Payment surcharging: ancillary revenue or cost saving?

In preparing for the Airline and Travel Payment Summit in Toronto on the 12/13th of October 2011, one of the themes that keeps emerging is payment surcharging.  In the UK, where I am based, this practice very advanced, but it's also one which the regulators are also looking at closely.

Although Ryanair is registered in Ireland, it does a lot of business in the UK and it's at the forefront of surcharging here.  However, they are not alone. You might be surprised to learn that Lufthansa and American Airlines are also surcharging on their own UK websites for credit card payments.

Here is a chart of airlines charging credit card surcharges in the UK market:

The above table only shows surcharging for credit card payments, although some airlines also include the UATP Card, which has a much lower cost of acceptance for them.  Monarch has taken the lead by charging a flat £10 for credit card payments, but not charging at all for debit cards.  Lufthansa on the other hand, doesn’t offer a debit card option in the UK, but does offer PayPal as a free payment option.

Flybe’s approach isn’t straightforward as it has two sets of charges.  One is the basic fee of £4.50 per person per sector.  On top of that there is a £1 charge per sector (but not per person) for each one way journey subject to a minimum of £5.50.  On the other hand, is the strategy adopted by Virgin Atlantic, which as a long haul airline has gone for the percentage approach.  This has the advantage of being simple for consumers to follow, whilst also maximising the surcharge revenues generated.  It isn’t surprising that United and Delta have not copied American in surcharging in the UK market.

Clearly, American is taking lessons from its OneWorld partner British Airways. (Iberia also charges if you have a UK registered card – the implication being if it isn’t UK registered then there is no surcharge?). However, perhaps United doesn’t have the same relationship with fellow Star carrier British Midland International?  Or maybe surcharging in the UK just hasn’t gotten high enough on its management's radar screen on the other side of the Atlantic.

So is surcharging revenue generation or a cost savings?  EasyJet’s 2.5% surcharge would very roughly equate with a merchant service fee, which would imply it is revenue neutral and probably more about saving cost, rather than being a pure ancillary revenue stream.  However, the same can’t be said for Ryanair.  According to Ryanair’s own figures, their average One Way fare is £33, and it's £6 credit card surcharge is almost 18% of this.  You can avoid paying this charge by using a pre-paid Mastercard, however, these cards often have their own associated fees for loading money on to them. On the plus side, the charges and fees are very clear on the Ryanair website unlike some of their competition where it is difficult to find details about them.

In summary, for some airlines, surcharging looks to be a  cost savings (for such airlines as British Airways and Lufthansa), but there is another camp (including Ryanair and Flybe) that would appear to be treating it as a revenue stream.  The next stage in the UK’s Office of Fair Trading’s deliberations in this area will be interesting to watch for the implications in the UK and beyond.

For more comments, analysis and insight into loyalty, airline merchandising and payments issues, please visit the SeaMountain blog at www.SeaMountain.co.uk

* Source information company websites at 1st August 2011