According to IATA, the airline industry operates on razor-thin profit margins that average just 2,6% (USD $5.44) per ticket. There is a surprising imbalance when compared to the payments ecosystem supporting it, which takes around 2.5% of the transaction value on average Payment Service Providers (PSPs) and intermediaries generate significant revenue by charging a Merchant Discount Rate (MDR) ranging from 1% to 3%, often yielding more profit from each ticket sale than the airline itself. This stark contrast highlights a critical area of opportunity: Airlines must look deeper at their payment and fintech strategies. By optimizing payment processes, renegotiating MDR terms, and adopting innovative fintech solutions, airlines can retain more of the value they create.
This article will delve into how the airline industry arrived at this point, tracing the structural and technological changes that have increased reliance on costly payment intermediaries. It will examine emerging market tendencies and strategies that airlines adopt to address these inefficiencies. Finally, the article will discuss why these strategies must be tailored to individual airlines, given the significant differences in geographical reach, market segmentation, and internal technological capabilities. No solution can fit all airlines; customized approaches are necessary for success.
How the Airline Industry Got Here
Over the past two decades, the airline industry has undergone significant structural changes, particularly across sales channels. Historically, airlines relied more on indirect sales channels such as travel agencies and global distribution systems (GDS). These intermediaries handled customer-facing transactions and payment processing, abstracting airlines from many payment complexities and costs. According to T2RL, between 2015 and 2023, the share of tickets sold directly by airlines rose from approximately 50% to 60% as airlines invested in their own websites and mobile apps to build stronger customer relationships and reduce intermediary fees. The downside is that airlines became exposed to direct payment processing costs, which intermediaries in the GDS model previously absorbed.
The adoption of NDC standards enabled airlines to reduce dependence on some of the most expensive distribution through GDSs and sell more personalized and dynamic offers for core and ancillary services. For example, McKinsey estimates that NDC can generate an additional $7 USD per passenger. The shift towards more direct business with both passengers and travel agencies empowers airlines to have greater control over payment options and associated fees.
Focusing on direct sales exposed airlines to new challenges requiring new skills and know-how. Airlines must now support various payment methods to accommodate global customers, including credit cards, debit cards, digital wallets, and emerging options like Buy Now Pay Later (BNPL). Each payment method has unique cost structures, security requirements, compliance structures (e.g., PCI or GDPR), standards (e.g., EMV), user experiences, integration methods, and market segments, further complicating the payment landscape.
These developments underscore how the shift toward direct sales, while strategically advantageous, has contributed to the growing financial burden of payment processing and highlighted the need for innovative solutions to address these costs effectively.
Historically, airlines have perceived payment processing costs as a non-negotiable overhead, often bundled into broader contracts with intermediaries like GDS. This arrangement limited their ability to scrutinize or control these expenses, which were treated as part of doing business rather than an area for strategic optimization. Consequently, airlines concentrated their efforts on their core operations—selling tickets and ancillary services—while neglecting payment-related inefficiencies. Research highlights that even today, payment-related negotiations are not a priority for many airlines despite these fees being a considerable non-operational cost.
Finally, while the airline industry has a strong history of collaboration on industry-wide initiatives, such as safety standards and slot management, it has yet to establish a united front for negotiating payment processing costs. In contrast, other industries have successfully banded together to address similar challenges. A notable example is the United States retail sector’s collective response to high interchange fees, which led to implementing the Durbin Amendment, capping debit card fees for merchants. This demonstrates the potential benefits of collective bargaining, a strategy airlines could explore to reduce payment costs and gain better terms with financial intermediaries.
How to work on your payment strategy?
Achieving the right balance between local and global acquisitions is essential for airlines seeking to optimize their payment strategies. Local acquirers often offer more favorable rates and tailored solutions, but relying solely on them can increase operational complexity and administrative burden. In contrast, global acquirers provide simplicity and consolidated reporting, making them ideal for airlines with large-scale international operations. By finding the optimal mix, airlines can reduce costs, improve customer satisfaction, and maintain operational efficiency.
Shifting from credit cards to alternative forms of payment offers significant cost-saving opportunities for airlines, as alternative payment methods often carry lower transaction fees than traditional credit card processing. As previously stated, credit card transactions can cost airlines between 1% and 3% per ticket. At the same time, alternative forms of payment such as bank transfers, digital wallets, or Buy Now, Pay Later (BNPL) options can reduce these fees to as low as 0.5% to 1% . This differential highlights the potential value of diversifying payment methods to manage costs effectively.
Furthermore, alternative forms of payment can enable access to non-banked or underbanked customer segments, allowing for sales expansion. For example, low-cost carrier AirAsia successfully implemented an e-wallet solution through its Super App with the launch of ‘airasia pocket,’ a closed-loop e-wallet. This innovation allowed AirAsia to target previously untapped Southeast Asian markets, where banking penetration remains low. By enabling seamless, in-app payments for flights and related services, the airline reduced payment processing costs and expanded its customer base significantly. But, there is a limit to the number of payment options an airline should offer to the end user, as each new option usually comes with maintenance costs and the value of adding more options decreases as every new option will bring less and less marginal value.
Another trend that can be capitalized on is the global loosening of financial regulations, often referred to as fintech regulation. These frameworks, including initiatives like Open Banking in the European Union and the United Kingdom, have enabled non-traditional players to enter financial services sectors previously dominated by banks (e.g., Open Banking). Such regulatory shifts present significant opportunities for airlines. By leveraging these changes, airlines can access new financial product ecosystems or tap into the lucrative payment processing margins. Most notable examples for airlines are usually linked to their loyalty programs as a first step. For example, Emirates collaborated with Mashreq Bank to launch the Skywards Everyday app, allowing customers to earn rewards on daily spending and expand their ecosystem beyond traditional airline services (Sources: Mashreq Bank Newsroom).
Likewise, Qantas has expanded into the financial services space through its loyalty program, launching Qantas Insurance, which leverages its frequent flyer database to offer tailored health and travel insurance products. This move diversifies income and strengthens customer loyalty (Source: Qantas Loyalty Annual Report 2023). Such innovations exemplify how airlines can strategically use fintech solutions to enhance their value proposition and solidify their financial footing. These opportunities are already being capitalized by others like Amazon launching Amazon Pay, Uber with Uber Money, to name some examples.
The airline industry’s future is being shaped by transformative trends, including distribution, the shift in the approach of loyalty programs, the heightened focus on digital sales, and the growth of ancillary revenue streams as essential components of profitability. These trends signify a broader evolution in which airlines move beyond their traditional operational roles to become integrated holdings—interconnected entities capable of delivering comprehensive end-to-end customer experiences with access to new business models.
Dedicated Expertise for Airlines
Successfully navigating this transformation requires a partner with deep expertise in both the airline industry and the evolving fintech landscape. This is where companies with a strong track record in digital reinvention and cross-industry innovation can make the difference. With more than 20 years of experience delivering tailored solutions in payment optimization, loyalty ecosystems, and customer engagement, Globant is a trusted partner to leading airlines around the world.
Our dedicated Airlines Studio, backed by over 14 years of specialized expertise and thousands of consultants, collaborates with major carriers globally to unlock new opportunities. Globant’s network of studios brings cross-industry perspectives from e-commerce, fintech, banking, artificial intelligence, and streaming, enabling us to infuse fresh thinking and proven solutions from adjacent industries. We are an ideal partner for airlines ready to embrace the future.
