Balancing the fight for the passenger against airline ticket fraud

The airline industry has seen a significant market shift from focusing on the high yield business traveller in the 1990s, to the predominating low cost carrier business model of today.

In the 1990s, major airlines coveted the high yield business traveller who would pay $5,000 to $10,000 for an overseas executive or first class ticket. Students, families, and budget minded travellers were the ignored segment of the market that no airline (except Southwest) specifically catered to, or attempted to woo as long term clients. This low yield segment was not worthy of an airline’s special attention and efforts. But that was in the past.

During the global economic troubles of the past decade, the large, established flag carriers like British Airways, Air Canada, KLM/Air France, American Airlines, Alitalia and many dozens of others, were basically fiddling as Rome burned. The industry was shifting around them as their legacy high-yield business models shriveled, whilst the Low Cost Carrier (LCC) business model took route on a global scale, muscling away a huge segment of the available revenue seat miles.

In layman’s terms, as the global economy collapsed, businesses bought a lot less $10,000 airline tickets, and everyone, not only students and families, was looking for the best airfares possible. The airlines that could best lower costs and maximize economies of scale, such as Southwest (an outstanding example) and Ryanair (a much cruder example) succeeded and grew at the expense of the staid and non-entrepreneurial legacy carriers.

The “fiddling” has stopped at some legacy carriers, as they’ve launched their own LCC operations. Recent examples include Alitalia’s Air One, Air Canada launching Rouge, and Singapore Airlines launching Scoot.

The special sauce involved in successfully running a LCC is two-fold: First, management needs to examine every conceivable cost component and reduce costs to the bone, leaving no penny unaccounted for. Secondly, management needs to compete as best as possible on price. Passengers will choose one airline over another to save just a few dollars (or Pounds or Euros) on the cost of a ticket. Evidence being the success of travel price-comparison websites.

If hard costs like fuel, salaries, aircraft lease, insurance, maintenance, and airport related fees are similar across the spectrum, how can one airline truly offer a lower ticket cost and woo passengers without sacrificing the bottom line?

Could there in fact be a significant cost component that all airlines are seemingly beholden to, that could be eliminated, with benefit to the passenger, which could at the same time translate into a competitive advantage? Not a single airline has been bold enough to address this cost issue because they have been blind-sided by legacy thinking, and are incapable of thinking “outside the box”.

The world over, probably 99.99% of all airline tickets are purchased via credit card. Most airlines are probably paying out 2% of their gross revenues in processing fees to the credit card companies. Credit cards by their very nature bring additional costs and problems to the airline industry, specifically those associated with airline ticket fraud and ticket purchase chargebacks.

Airline ticket fraud can work in a number of ways. A fraudster can use stolen credit card details to purchase airline tickets online, and then resell them online via Craigslist or other such sites to unsuspecting purchasers. The fraudulently purchased airline seats are temporarily removed from the airline’s live inventory and cannot be sold to bona fide customers, and the airline misses out actual revenue. In addition, the airline suffers the manpower cost of investigating and addressing the matter, as well as the bad exposure of turning away unsuspecting passengers at the check-in counter.

The other common form of airline ticket fraud is credit card chargebacks. In this scenario a passenger books a ticket and travels with the airline, but the passenger files a bogus chargeback with their credit card company. The card-holder could say the ticket was purchased fraudulently by a third party in the name of a third party. Or the passenger could say the service provided was not that which was agreed to. There is any number of reasons a ticket could be charged back, potentially leaving the airline with a 100% loss of revenue on a ticket sale. And again, there are airline manpower costs to investigate such matters.

Accepting credit cards has become a necessary evil in the world of selling airline tickets. The fraud related costs are a significant cost component that must be accounted for in addition to the credit card processing fees. With some creative thinking, it is indeed possible for open-minded airline decision makers to shave costs (which competitors have ignored) while simultaneously beating the competition in the fight for the price sensitive passenger.

If an airline could process online website payments completely removed from the credit card networks by accepting a very close equivalent to payment by cash, three legacy problems could be solved:

1) By accepting a Euro or dollar form of electronic payment completely removed from the credit card networks, an airline would not incur a 2% credit card processing fee.

2) Airline ticket fraud and resultant costs would be significantly reduced. Fraudsters are attracted to the credit payment model like bees to honey. However, if a payment system was irrevocable funded from the user’s bank accounts using a secure, originator pushed funding source like IBAN or a similar such system, the possibilities for chargebacks would be significantly reduced. The airline would derive comfort and security in knowing that the ticket payments are being made with non-contingent bank sourced funds. Fraudsters will be much less attracted to IBAN and bank account sourced payment methods than credit card payment methods, for the simple reason that they prefer to follow the path of easiest success in their ill done deeds.

3) The airline in this scenario would benefit from a competitive price advantage without a resultant effect on the bottom line.

This last point is particularly important. As it stands today, no airline offers its passengers a choice in how they wish pay. It is credit cards or debit cards (which are also processed via the credit card networks), or nothing. There is an “outside-the-box” strategy that an airline can employ which actually empowers its prospective customers to decide if they would like to pay with credit card, or alternatively, pay via a cash-based payment method completely removed from the credit card networks.

Thus, this new “outside–the-box” payment option allows airlines pass the decision making authority to the passenger to decide if the airline should pay the 2% credit card fee to the credit card companies, or back to the passenger.

If the customer pays by credit card, the fee goes to the credit card company. If the customer decides to pay with non-contingent bank account sourced credit, the airline passes a 2% credit card fee as a discount to the customer.

Therefore, savvy airline executives can turn the credit card fee into a competitive advantage by empowering their customers to decide who the airline should pay the credit card fee to, be it the credit card company or the passenger.

Today, no airline gives the customer no choice in the matter. So the first airlines to actually give their customers a choice, will derive a competitive pricing advantage over their competitors without any financial change in their bottom lines.

There is no logical basis for an airline not to extend this fundamental choice to their customers. We know that airline passengers are sick and tired of being levied surcharge on top of surcharge. Last year Ryanair passengers were very vocal in their great disgust with the airline for imposing an added fee-based Ryanair payment card to facilitate online payments, with even higher fees for payments made via non-Ryanair credit cards.

Airlines the world over are fighting tooth and nail for customers, and they can’t figure out how to cut costs and create new competitive advantages, yet this opportunity has been staring them square in the face since as far back as 2010.

This new opportunity does not stem from any of the legacy online payment systems like PayPal, Google Checkout, or Amazon Payments, all of which are actually considerably more costly (with 4-5% transaction fees) than processing payments through a dedicated merchant account. A little known start-up online payment company based in Vancouver, Canada called CashSender.com which presently operates in Canada and Europe, has a unique selling proposition: they processes online payments completely removed from the credit card networks for pennies per transaction. (Full disclosure, I am the founder of CashSender.)

With ticket purchase payments processed via CashSender, an airline will simultaneously address all three of the legacy payment problems addressed above: The 2% credit card fee will be avoided, airline ticket fraud and chargebacks will be significantly reduced, and the airline would enjoy a pricing advantage over competitors by re-directing the credit card fee to the customer.

CashSender is looking to partner with launch client airlines, particularly in Europe and Canada, and other industry stakeholders (including online reservation software providers) to bring this much needed openness with the benefits of enhanced security to the airline ticket purchase process.

A concept we often here about is how cutting edge companies provide services that “disrupt” the marketplace. For airlines looking to upstage competitors and “disrupt” the marketplace, this is an ideal opportunity to take a position and set a trend. Instead of fiddling while Rome burns.

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