Originally Posted by
EI-BUD
Cyrano- How do the credit card providers know when the flights have been taken?
Seems strange, I would have thought like any other business that once the customer pays online the airlines gets the funds in the next 48 hrs approximately, depending on who they bank with.
EI-BUD
Fair question. The big difference between airlines and most other businesses is that the consumer pays something but doesn't get what he/she has paid for several days, weeks, or even months, unlike a CD or a new suit or a restaurant meal. Here's what I recall from my exposure to this area. It isn't as much of an issue if you are a big established network carrier with no real chance of failure, but if you are a newer or smaller and less proven/robust carrier, then you can expect major cashflow implications. Basically, the credit card company (or more precisely the "
acquirer") doesn't hold back individual amounts ("Mr BUD is not travelling until September 1 so we won't transfer the funds until then"); rather, they look at what their aggregate liability would be if the airline folded ("days sales outstanding" if you like).
Imagine an airline sells an average of €1m of tickets every day. These are for flights ranging from tomorrow through to some months hence. It's pretty easy for the airline to look at a forward-booking profile from their reservation/revenue-management system to see what the total not-yet-flown booked revenue is. Imagine it's €30m on average. That might be an average of €2m per day for the next few days, declining all the way out to only a few thousand per day a few months from now. But if they sell an average of €1m of tickets a day, €30m is 30 days of sales.
The credit card acquirer wants to keep enough cash back to ensure that it won't be out of pocket from refunds if the airline goes bankrupt, so it sets (in this case) 30 (or maybe 33, for leeway) days as the holdback period. In other words, the revenue from all the tickets sold today won't be transferred to the airline's account until 30 days from now. And that means that even if the airline is running a promotion and has doubled its sales for a few days, it won't see the direct cash effect of that for (in this example) 30 days.
Of course there's more complexity to this. The airline and the acquirer will typically negotiate changes to the withholding period ("we've increased daily sales by 20% over the last month, so you're holding back too much - you need to reduce the period"). But that's the general idea.
I would expect (but I don't know) that this simplified aggregated holdback is the sort that's being applied in the EI/RE deal, rather than the micro-level "OK, flight 3250 today had revenue of €x,000, so transfer that over to them now" approach that the press article seems to imply.
Hope that helps.
C.