The shifting power between airlines and acquirers

Acquirers are pivotal partners for airlines, processing billions in card payment transactions annually. The industry experienced an earthquake during the COVID-19 pandemic, which significantly disrupted the relationship between acquirers and airlines. As airlines faced unprecedented challenges, acquirers acknowledged a higher credit risk exposure¹ and reassessed their risk management policies.

Between 2020-2022, the airline sector saw numerous bankruptcies and restructurings. Major carriers like Avianca, LATAM, and Virgin Australia underwent significant restructuring, while others like Air Namibia, Flybe and Germanwings ceased operations entirely. Alitalia required government intervention, and carriers such as SAS entered Chapter 11 equivalents. This fundamentally altered how acquirers viewed airline partnerships.

During this period, some acquirers exited contracts with airlines or changed contractual terms on a "take it or leave it" approach, leaving even long-established airlines with little choice but to accept much stiffer terms. These included increased collateral requirements or extended merchant settlement periods (sometimes after X days following the departure date of the second leg), which strained airline cash flow at the worst possible time.

The complexity of airline payment processing meant that finding alternative providers was not simple – the average time for an airline to have a new acquirer fully integrated and operational is on average nine to twelve months.

The return to growth and renewed acquirer interest

Today, passenger revenue is rebounding strongly. Its global revenue grew from $646 billion in 2023 to $744 billion in 2024, representing a 15% Compounded Annual Growth Rate (CAGR).

European airlines specifically saw net profits increase from $8.6 billion to $9.0 billion in the same period. This return to growth has rekindled acquirer interest in the airline sector, creating new opportunities for airlines to renegotiate terms established during the crisis and to develop relationships with a broader range of acquirers.

Drawing from payment diagnostics conducted for many airlines across the world, Edgar, Dunn & Company has identified areas of improvement that can significantly impact acquiring operations for airlines:

1. Cost structure transparency beyond headline rates: Many airlines focus solely on headline rates while overlooking other significant costs such as non-reimbursement of interchange on refunds or high FX markups on foreign currencies, which can substantially increase the total cost of acceptance

2. Selecting the optimal pricing model: While the industry trend leans toward IC++ (Interchange Plus Plus) pricing for transparency, the ideal model varies by airline profile and market mix. Airlines must conduct detailed analysis to determine where a blended rate may be more favourable versus where IC++ would generate cost savings. Without this market-specific understanding, airlines risk making blanket decisions that optimise some regions at the expense of others. The key is developing a data-driven approach that evaluates each model's performance across the airline's unique market portfolio

3. Interchange downgrades: Missing data elements and inadequate monitoring processes frequently result in transactions failing to qualify for optimal interchange rates, directly increasing costs without airlines' awareness

4. Missed “on-us” opportunities: Airlines often overlook the potential benefits of establishing direct agreements with acquirers that also have issuing capabilities in specific markets. When an acquirer processes transactions for cards they also issue, there are opportunities for preferential rates and improved processing efficiency. By identifying and leveraging these "on-us" possibilities, airlines can achieve +10% savings on applicable transaction volumes

5. Non-competitive benchmarking: Limited visibility regarding market rates leaves airlines unable to effectively evaluate their acquiring costs against peers, potentially resulting in significantly higher fees than market benchmarks

6. Strategic acquiring partnership management: Without a defined geographic optimisation strategy, minimal acquirer performance measurement and insufficient diversification of partners, airlines fail to leverage the full potential of their acquiring relationships wile exposing themselves to operational risk. The pandemic demonstrated that over-reliance on a single acquirer or very limited number of providers can leave airlines vulnerable to unfavourable term changes

7. Agreement term optimisation: Airlines frequently accept extended lock-in periods with volume commitments while missing opportunities to include performance incentives that could drive authorisation rate, service quality and cost improvements over time. Furthermore, airlines often fail to secure commitments from acquirers to add new services or features to their development roadmap, limiting future capabilities without contract renegotiation

While identifying these areas for improvement is valuable, airlines must also prioritise their efforts strategically. The chart below positions each area for improvement according to two critical dimensions: estimated financial impact (is it worth it?) and acquirer negotiation receptiveness (are we likely to get it?). This framework helps airlines focus their resources on areas offering the optimal balance between potential savings and likelihood of successful negotiation.

For context, it is important to note that the relevance of these areas for improvement varies significantly by airline profile. Tier 1 international carriers operating globally may benefit from different strategic prioritisation versus regional carriers or carriers with more limited geographic footprints. For example, an airline operating primarily within the EU would have minimal FX exposure compared to a global carrier.

Before rushing to solve these issues or renegotiate with acquirers, airlines would benefit from conducting a thorough payment acceptance diagnostic. Such homework pays dividends: it reveals the true state of play, pinpoints where real money is being left on the table, identifies service offering and performance gaps and provides the quantitative evidence needed to support negotiation positions with acquirers. The diagnostic should also assess acquirer provided transaction data quality, which impacts reconciliation efficiency – a critical aspect EDC will explore comprehensively in our seventh article “Payment Data Management”.

Best practices to achieving an optimisation of acquiring contracts:

Based on its significant experience working with many airlines, Edgar, Dunn & Company has identified several best practices:

1. Data-driven negotiation: Conduct detailed analysis of transaction data to identify all costs beyond headline rates. This reveals the true impact of cost items such as non-reimbursed interchange on refunds and FX markups across currencies

2. Pricing model optimisation: Perform market-by-market analysis to determine where IC++ or blended rates are most advantageous. This targeted approach prevents applying a one-size-fits-all solution across diverse markets

3. Interchange qualification management: Implement systematic monitoring of downgrade reasons and establish data quality standards. This proactive approach prevents revenue leakage from transactions failing to qualify for optimal rates

4. On-Us agreement development: Map the issuing capabilities of contracted acquirers in key markets to identify on-us opportunities. Negotiate preferential agreements for these transaction flows to capture +10% savings

5. Competitive benchmarking framework: Establish regular comparison of acquiring costs against market rates and peer airlines, as well as a comparison of capabilities. This enables to identify non-competitive rates and provides leverage in negotiations

6. Strategic acquirer partnership: Develop a geographic optimisation strategy that aligns acquirer strengths and geographical coverage (access to domestic schemes) with market needs. A balanced approach should optimise geographic coverage while maintaining sufficient diversification for resilience. This may require partnering with a payment orchestrator with strong credentials in the travel space to accelerate the integration of acquirers able to process cards domestically and/or accept local alternative payment methods

7. Agreement flexibility planning: Structure contracts with balanced term lengths and incorporate volume-based incentives. Negotiate reasonable volume commitments that maintain leverage while securing favourable rates

The pandemic-driven disruption, while painful, has accelerated a necessary transformation in how airlines approach payment acceptance. Forward-thinking carriers are seizing this moment to implement comprehensive payment strategies that not solely focus on cost reductions, but also on revenue-side opportunities driven by payments.

As passenger volumes continue to grow and airline profitability strengthens, carriers leveraging the opportunity to optimise acquirer relationships will establish a significant competitive advantage through higher conversion, lower costs, improved cash flow, and enhanced payment capabilities to enable better customer journeys.

In the next chapter of our series, we will explore the third crucial payment issue for airlines: “Untapped Issuing Opportunities”. Charlotte Piron will examine how airlines can leverage their trusted relationships with their clients – both consumers and businesses – to develop innovative payment products that generate new revenue streams while enhancing the customer experience.

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‍¹ Airlines represent a “credit” risk for acquirers because airlines collect payments for services that will be delivered in the future. And the acquirer is responsible for refunding transactions when cardholders submit a chargeback following an airline bankruptcy.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).