With the word changing so fast around us, perhaps it is time to set aside old ways of thinking about paying for airline tickets and embrace a new approach that no longer mandates pre-payment. But would a deferred payment model for airline tickets actually work?
The Problem: Airlines Run A Business Based Upon Deferred Revenue
While hardly unique to the airline industry, the issue of deferred revenue is particularly acute in the airline industry. Revenue to run day-to-day operations and meet expenses is often sourced from future tickets. The industry is such a high-revenue, high cash-flow industry that a steady stream of revenue is necessary, like oil in a car, to keep the engine running smoothly.
But as we’ve seen in the preceding months, problems occur when future bookings dry up. Suddenly, cash flow trickles to a halt, payroll and debt servicing is threatened, and consumers entitled to refunds are left holding the bag.
This issue is particularly severe in Germany, where Lufthansa has aggressively avoided refunds under the tacit approval of the German government. Despite a rebuke from EU leaders in Brussels, Lufthansa refunds face a lengthy delay.
It’s not just private consumers who have extended interest-free loans to Lufthansa in the form of a lengthy refund process. Firms small and large in Germany are waiting for thousands and in some cases hundreds of thousands of Euros in ticket refunds. Unsurprisingly, cashflow tied up in unused airline tickets also greatly hurts smaller businesses who are the victim of Lufthansa’s predatory “survival” tactics.
The Solution: Airlines Should Not Collect Payment For Tickets Until Check-In
One way consumers are responding is through increasing calls to move to a “pay-as-you-check-in” approach. As VDR, a German business travel association, explained:
“The model that has been in existence for years, to run the business permanently with the credit of the customers.”
That organization, along with a growing list of companies (like Deutsche Bank, Merck, and Siemens), politicians, and citizens are lining up in favor of a paradigm in which money would only exchange hands upon check-in. Not only would this protect consumers from wayward airlines, it would also eliminate a reimbursement process that is inefficient and costly itself to administer.
Lufthansa, unsurprisingly, is not keen on such a change. A spokesperson told Handelsblatt:
“Lufthansa continues to consider the current regulations to be adequate and to be effective in terms of product differentiation and supply management.”
Lufthansa also thinks the proposed “pay-as-you-check-in” system would lead to flight load unpredictability and more environmental waste (you can always count on Lufthansa to virtue signal for the environment…when it suits them).
This is not necessarily so. Hotels around the world use this system and it seems to work just fine. A credit card would still be taken for deposit and there would be no-show penalties up to and potentially even exceeding the value of the ticket (a new revenue source…).
Indeed, this pricing model would upend the industry. But it is worth exploring and worth exploring now…there is not a better time for experimentation than in the unprecedented pandemic era.
I’m intrigued by the idea of “pay-as-you-check-in” model for airline tickets. I do think it could work and would eliminate so much wasted time and effort in the refund procurement process. Perhaps Germany will be the test case…
Would you support a “pay-as-you-check-in” model as a means to hold airlines more accountable and encourage financial discipline?
image: Elmar Bajora / Wikimedia Commons
@ Matthew — This is the consequence of irresponsible executives.
the model could always be 10% non-refundable upfront, rest upon check-in – that way airlines get some money and commitment upfront, consumers get 90% protection. fare classes could differentiate that percentage (i..e higher fares requiring lower upfront non-refundable %age)
Another idea is what the cruise industry does. An initial deposit then then there is a date for final payment due.
What this hinges on is whether the tickets are refundable. I can see paying for a full-fare refundable ticket at check in, but not a deeply-discounted non-refundable ticket. The airline getting the payment up front is one of the contributors to the total discount.
Incidentally, hotels do the same thing with non-refundable stays – they make you prepay.
Completely logical and sound proposition but will never happen.