Airlines face slim profit margins. Their high fixed costs of labor, equipment and fuel leave them few cost-cutting options. So in the face of sky-high fuel costs that seemingly have no limits, many airlines have identified that credit card fees are their largest controllable cost. Airlines are encouraging their customers to pay with alternate payment solutions, which offer them significantly lower payment fees than traditional credit cards. Airlines earn billions of dollars each year from their own co-branded credit cards, which offer customers frequent flyer miles and other rewards for purchases. So who wins here?

The complex landscape of payment solutions and changing marketplace demands were addressed at the first Airline Payment Summit that took place on 9-10 April in Toronto, bringing together airlines and credit card companies to discuss global trends and needs.

According to the International Air Transport Association (IATA), the industry as a whole earned an estimated $5.6 billion U.S. dollars in 2007, which represented a 1.1% net margin on sales of $490 billion. At the same time, a recent study by Edgar, Dunn & Company and the Airlines Reporting Corporation (ARC) revealed that passengers pay for their airline tickets 83% of the time with credit cards with fees averaging $12 per ticket, costing the industry $1.5 billion annually. In an urgent attempt to reduce this figure, the websites of many airlines are now crowded with a variety of lower-fee payment options, including Bill me Later, PayPal, TeleCheck and Western Union. For business travelers, who tend to book through corporate travel agencies, airlines are encouraging the use the world’s first credit card, UATP - a payment solution for travel purchases that is gentle on fees, since UATP is owned by the airline industry.

Michael Smith, Airline Payment Summit Chairman and Director of the U.K.-based consultancy SeaMountain, says: “It’s a paradox - on the one hand, airlines work to cut traditional credit card payment costs, and with the other, mileage-earning co-branded credit cards generate huge amounts of cash for both the airlines and the issuing merchant banks.” Smith continues: "Airline co-branded credit cards are among the most profitable cards for banks due to emotional behavior driving customers to collect more and more miles.”

For each mile that a customer is given by a credit card issuer for purchases, the airline receives a payment of generally between one and two U.S. cents. For a large airline, this can add up to hundreds of millions of dollars in revenue in a single year. The Airline Payment Summit will therefore discuss the question of whether airlines should receive a reduction on credit card fees, since they drive the majority of their direct sales through the credit card channel, while also generating unmatched profits for credit card banks through airline co-branded cards. The event will also examine payments from the point of view of card issuers, who are questioning the value of the frequent flyer miles which they purchase from airlines, since available frequent flyer seats are becoming more and more scarce.

In keeping with the current economic client of driving down costs while increasing revenues - the duality of airline payments, that is reducing payment costs, while also increasing payment revenues from co-branded credit card - were high on the agenda at the Airline Payment Summit. Other important payment-related issues were also high on the “topics for discussion list” including barter, fraud, information security, onboard payments, multi-currency payments and more.