The COVID-19 crisis has brought the airline industry to a near halt. For most airlines, capacity is down by 70-90%. As a result, the value of refunds has exceeded revenue from sales, for the first time in history. IATA estimates that over $35 billion of involuntary refunds are due as a result of cancelled flights.
It may be a while before demand reaches pre-crisis levels, but there are practical steps that airlines can take to manage their refunds today, secure cash holdings and to prepare for recovery.
What are airline goals while managing refunds in the current scenario?
Dealing with refunds during this crisis presents potentially competing goals:
- Retain goodwill with travel partners and customers. The COVID situation is new. Airlines, agents and travelers have been uncertain as to their rights and responsibilities. At a time when the volume is well above normal, it’s not easy to please everyone. In the next section of this blog, we will explore ways to create a win-win-win situation for all stakeholders involved.
- Process refunds efficiently, within limited resources. Airlines are facing huge shortages of staff, due to the sheer size of the refund volumes, never faced before, but in some cases, also due to furloughs or lay-offs.
During our Refunds Webinar in mid-May, a survey of 43 airlines showed that the majority of airlines are processing less than 1,000 refunds per week. As the delays increase, travel agents and passengers are getting frustrated and are even approaching governments, who are intervening. With a substantial backlog and the pressure to process these in a reasonable timeframe, normal refund processes are just not enough.
- Preserve cash as much as possible. In its most recent impact assessment, IATA estimated that industry passenger revenues could be $314 billion below those of 2019. For most airlines it´s vital to find ways to hold on to tickets and the cash they represent, giving rise to voucher-based initiatives.
What can you do to achieve these goals?
In discussions with our customers and industry partners, we have seen interesting initiatives emerge. There is no golden bullet, but the following is a three-pronged approach that we recommend.
- Leveraging refund and cash-holding insights. Delivering an effective refunds policy whilst retaining goodwill and preserving cash requires you to know your customers. What is their refund behavior in each market? Which routes and countries have most un-refunded ticket sales? Who are the travel partners that we should work with to preserve cash? All of this information is within your Revenue Accounting solutions and your Sales Channels. It is vital to know where cash is being held. Accelya analysis of BSP data suggests that around 70% of travel-partner-issued tickets have not yet been refunded or exchanged. This presents either an opportunity or a risk depending on how you treat your sales channel. The more insights you have, the better your outcome will be.
- Automating involuntary refunds. There are very few airlines that don’t have a significant refunds backlog today. Of this backlog, BSPlink refund applications constitute 10%, amounting to 2-3 million unprocessed refund claims. An automated refunds system is the most efficient solution. A number of Accelya customers have requested us to specifically target their BSPlink refund applications. As a result, we have come up with a ‘light’ version of our refund solution that can be implemented within 2 to 3 weeks. The solution applies simple rules, is offered on a pure cost basis, and can process up to 50,000 refunds per week – making it a cost-effective alternative to scaling up staff. Most importantly, it requires minimal manual effort, thus ideal for Airlines who want to address the immediate refund crisis situation, within the resources available.
- Incentivizing vouchers over refunds with targeted Travel Agencies. According to our Webinar survey, promoting voucher-based refunds, to generate a win-win with agents and customers, is a top priority for airlines. To support airlines and agents on this new initiative, IATA’s Global Net Remit 5 (GNR5), now offers an additional service (developed in partnership with Accelya) to automate the management of incentives for vouchers or other exchange/re-issue transactions. You can incentivize your travel agents with a fixed commission, or a variable over commission, based on a percentage of the fare. This is easily and automatically calculated daily and reported through the BSP process. The incentive is paid to agents via Agency Credit Memo (ACM) and you have access to reports and analytics for decision making. We have worked closely with our airline partners and IATA to ensure that this voucher module is focused on your key markets, Origin & Destinations and travel partners, using refund insights that you (or Accelya) have developed.
Find your balance
We are an innovative industry. Airlines, travel partners and the travelling public are all trying to pick their way through this refund maze. There are some very good examples of best practices: from balanced - Lufthansa Group´s ‘give a little, get a little’ approach is now becoming popular - to bold - Emirates reaffirms customer commitment with ramp-up of refunds capability. In the end, each airline will have to determine the best strategy to achieve an optimal balance between refunds backlog, cash preservation and customer goodwill.