10% of the total value of transactions when collecting revenues on behalf of other stakeholders, while still including payment costs for the total transaction value.
The $14 Billion Opportunity
If airlines strategically address payments, they could reap a further $14 billion in value (this is on top of $40 billion retailing opportunity). McKinsey breaks down this value — including cost reduction, incremental revenue opportunity and and additional value — in the graphic below.
McKinsey looks at this $14 billion in value through through six value-creations levers airlines can use to seize the opportunity:
- Increasing customer reach and conversion.
- Growing ancillary services and making them easier to purchase throughout touch points on the customer journey.
- Enhancing loyalty programs, by analyzing customer data.
- Providing flexible exchange policies and easier refunds.
- Becoming part of the corporate payment ecosystem.
- Reducing working capital costs and payment costs.
Payments represent both a significant cost and incredible opportunity for airlines and when deployed correctly, can dramatically improve the often-talked about customer experience.
While payments have been a function maybe not receiving as much attention as it deserves within the airline industry, it could be a key differentiator, especially considering how the global economy is shifting as a whole with new forms of payment, more flexible payment options and more generous return/cancellation policies all being adopted.
You can download the full report here