Air Travel Payment Systems …what is next ? Alexander Houston Airplus International

United To Shift Card Costs To Agencies The Beat ~ a travel business newsletter New York City 6/24/09 7:30 PM United Airlines has informed an unknown number of travel agencies that as of July 20, they will be required to process all credit card transactions using their own merchant accounts.

Agenda  Credit card economics and practices  Analysis of different surcharging models and their effects on:  Airlines  Corporations  Credit Card companies  Options for the Corporation and consumer  Questions / Discussion

Air Travel Payment Systems Economics and Technology drive Change! Merchant Fees…the cost of the cards continues to rise Payment alternatives emerge

Challenges to the interchange model spell change for merchants and buyers.

Cost Transparency – Unbundling “Challenges to the current credit card business model will result in greater transparency to the components of the interchange model, and ultimately, to the unbundling of interchange pricing and shifting of roles in the payments value chain among current and new players.” - A New Business Model for Card Payments, Amy Dawson and Carl Hugener. Source: “A New Business Model for Card Payments” by Diamond Management Consultants – October 2006

What are merchant fees? What is Interchange? Merchant fees are the fees merchants pay to the banks to accept the credit card Interchange refers to the fee banks charge to process a credit card as a form of payment

Current four-party system of the credit card industry  Annual fees are often an exception for medium and large corporations  Rebates are on the way to becoming a standard  Bonus programs are on the rise for SMEs Merchant fee Annual fee (optional) Incentives, rebates, bonus programs (optional) e.g. 1.90% of X (Corporate) Cardholder Acquirer Merchant Issuer Interchange fee e.g. 1.80% of X

The cost of cards Pressures on Interchange / Merchant fees –Regulatory and litigation –Merchant pressure for transparency –Non-acceptance and increased competition The transformation is underway –Surcharging –Alternative forms of payment

2/3 of Corporate Card Volume is Spent in Air and Hotel Source: Runzheimer International Mobility Report, Oct 2006 Typical Corporate Card Usage (USA)

Merchants Pay a Significant Proportion of the Costs! Source: AirPlus estimate Card HoldersMerchants Annual fees, if any Conversion fees ATM fees Late, overlimit fees, etc Revolving credit interest 70% - 90% of total 10% - 30% of total Merchant Service Charge

Almost 50% of Credit Card costs Spent in Rewards and Branding !!! Source: Diamond Partners Typical Corporate Card / Cost breakdown (USA)

Distribution Economics – The Downward Spiral Airlines overpay distribution intermediaries for their services Rebate/Incentive competition drives airlines costs higher Travel intermediaries use the excess funding to buy the business of their customers

Airlines and other merchants cut distribution costs Credit Card ChargesGDS fees Surcharging for full content ??? Travel Agency Commissions Zero-Commission Major distribution cost elements for an airline Terminator 1 Terminator 2 Terminator 3

Merchant Service Fees Range from 1.0% to 2.5% Airlines, Hotel, Car Rental for Corporate Cards Amex 2.0% – 2.5% Visa / MC UATP 2.0% – 2.4% 1.0% – 1.65% Source: Airplus – fees shown typically air only

Average Credit Card Merchant Fee for an Airline Ticket is $12 OAK-LAX 80 US$ Expensive Credit Card Inexpensive Credit CardTicket Price 2 US$0.80 US$ Avg. Ticket for network carrier: 520 US$ 13 US$5 US$ ORD – LHR 4,000 US$ 100 US$40 US$

Airlines Increasingly Focus on Credit Card Costs „Today Northwest pays more to credit card companies than to GDS‘“ -- Al Lenza, Vice President of Distribution and E-Commerce for Northwest Airlines -- at The Masters Program 2005

„Today Northwest pays twice as much to credit card companies than to GDS“ - Al Lenza, Vice President of Distribution and E-Commerce for Northwest Airlines - at The Masters Program 2007

There ARE Options !! Distribution Intermediary CostsCatalyst for Change Travel Agency Commissions and Overrides The Internet and E tickets Online direct sales Orbitz, Expedia, Travelocity Web fares GDS FeesDirect Connect G2 Switchworks ITA Credit Card CostsPayPal Check Free Google Pay Western Union UATP Direct Debit

Airlines have four major Options Objective: Bring credit card costs down Zero-Commission Change credit card business model to user pay principle Do not accept (some) credit cards on (some) corporate rates And/or Surcharging Flat: Charge the same amount for all credit card bookings or Differentiated: Charge according to credit card costs Regulate/Negotiate European Commission & Anti-trust cases CO branding and New Products Consumer products like debit cards or PayPal Corporate – low cost credit cards & Direct debit and/or

Regulate / Negotiate: More likely overseas than in US Zero Commission: Overwhelming Benefits but with Implementation Issues New products: Technology can reduce costs, but it takes time Flat Surcharging: Sounds Easy, But Does Not Change the Costs At All

Zero Commission: Overwhelming benefits, but with implementation issues ProsCons What‘s happening in Asia and France Merchants can cut up to 90 % of costs, they pay little or no fee User pays, user selects card Corporations can choose an inexpensive provider Price authority with issuer Implementation has to be simultaneously for all credit cards if not, credit card providers with no zero-commission have an advantage and an increase in market share Card holder pays for credit card usage Hong Kong: - Credit cards not accepted on corporate net rates. Travel agencies surcharge a fee for credit card usage on Corporate Net Rates. Same for British Airways in the UK. Mainland China: - Travel agencies surcharge a fee (~4 %) for payments with international credit cards France: - Low local interchange fees, leading to high annual fees for cardholders and high transaction fees when used outside Eurozone (e.g. 2.4 % of trx volume €)

Surcharging: Sounds easy, but does not change the costs at all ProsCons What‘s happening in Europe Increased revenue through additional surcharge Easy implementation Increased transparency via differential surcharging as costs vary card to card Corporate / card holder has to pay for card usage Surcharge does not equal costs Not legal in all areas Sends unintended message that credit cards are not preferred Merchants surcharge either a fixed amount or a percentage to cover their collection costs Examples in the airline industry: - Lufthansa: € 3 on economy tickets for credit card online sales - British Airways: £ 3 for credit card online sales with invoice address in UK - Ryanair: € 2.50 per coupon for credit cards; no charge for VISA electron; Amex is not accepted - Germanwings: € 6 for credit card sales, except for proprietary credit card

Differential Surcharge Example from Denmark

ProsCons What‘s happening in the USA and EU with the authorities Low cost strategy, because legal approach Merchants can co-operate and hide behind associations „Smash banking fees“ popular approach for regulators Lobbying initiatives focus on VISA and MasterCard as easy targets No level playing field as Independent providers will immediately benefit In B2B merchants risk to increase costs USA: -Authorities have not yet focused on this market European Commission: - Harmonization of internal market: Single Euro Payments Area (SEPA) to be introduced in Visa / MasterCard interchange fees are subject to investigations by European Commission and national anti-trust authorities Regulate / Negotiate: Not likely in US

New products: A territory not yet fully explored ProsCons What‘s happening New products make new pricing more easily accepted Debit card ideal from a merchant‘s perspective Debit cards, PayPal, Check Free etc. are B2C products only New corporate products will require implementation efforts like zero- commission for travel agencies Airlines upgrade the acceptance of debit consumer cards Direct debit options for corporations New corporate products not available yet

Ok…So what do we do ?

The United States is a Mature credit card Market Credit card usage is culturally ingrained Incumbent issuers with strong brands and resources Regulations vary between states But Cost of the cards keep increasing Technology is enabing alternatives It is not just an …“airline thing“

What do I Prefer…? Zero-commission aligns credit card costs with other payment options for merchants/airlines Issuer must cover its costs with its own fees Stronger price competition between issuers will drive overall costs down More transparency Zero- Commission Differential Surcharging

What do I think will happen…? Carrot rather than the stick approach in a mature market Some payment options are better than others for merchants/airlines Acceptance of new technology in a changing demographic base Incentives to Use lower cost options Negotiation and co-branded cards Technology enabled alternatives

Difficult for Credit Card Companies and the Airlines to Change the Business Model by Themselves SurchargingAnnual Fees Open Book Low Cost Cards Traditional Interchange Model

Credit Card Costs: WHAT can I do ? Move Your Cheese or Someone Else Will Transparency - Information on credit card costs needs to become available…you are paying for it ! Corporations – be aware of and/or move to a low cost form of payment Airlines – Incentive for the use of low cost form of payment Focus on costs will drive costs down First movers will make the market, e.g. open book policy with credit card company

There ARE Options !! Distribution Intermediary CostsCatalyst for Change Travel Agency Commissions and Overrides The Internet and E tickets Online direct sales Orbitz, Expedia, Travelocity Web fares GDS FeesDirect Connect G2 Switchworks ITA Credit Card CostsPayPal Check Free Google Pay Western Union UATP Direct Debit

My prediction…. Economics and Technology will continue to drive Change! My Advice…. Know what options are available for your program …Be ready to move! Proact don’t React!

Thank you !