The Lufthansa Group has started offering all corporate customers its Pay As You Fly (PAYF) fare type, as reported by BTN Europe last month. It is a radical departure from normal airline practice of taking payment at time of booking. But why is it happening now, is it good or bad news for buyers and airlines, and will other airlines follow suit? Here’s the lowdown on this potentially major evolution in air travel procurement.
What’s the origin of PAYF?
Lufthansa piloted the concept of not paying until departure in 1997, with Siemens as its original customer. Over the next couple of years the airline extended PAYF to a handful of other high-spending corporate clients. Various North American airlines experimented with the idea around the same time, but it never became established on either side of the Atlantic.
What has changed?
Last month Lufthansa Group extended PAYF to all domestic and intra-EU flights for any corporate customer, regardless of spend, based in the DACH region (Germany, Austria, Switzerland). PAYF is also to be expanded beyond Lufthansa itself to sister carriers Austrian Airlines, Brussels Airlines and Swiss.
Why now?
“The trigger in the German market was when Air Berlin went bankrupt in 2017 and German companies had millions of euros in unused tickets that they had to write off,” says Dominic Short, president of the Association of Swiss Travel Management. German travel managers’ association VDR began lobbying federal and state administrators, and redoubled its campaign when coronavirus shut down business travel, for two critical reasons.
The first was the delay, often deliberate, by some airlines in refunding tickets for cancelled flights. At the peak of the crisis carriers sat on an estimated US$35 billion of customer money for which they had provided no service – money many of those customers badly wanted back because of their own cashflow struggles.
“Customers don’t get a guarantee that they will get their money back in the case of a bankruptcy or disruption to their flight,” VDR president Christoph Carnier said in a recent BTN Europe podcast (listen below). “Some customers are still waiting for a refund, so we found it was a good time to come with this idea again.”
The second reason is that the current lull in flying offers an opportunity to reset airlines’ liquidity strategies. “In former times airlines would have been bankrupted if they had not been pre-paid because they needed that money as investment capital,” explains Jörg Martin, principal of CTC Corporate Travel Consulting in Germany and head of VDR’s aviation committee.
“That is no longer needed because we have had this drastic break with near-zero business. This is really the right time to make changes without interfering in airline finances and causing them to collapse. Working with government money behind them, they can restart with a payment structure on a more serious level.”
What are the advantages for corporate clients?
All the problems around applying for and chasing refunds go away with PAYF, which also means not having to pay your TMC to manage refunds either. Nor is there any risk of losing money to airline bankruptcies. All in all, says Short, “it minimises the risk to the corporate customer and optimises cashflow.”
What are the disadvantages for corporate clients?
None as such, but to date PAYF has only been applied to higher fare classes. “PAYF has its price, but those who value it will get along well with it,” says a travel manager of one long-standing PAYF customer.
According to BCD Travel Germany managing director Alexander Albert, a PAYF fare is typically double or triple Lufthansa’s lowest Economy Light fare and slightly higher than Economy Comfort but less than the Economy Flex fare.
Albert also warns that “some parameters and processes are different” operationally for TMCs when payment is no longer taken at time of booking. For example, contractually speaking, the TMC only charges a transaction fee for a reservation when issuing a ticket, but under PAYF the TMC does not issue the ticket.
Other adjustments include ensuring the ticket is captured correctly for management information and being aware that interlining on PAYF reservations is not possible through some online booking tools.
What are the advantages for airlines?
VDR argues that airlines benefit too through avoiding administering refunds and managing unused tickets. It also builds loyalty between airline and customer.
What are the disadvantages for airlines?
This is the most hotly disputed issue around PAYF. Lufthansa says it will continue to make payment on departure the exception rather than the rule because “a fundamental short-term payment practice would lead, among other things, to a situation in which the utilisation of flights would be much less plannable. As a consequence, flying with half-empty aircraft would not make sense ecologically or economically.”
But, as Gray Dawes Group chief commercial officer David Bishop said on the BTN Europe podcast, “this product is about flexibility of when I pay, not flexibility of ticket conditions underneath it.”
Martin agrees. “I have no objection to PAYF with ticket restrictions,” he says. “It’s how you want to set it up. You could collect a penalty fee or the complete fare. This is just a question of when payment is taken.” The airline is always able to collect its revenue if ticket conditions do not permit changes or cancellations because payment is only allowed by credit card.
However, there are other reasons carriers may dislike the economics of PAYF. One is that the complexity of refunds acts as a partial deterrent to travellers contemplating cancelling their flights, Areka Consulting partner Guillaume Bizet said on the podcast. “PAYF may result in more cancellations and that would be a problem for airlines,” Bizet said. “That’s why they certainly will not extend this to all types of fares.”
Another, Bishop said, is that “unclaimed refunds are a key part of an airline’s revenue stream and the projections of that go into its financial models.” But, for Martin, this kind of assumption is no way to run a business and should disappear in the reset of airline/customer relations. “Is it serious business behaviour that you take money from someone and don’t give it back?” he asks.
Will other carriers adopt PAYF?
VDR says other airlines have been in touch wanting to know more, including another major European network carrier. BTN Europe asked British Airways for its views but received no answer.
Short believes airlines will have to respond because PAYF gives Lufthansa competitive advantage. “You’re going to be a more attractive partner than an airline wanting to keep things the same way,” he says.
Carnier expects a growing price differential to emerge, with, as in the hotel marketplace, discounts for payment at point of booking and a premium for those who only pay when the flight takes off. For many corporate customers, that will be a premium worth paying.
“As the customer I have the choice to decide okay, I pay a little more money but then I’m safe and will only get charged if I really receive my goods, with no additional processes behind,” says Carnier.