1. WHAT TRAVEL PAYMENT IS ALL ABOUT. Michigan BTA Thursday, February 25 th, 2010 P. 1 Matthew Talbot, Business Intelligence & Technology Manager for AirPlus International Credit Card Economics & Ancillary Fees

2. Agenda AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 2 2.Ancillary Fees – Where are we heading? 3.Voice Your Opinion 4. Q & A 1.Credit Card Economic Realities

3. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Background: The four-party credit card model P. 3 Merchant fee e.g. 2.50% Corporation / Cardholder Acquiring Bank Merchant Issuing Bank Interchange fee e.g. 2.35%  Annual fees are often exempted for medium and large corporations  Rebates are becoming commonplace in many countries  Bonus programs are on the rise for SMEs (especially reward programs)  Annual fees are often exempted for medium and large corporations  Rebates are becoming commonplace in many countries  Bonus programs are on the rise for SMEs (especially reward programs) Annual fees Rebates / Rewards

4. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Background: The three-party credit card model P. 4 Merchant fee e.g. 2.50% Corporation / Cardholder Merchant Annual fees Rebates / Rewards

5. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Merchant service fees range from 1.75% to 2.5% P. 5 American Express Visa/MasterCard  2.54% (global average merchant fee)  Around 2.50% for commercial cards US UATP (AirPlus)  1.75% and up Typical fees for corporate cards at airlines, hotels, & rental cars:

6. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Credit card benefits P. 6 To Merchants: To Corporates & Cardholders:  No invoice processing  Spreading of financial risk and lower fraud  Quick settlement of amounts  High quality customer data  One simple, electronic invoice for efficient settlement  Robust data for internal reporting and analysis  Data consolidation on a global level  Data integration into expense reporting tools To Travel Management Companies:  No invoicing or processing  No risk or collection, improved cash flow  Agency neutral  One form of payment for all expenses

7. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Merchants pay a significant proportion of the total bill P. 7 Card HoldersMerchants Annual fees (if any) FOREX fees ATM fees Other fees Revolving credit charges Rebates up to 100+bps 70% - 90% of total 10% - 30% of total Merchant Service Fee

8. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Merchant Fees – Seismic Changes in the Global Landscape P. 8 Market economics force travel intermediaries to use the excess funding to buy their customers Rebate/Incentive competition drives airlines costs higher. Costs passed on to you - the end user! Airlines overpay distribution intermediaries for their services Distribution Economics - The Downward Spiral

9. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Globally the credit card business model is under attack P. 9 Surcharging Differentiated acceptance  You pay a fee charged by the merchant for each transaction  Corporate Net Rates will exclusively be linked to a merchant-determined form of payment Non acceptance  Merchants decide to not accept specific forms of payment

10. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Examples: KLM introduced surcharges in offline booking channel P. 10  Since 4 August 2009 in The Netherlands, KLM has implemented:  7.50 € credit card surcharge on certain lower ticket classes  45% of the tickets purchased by corporates are affected  SN Brussels and Finnair have followed in The Netherlands Case study: The Netherlands and Sweden

11. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. European low cost carriers are in the mix too P. 11  MasterCard prepaid card only “free” form of payment  Other forms of payment are assessed 5 €  Note: Ryanair only accepts MasterCard & Visa Ryanair announces surcharge via Twitter

12. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. In Asia… P. 12  Here the majority of airlines do not accept credit cards for net fares  Net fares make up 90% of all corporate tickets  Corporate agencies either absorb the merchant fee, book code-share flights which accept credit card or surcharge the customer Hong Kong

13. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. And Australia: P. 13  Qantas charges differentiated surcharges by credit card type:  1.1% for MasterCard and Visa  2.2% for Amex Source: www.choice.com.au  Tiger charges a “convenience fee” of $6 per passenger per flight for domestic travel, and $5 per passenger for international bookings

14. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. The first initiative in the USA P. 14  From 20 July 2009 (+ further postponement)  Certain agencies are charged a $75 per ticket penalty fee should they continue to issue under United’s merchant agreement  Cards affected include Visa, MasterCard, Diner’s and American Express  UATP is exempt  Will TMCs accept this fee and pass it along to the customer?  Or, if they set up as a card merchant, will they then pass along their merchant fees directly to their customers? United Airlines

15. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Differentiated Surcharging example from Denmark P. 15

16. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Merchant Fees Changes in the Global Landscape P. 16 “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, Diamond Consulting “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, Diamond Consulting

17. Agenda AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 17 2. Ancillary Fees – Where are we heading? 3.Voice Your Opinion 4. Q & A 1.Credit Card Economic Realities

18. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Ancillary Fees include: P. 18  Bag fees  In-flight meals & beverages  Premium seat fees  Economy Plus Seating  Airline club access  Change Penalties  Upgrades  Standby fees

19. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 19 These fees were once bundled – and already included in the ticket price. Now, as airlines begin to unbundle these fees, a new reality emerges for our industry: Pay for what you use!

20. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. The Cost - $1.9B collected in Q3 2009 alone and rising P. 20  Prices change frequently  E.g. US & AA recently announced they will match the other airlines in raising baggage fees to $25 for first bag and $35 for second bag  Some studies show that ancillary fees represents only 1% of air costs*, some up to 30%**  Most fees are waived for elite flyers  Change penalties continue to rise  Is this even considered an ancillary fee? * TRX (as reported in The Beat) **NBTA 2010 U.S. Business Travel Buyers' Cost Forecast. It is difficult to quantify the cost of ancillary fees:

21. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Tracking fees… P. 21 http://www.exploreflightfees.com/#

22. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Questions you need to think about: P. 22 Policy & Compliance Should a policy be developed for ancillary fees? Will it prompt travelers to use a service they would not normally use? Once added, do you have the manpower and reporting in place to enforce it? Projecting traveler use of services is difficult Data doesn’t currently associate service purchase with specific trip/project Fees are adjusted frequently Expense systems must be changed to provide new categories Airlines should enhance reporting for their corporate customers Enhanced Corporate Card reporting to support program needs Cost Impact & Budgeting Expense Process & Reporting

23. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Examples: Data on Fees Provided to Card Companies - CO P. 23 ?

24. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Examples: Data on Fees Provided to Card Companies - UA P. 24

25. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Examples: Data on Fees Provided to Card Companies - AA P. 25 ? ?

26. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Everyone is working towards a solution – But Not Together! P. 26 Developing EMDs Working to introduce standardized codes for ancillary fees has set a deadline to standardize fees in 2012 GDS’s are looking at building merchandizing platforms

27. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Everyone is working towards a solution – But Not Together! P. 27  No tie back to the original ticket number  no reporting  Some airlines say that 90% of travelers would agree to pay for these fees at the time of booking through their travel agency  Easy for them to say  And who handles refunds?  Agencies may very well charge their own fees in order facilitate the myriad of airline’s fees purchased through them

28. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. There is no silver bullet P. 28  Standardization across the industry  Airlines sending the data in a standard format differentiating for all types of fees  The data needs to be the same regardless of source  Travel policies redesigned to account for these fees But a good solution has to include: For AirPlus, we want to increase the transparency of customer’s travel data for effective cost control. We would like to see an industry standard as this would allow us to provide the necessary data needed to match a fee with the original ticket.

29. Agenda AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 29 2.Ancillary Fees – Where are we heading? 3.Voice Your Opinion 4. Q & A 1.Credit Card Economic Realities

30. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. What are your thoughts? P. 30  Is it important to you to have visibility into these fees?  Are all fees of equal importance?  What information do you need and what will you do with it?  Who needs information regarding fees?  Where will the decision to accept a service for a fee be made…during the original booking process, pre-trip, during the trip or on-board?

31. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. What are your thoughts? P. 31  Do you want to be able to charge fees back to a lodged/ghost card?  Is it important to you to be able to negotiate these fees?  Your average ticket price may stay the same or even decline but the total cost of air may go up. How do you explain that to your CFO?

32. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Voice your opinion P. 32  Remember that YOU have a voice!  As nothing has yet been resolved, we ask for you to share your ideas with the industry.  Talk with your vendors.  Urge for a common solution to be found to resolve this issue  Sooner rather than later!  Encourage the development of a total cost calculator to provide greater transparency to what fees would be charged - help make better buying decisions.

33. Agenda AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 33 2.Ancillary Fees – Where are we heading? 3.Voice Your Opinion 4. Q & A 1.Credit Card Economic Realities

34. WHAT TRAVEL PAYMENT IS ALL ABOUT. Q & A Thank you! Matthew Talbot Business Intelligence & Technology Manager AirPlus International, Inc. mtalbot@airplus.com www.airplus.com www.airpluscommunity.com AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 34

35. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. P. 35 Backup Slides

36. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Airlines have three major options P. 36 Objective: Bring credit card costs down Negotiate Surcharging50:50 Change credit card business model to splitting costs 50:50 Do not accept (some) credit cards on (some) corporate rates Strike a deal, e.g. co-branding Lobby against interchange Charge a fee for credit card usage

37. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. The standard surcharging has both wanted and unwanted effects for the surcharging airline 1.Additional costs ($ 700,000 US for the average BTN100 corporation) 2.Possible reactions/activities: Avoid through switch to non-surcharging airlines Accept it Compensate through rebate from cc company Avoid through free payments, TMC invoice or debit card None Lost customers Favors high MSF cc Corp. Customer Credit cards Additional revenue Lost revenue Debit wanted TMC invoice ? Higher credit card costs Airlines Standard surcharging – example: $4 US per ticket P. 37

38. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. With a differentiated surcharge the business case of an airline improves 1.Additional costs 2.Possible reactions/activities: Avoid through switch to non-surcharging airlines Accept itCompensate through rebate from cc company Avoid through free payments alternatives, TMC invoice or debit card Differentiated surcharging – example: 2.5%, 1.8%, 1.3% Change to cheaper/est form of cc None Lost customers Favors high MSF cc Additional revenue Lost revenue Debit wanted TMC invoice ? Higher credit card costs Lower credit card costs Favors low MSF cc Corp. Customer Credit cards Airlines P. 38

39. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. Zero commission leads to a level playing field with the pricing responsibility for the credit card companies  The systematic flow of the model changes  Zero commission means zero merchant fee (lower merchant fee in a model, where issuer and acquirer are different entities)  Issuer must cover its costs with the surcharge and annual fee Merchant fee Annual fee optional e.g. 0.10% of X Surcharge fee Kick back, rebates, bonus programs optional (Corporate) Cardholder Acquirer Merchant Issuer P. 39

40. AIRPLUS. WHAT TRAVEL PAYMENT IS ALL ABOUT. 50 : 50 avoids negative side-effects 1.Additional costs depend on airline ticket pricing and credit card pricing 2.Possible reactions/activities: Avoid through switch to non-surcharging airlines Accept it Avoid through free payments, TMC invoice or debit card Corp. Customer 50:50 example: The airline caps all merchant fees, only the acquirer fee is paid, but no interchange is assessed Change to cheaper/est form of cc None Lost customers Credit cards cc costs at zero Lost revenue Debit wanted TMC invoice ? Airlines cc costs at zero Favors low cost cc P. 40