While you routinely surf the web for travel deals, does it ever cross your mind that credit card you whipped out to pay for the trip is slowly bringing the travel industry to its knees? Probably not — it isn’t your problem. Yet.
The fact is, credit card payments are becoming a luxury the industry can no longer afford. The companies that process the transactions are putting the squeeze on travel suppliers – which in turn means you may well feel the pinch.
The world wide credit crunch has spread beyond Wall Street and is hitting travel hard because of the inherent risk in any travel product. All credit card purchase agreements guarantee you will receive what you bought. With most consumer goods, it’s unlikely the product you purchased will suddenly de-materialize – so the processors are more than willing to handle the transaction. Airlines, on the other hand, do stop flying on occasion. As noted with the fall-out from Zoom’s failure which cost credit card companies hundreds of thousands of dollars.
Processors have figured out it’s expensive to clean-up that kind of mess and they’re pushing the liability onto the travel industry. A case in point is the recent failure of the Canadian tour operator, Conquest Vacations. One of the factors that drove Conquest over the brink is the exorbitant cash reserve fund the credit contracts require of travel suppliers. Processors are demanding millions of dollars to be held in trust by travel companies to cover the cost of potential charge backs. Travel suppliers are buckling under the weight.
In renegotiating the terms of one of its credit card agreements, Air Canada recently managed to lower the reserve requirement from $1.3 billion dollars to $800 million. That’s a staggering amount of cash to keep on hand, in any economy. There are few alternative payment options and consumers are further enticed by the perks and rewards of credit card reward programs – another issue which is affecting merchant fees – but, that’s another story. The industry is being held hostage to the demands of the credit card companies.
United Airlines has taken a controversial approach to divesting themselves of some of these costs. In the states, United has announced an initiative whereby they refuse to allow some travel agents to use the standard payment process — where the carrier is the merchant for the credit card transaction. If this move is enacted, it means the travel agent will have to assume the cost and risk of being the merchant. The agent would then pay United for the ticket in cash. For most travel agents, this is a non-starter. Not only are the credit card costs out of their reach, this scenario is highly risky for the consumer.
According to Kevin Mitchell of the Business Travel Coalition, a consumer travel watchdog group, requiring travel agencies to pay the airline cash for tickets could result in “a wholesale transfer of the financial risk to the consumer.” That’s because the tickets will be processed through the travel agents’ credit-card agreements, not those of United Airlines. As a result, if a customer has a dispute with United about the ticket purchase, the credit-card companies will no longer, in Mr. Mitchell’s words, “have your back.”
In other words, should the airline fail, it has no obligation whatsoever to the consumer for non-delivery. The airline has been paid and the travel agent is left holding the bag.
United Airlines is testing the waters with this initiative, which is a common airline tactic in the States. And although the move is being strongly contested by travel agency groups in the U.S. and Canada, it’s looking like it’s only a matter of time before the practice becomes wide spread.
Although airlines cannot be perceived to be in collusion because of strict antitrust legislation, if history is anything to go by, they will all follow each other. The practice will likely be adopted in Canada as well. Travel Agents know this and they are watching each step anxiously.
One thing is sure, the credit crunch and the inability of most airlines to make money in the present environment make it more likely they will look for new sources of savings. Pushing the merchant responsibility onto travel agents is a quick way of shedding some baggage – but the long term fallout will not be to anyone’s advantage.
Photo Credits: ChrisSteer, PeskyMonkey, PaulFleet