Airlines have highly complex transaction lifecycles. They span multiple sales channels, countries, currencies, payment methods, and intermediaries. How do you manage payments and reconciliations across such a diverse landscape? You need resource allocation and departmental synergies on a massive scale.
However, this transactional complexity exposes airlines to potential revenue leakage. There are several factors that feed into this: missing sales and payments, inaccurately applied commissions, and loss due to foreign exchange fluctuations and intricacies of Dynamic Currency Conversion (DCC).
This complexity makes it all the more important for airlines to ensure that all payments from ticket and non-ticket sales are paid into its bank account on time and are accurately accounted for. In this article, we’ll discuss ways to handle payment reconciliation as a way for airlines to prevent lost revenue.
Reconciliation for airlines can be divided into 4 stages:
1. Sales: Airlines receive payments through various channels, such as on the airline’s website, through third-party sites, and travel agents. Airlines that offer international flights must also manage different currencies, exchange rates, and foreign payment platforms.
2. Billing: Airlines need to have efficient payment and billing capture processes in place to ensure funds are received by airlines in a quick manner. Delays in billing on a massive scale can lead to cash flow problems.
3. Settlement: Once payments are received, they’re adjusted by payment acquirers and applicable fees are applied. It’s important for airlines and acquirers to agree to procedures to handle issues such as payment disputes.
4. Payment: Airlines typically consider transactions as “paid” once the payment has been deposited into the airline’s bank account (although the transaction may still be open in the airline’s accounting system).
Drivers and Challenges for Airlines
Of course, having and maintaining an efficient reconciliation process is easier said than done. An efficient reconciliation process enables an airline to exercise control over several areas such as:
- Control on Receivables: Airlines need to manage multiple complexities when working with various sales channels, each with different financial suppliers, settlement currencies, and bank accounts. Since it’s impossible to exactly match every sale to a payment, airlines need to establish a “tolerance” window.
- Control of Compliance: Airlines need to ensure exact commission pay-out to acquirers, payment deductions, and bank charges as well as managing regulatory mandates. Additionally, they need to manage another level of compliance in a PCI-DSS environment, which is strictly regulated by card schemes.
- Control of Gain/Loss Account: Airlines need to monitor and report the foreign exchange impact resulting from currency conversions, card sale disputes, and any adjustments and write-offs - under the correct accounting head.
Types of Reconciliation
So how do airlines handle reconciliation today? Most turn to one of two common methods, batch matching or manual transaction matching:
- Batch Matching: This is the process of matching multiple transactions at once by matching a sum number rather than individual numbers. Batch matching is quick and easier than manual matching. It also has low full-time employee (FTE) and IT costs associated with it. However, airlines will have to deal with higher write-off budgets, and will only have high-level transaction information. This method can result in loss of chargeback claims due to the lack of availability of detailed level data.
- Manual Transactional Matching: The process of matching every transaction manually. Airlines benefit from accurate reporting and lower revenue leakage from lower write-offs. On the other hand, airlines deal with larger investments in time and resources, resulting in higher incurred costs. Manual checking also opens up the possibility for human error.
Costs of Reconciliation
The manual and batch reconciliation process not only has the drawbacks listed above but can also take a significant chunk out of airlines’ revenues due to high costs. Some of the factors driving these costs include:
- Staff: Though FTE costs can vary, they typically range from 20 thousand USD for an airline with 0.5 million credit cards and AFOP transactions to 45 thousand USD for an airline with 7.5 million transactions.
- IT and PCI: Related costs include PCI exposure, resources dedicated to support or internal development, security costs, technical maintenance, and more.
- Write-offs: Airlines typically allocate a budget that ranges from 0.01 to 0.015 percent.
- MIS: Airlines that rely on FTEs to file and consolidate reports can spend between 30 thousand and 40 thousand USD per year.
Best Practices for Airlines
Revamping the reconciliation processes should be top priority for any airline. Yet this process requires the involvement of many teams, including accounting, finance, and IT. This level of coordination shouldn’t deter airlines from moving forward, however. While leadership may feel more comfortable sticking with the manual processes used for years, the following should be kept in mind:
- Quality assurance risk increases with the number of transactions needed to be matched manually
- A large number of transactions also makes it hard for employees to monitor metrics such as payment settlement time and amounts (like acquirer fees)
- Manual reconciliations usually involve a costly allocation of resources from multiple countries
- Manual reconciliation processes lack the ability to provide reports and automated feeds to ERP
Airlines can greatly reduce these risks by turning to automated transactional level reconciliation which not only help with the risks discussed, but also with:
- Reconciling transactions at a greater speed
- Monitoring compliance across all aspects of the reconciliation process, such as adjustments and foreign exchange differences
- Providing interfaces with other systems including the airline’s ERP and databases that store information on chargebacks and more
- Providing detailed reports regarding billing, receipts, settlements, fees and other deductions
These are just some of the benefits that automated transactional reconciliation can bring about to your payment reconciliation processes. Knowing all of your airline’s numbers is now more plausible than ever. It’s time to take advantage of that opportunity.