With a projected value of $40 billion by 2030, retail presents a huge opportunity for airlines in the years to come.
But to fully harness that potential, operators need to get the payment component right, according to a new report from McKinsey & Co.
In a study titled “Airline Retail: How Payment Innovation Can Improve Outcomes,” McKinsey outlines how payment innovation can help airlines improve customer experience, increase revenue and reduce costs. .
Currently, approximately 2.9 billion airline booking payment transactions, valued at around $1 trillion, take place worldwide each year.
Transactions come at a cost, however: According to a McKinsey analysis, the airline industry spends more than $20 billion per year on payment costs, representing about 3% of total airline revenue and roughly 78% of the industry’s net profits.
While much of the spending is due to travelers’ reliance on credit cards, airlines also collect revenue on behalf of other parties in the value chain, such as airports and tax authorities, and forward around 10% of the value total of your transactions, while still incurring payment costs for the full value of the transaction.
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Some intermediaries, such as Hopper and Booking.com, have recognized payments as a differentiator and have invested in fintech solutions accordingly. For airlines, by improving payments and embracing retail, they have an opportunity to avoid further disintermediation.
“Overall, airlines have yet to harness the link between payments and customer experience; these are often seen as separate concerns. But payments are an important element of the customer journey – every touchpoint presents an opportunity to capture additional revenue,” the report states.
“The ease of making a payment is often a key decision criterion for customers when it comes to booking on an airline website versus an online travel agency or booking platform and is a crucial factor in the sale of ancillary services throughout the payment process. Improving the ease of payment and improving the sales conversion rate has the potential to drive sales.”
According to the report, airlines stand to gain an additional $14 billion on top of the $40 billion airline retail opportunity by strategically addressing payments.
To capture the $14 billion payout opportunity and realize the $40 billion value of airline retail, McKinsey has identified six value-creation levers airlines can act on:
- Increase customer reach and conversion: Airlines should look to attract new customers, particularly in emerging markets, as well as improve the user experience in direct booking channels. This helps increase usage and prevents customers from abandoning the sale in the middle of the booking process.
- Grow ancillary services: By improving the overall customer experience, airlines have the potential to grow ancillary services and increase revenue. For example, the introduction of “micro-rewards” such as miles for flights or lounge entry could help increase the number of customers using ancillary services. Airlines should also consider enabling all relevant payment methods throughout the customer journey to make it easier for travelers to use their preferred payment methods.
- Improve loyalty programs: Payment methods, such as co-branded cards, are key to an attractive loyalty program, says the McKinsey report. By analyzing consumer data on card usage and engagement at payment touchpoints, airlines can learn more about their customers and tailor loyalty program offerings to traveler preferences.
- Provide flexible exchange policies and easier refunds: Airlines that offer flexible fares and easier access to refunds not only give travelers more choice, but also build loyalty and increase sales. Airlines may also incentivize customers through coupons or perks to use the airline’s preferred refund method.
- Be part of the corporate payment ecosystem: To reduce costs in the corporate arena, which tends to prefer more expensive payment methods, airlines could become part of the financial automation ecosystem and provide more integrated solutions, such as the introduction of accounts payable automation and increased digitization of corporate transactions. They could also expand their buyer base to improve currency exchange terms and review co-branded card terms.
- Reduce working capital costs and payment costs: Airlines can reduce overall costs by encouraging customers to use payment methods that have shorter settlement times, helping to reduce payment costs throughout the value chain. In addition to negotiating lower rates and better payment terms with payment providers, they can also take steps to switch travelers to more cost-effective booking and payment methods, such as through direct channels.