Airlines Give Themselves More Leverage on Fees

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Struggling with thin margins and rising costs, airlines are trying to whittle away at the fees they pay for processing credit card payments.

And though negotiating lower fees from card companies has been a challenge in the past, airlines are finding that cobranded credit cards and the ability to use alternative payment systems are giving them more leverage.

A result is serious scrutiny of credit card fees, which according to Edgar, Dunn & Co. cost airlines an average of $12 per ticket.

Pascal Burg, a director of Edgar Dunn, a research firm in San Francisco, said that "two or three years ago the airlines were not in the driver's seat; they saw payments as an inevitable cost. Today the larger airlines are definitely much more in the driver's seat."

Aside from the sizeable transaction volume airlines provide to card companies, airline cobranded cards have become some of the best-selling cards for the associations, giving airlines more negotiating power.

Steve Freiberg, the chairman and chief executive of Citigroup Inc.'s credit card operation, said demand for Citi's co-branded airline cards continues to surprise him.

"Miles are still a pull," he said. "We've had growth that far exceeded our expectations" on the cards.

Mr. Burg said several airlines have been able to use that newfound leverage in their favor.

"More than one airline," he said, "has negotiated its rates down. It is fair to say that over the next few months there will be more pressure on MasterCard and Visa to lower their fees ... and a lot of airlines are looking hard at their American Express relationships."

British Airways PLC spokesman Steve Ebrrow said the carrier is "looking to reduce costs in payments." But he conceded that "it's difficult when you're looking at cutting costs in the money collection process, because credit cards are still the payment of choice."

Some airlines are starting to dabble in less costly online payment alternatives. Last spring Continental Airlines Inc. added First Data Corp.'s Western Union remittance service as a payment option on its Web site. That allows passengers to reserve a seat and then send payment to the airline through one of Western Union's walk-in outlets.

The Houston-based airline also incorporated a bill-me-later function that involves mailing the customer a bill, which is typically paid by mailing back a check.

Also, in 2004 Continental started accepting electronic checks online; customers enter their bank account information, and the airline then initiates an automatic clearing house debit.

John Slater, continental.com's managing director of distribution, said that with the new payment features "the consumer wins because they get more choice, and we win because we get discounted distribution channels."

Continental originally focused on offering the three new payment options for customers abroad, particularly in Latin America, but response has been equally positive with domestic customers, Mr. …