Carriers want to reduce the expensive fees they pay to card companies – and they could make their move this year. If they do, corporate clients may be the ones to pick up the bill.

One key development in business travel many observers believe could happen in 2008 is airlines starting to avoid or pass on the fees charged to them by card companies.

Card fees are under fire because they represent the next logical target in the carriers’ war on costs. “Labor is expensive but the airlines have done a good job in reducing their costs there,� says Rose Stratford, senior vice president of industry relations for BCD Travel. “Fuel costs are volatile and cannot be controlled, so airlines are focusing on what they can reduce, which is distribution costs.�

In recent years, carriers have largely eliminated the commission they pay to travel agents and started work on reducing their global distribution system costs. That means, in the U.S. at least, their highest distribution cost has become the merchant fee they pay to card companies, usually amounting to 1 percent to 3 percent of the air fare. According to one estimate, this equates to a $3 billion annual bill for the world’s carriers.

Airlines are unhappy about this, but it is not yet clear how they are going to solve the problem. Some, especially low-cost carriers, have started charging handling fees for payment by card through their websites. A small number of traditional carriers are also doing this, including Qantas, Singapore Airlines and the UK trio of British Airways, Virgin Atlantic and bmi British Midland.

Most corporate travelers do not book air tickets through websites. Instead, they use their company’s travel management company (TMC), such as BCD Travel, which generally makes reservations through a GDS. Airlines are therefore considering passing the card merchant fees incurred for these transactions on to TMCs.

As was the case with the GDS surcharges introduced in the U.S. in 2006 and the UK in 2007, TMCs would inevitably have to transfer these costs in turn to their corporate clients. “If airlines pass on their card fees, it would ultimately lead to a cost increase to the consumer,� says Stratford.

Yet if it were as simple as that, the airlines would probably have done it by now. There are considerable complications, as British Airways discovered when it tried this strategy earlier in the decade. One problem is that it would severely antagonize the card companies, with whom airlines have lucrative partnerships to provide frequent-flyer mileage for card loyalty programs.

Another option for airlines is to promote alternative forms of payment. Southwest Airlines, Northwest Airlines and several smaller carriers have introduced the electronic system PayPal, which charges much lower merchant fees than the card companies. The disadvantage is that this is only for bookings through websites. It works well for leisure travelers but not for business travelers because it does not cover bookings through GDSs.  

Furthermore, corporate cards are very important to the running of managed travel programs. “Corporations consolidate their payments and their management information through a corporate card,� says Stratford. “It will fragment their programs if they have to use different payment methods.�

Another option is to switch to corporate cards which charge lower merchant fees. In particular, cards based on the Universal Air Travel Plan payment network are much lower because the network is owned by airlines. “Some airlines are promoting them as an alternative form of payment for that reason,� says Stratford.

The catch is that the card companies which charge higher fees are often the ones that offer airline mileage and other rewards to travelers. If airlines start incentivizing corporate clients to use cheaper payment methods, procurement departments will want to move away from cards with expensive reward programs – and of course that would lead to the airlines indirectly hurting themselves.

Alternatively, mounting pressure could force card companies to reduce their merchant fees to airlines. However, even this solution is not as simple as it sounds. If that were to happen, card companies might make good their losses by increasing subscription fees to cardholders and reducing the substantial rebates they pay to larger corporate clients.

The money flow between card companies, airlines, TMCs and corporate clients could well start to change in 2008, but the many complexities of these relationships makes it difficult to predict what form change will take.

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