IATA: Innovation to Ensure Survival

Three years on from the pandemic outbreak, the airline industry is almost back to full strength and its representative body, the International Air Transport Association, continues its support of industry innovation aimed at transforming the passenger experience from shopping for air travel to arriving at the final destination. Here, Javier Orejas, IATA’s Global Head of Banking, gives TMI the inside track on innovation in the industry – including payment trends relevant to all treasurers.

On 5 May 2023 the World Health Organization’s (WHO) Director-General Tedros Adhanom Ghebreyesus announced: “It’s with great hope that I declare Covid-19 over as a global health emergency [although] that does not mean Covid-19 is over as a global health threat.”

While the risk of new variants still remained, he said, the pandemic had been on a downward trend for more than a year and most countries have already returned as far as possible to life as it was pre-Covid.

The downgrade is particularly welcome news to the airline industry’s main lobby group, the International Air Transport Association (IATA), which forecasts that 4.35 billion people will travel by air this year. That figure would not be far short of the 4.54 billion passengers who flew in 2019.

IATA, which was founded in the final months of the Second World War, marked its 75th anniversary in April 2020 just as the first wave of the Covid virus had spread around the globe. Lockdowns and travel restrictions grounded airline fleets and closed airports for prolonged periods and airlines carried only 1.8 billion passengers that year. Governments were forced to quickly step in and support carriers and by late March, the United States Congress had agreed to provide $25bn in financial assistance “to preserve aviation jobs and compensate air carrier industry workers” under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

As IATA reported: “All sectors making up the aviation value chain suffered significant losses in 2020 and 2021 – except for air cargo carriers and freight forwarders who experienced yield increases given undersupply and sustained demand.”

Bouncing back

IATA’s most recent annual general meeting, held in Istanbul in early June, was able to present a much more upbeat picture. “Despite economic uncertainties, people are flying to reconnect, explore, and do business,” the Association’s Director General, Willie Walsh, told delegates. “Airports are busier, hotel occupancy is rising, local economies are reviving, and the airline industry has moved into profitability.”

People’s desire to resume travelling has strengthened the global airline industry’s profitability, further helped by better cargo revenues, China’s abandonment of its strict zero-Covid restrictions last December, and lower jet fuel prices. IATA, which in December 2022 predicted that global airlines would collectively report net profit of $4.7bn in 2023 has more than doubled the estimate to $9.8bn, on revenues of $803bn.

As reports noted, the mathematics based on these figures translates to a net profit of only $2.25 per passenger. Walsh acknowledged: “Repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines”.

The upturn is nonetheless a relief after airlines collectively suffered net losses of $183bn between 2020 and 2022. “The fact that the industry could survive that demonstrates the resilience and determination and the actions that have been taken,” Walsh told reporters, adding “we’re fully acknowledging challenges, but we’re still quietly confident about the future.”

The industry is better placed this year to meet the rebound in passenger numbers. In 2022, as the steady revival in air travel accelerated, airlines, airports, and ground handling service providers that had laid off employees during the pandemic found themselves with too few staff to cope with the upsurge in demand. As a result,  there were widespread cancellations and delays. Although Walsh has admitted there continues to be a shortage of air traffic control staff, airlines have been steadily recruiting more pilots, flight attendants, and reservation agents.

There is also some modest relief on jet fuel costs after last year’s price spike, which Bloomberg^[1] reported mostly only the industry’s larger operators such as IAG, Air France, KLM and Lufthansa were able to mitigate through swaps and options to hedge against increases. Other airlines remained on the sidelines.

Western airlines are also hampered by the closure of Russian airspace since the war in Ukraine broke out in February 2022. A Paris-Beijing flight, for example, which was previously 5,200 miles (8,370km ) must now be diverted further south, adding 870 miles (1,400km ) to the journey and two hours to the flight time.

Efficiency and choice

IATA was founded in Cuba’s capital of Havana in 1945 with 57 members from 31 nations as a trade association for the world’s airlines. Its purpose is to represent, lead, and serve the global airline industry and its mission statement designates the following three areas:

Representing the airline industry
We improve understanding of the air transport industry among decision makers and increase awareness of the benefits that aviation brings to national and global economies. Advocating for the interests of airlines across the globe, we challenge unreasonable rules and charges, hold regulators and governments to account, and strive for sensible regulation.

Leading the airline industry
For over 70 years, we have developed global commercial standards upon which the air transport industry is built. Our aim is to assist airlines by simplifying processes and increasing passenger convenience while reducing costs and improving efficiency.

Serving the airline industry
We help airlines to operate safely, securely, efficiently, and economically under clearly defined rules. Professional support is provided to all industry stakeholders with a wide range of products and expert services.

The Association’s head office is in Montreal, Canada, with executive offices in Geneva, Switzerland. Membership totals some 300 airlines, primarily network carriers but with some low-cost carriers (LCCs), in more than 120 countries. On 5 June, IATA announced that RwandAir’s CEO, Yvonne Manzi Makolo, had assumed the post of Chair of the Board of Governors for a one-year term, becoming the first female to be elected to the position.

Everyone’s trying to achieve cost efficiency and one means of doing so is to incentivise direct distribution for those customers who prefer it.

Over the years, IATA has introduced several initiatives aimed at increasing efficiency, improving the passenger experience, and removing costs. Simplifying the Business (StB), launched in 2004, for example, mandated the phasing out of paper tickets in IATA financial systems and supported the introduction of standardised bar-coded boarding passes. From StB developed the Fast Travel programme, focused on the development of industry standards providing passengers with six self-service options before boarding the aircraft including self-check-in, self-flight-rebooking and self-bag-tagging.

The launch of the New Distribution Capability (NDC) data exchange standard followed in 2012. It aimed to modernise the decades-old technical standard used for the sale and distribution of airline tickets in travel agent booking systems. The standard has paved the way for carriers to be able to offer continuous pricing and control over how their products are displayed and sold, regardless of shopping channel. According to IATA, it “enables the same choices to be offered to high street travel shoppers as are offered to those who book directly through airline websites”.

Added to these more recently is the payment platform IATA Pay. Javier Orejas, IATA’s Global Head of Banking, says that payment cost and efficiency for ticket purchases and other transactions has become a major topic for the airline industry. IATA Pay is an efficient means of simplifying the payment process for buying tickets that cuts costs for airlines while providing an improved experience for their passengers.

He adds that IATA Pay is also a response to the emergence of open banking and request to pay (RtP) models in a growing number of countries. “We’ve already seen huge success for national instant payment systems such as India’s UPI [Unified Payments Interface], Thailand’s PromptPay, Singapore’s FAST [Fast and Secure Transfers] and Hong Kong’s FPS [Faster Payments System]. And treasurers across the globe are no doubt experiencing the same as instant payments infiltrate their day-to-day activities.

“Another reason for implementing IATA Pay is that we also want to help airlines distribute e-tickets and reduce the large number of ticket transactions that are carried out by card payment. This is very expensive for airlines, typically 2.2% of the total payment amount that adds up to an annual cost of $20.3bn .”

IATA Pay offers travellers an alternative method to pay for air tickets purchased online by directly debiting their bank account. The pricing structure is based on a single fixed fee rather than a percentage of transaction and it improves payment speed and security, while reducing payment costs. Airlines save up to 99% in payment processing fees, with the attendant benefits of settlement within 24 hours, reconciliation, refund management, and an administrator portal.

By airlines, for airlines

Orejas joined IATA in 2007 from IT services and consultancy group Accenture, where he held several positions in the field of strategic banking consulting. Over the past 16 years, he and his colleagues at IATA have helped to design and implement innovatory cash management and payments solutions for strengthening airlines’ financial health and enabling IATA to make its financial services cheaper, and more efficient.

IATA Pay was developed in 2018 and he describes it as a “no brainer”. “Everyone’s trying to achieve cost efficiency and one means of doing so is to incentivise direct distribution for those customers who prefer it. Airlines are looking to promote direct sales, minimise cost and be in direct contact with the customer,” all of which are aims that IATA Pay responds to. “We’ve promoted it as a solution developed by airlines for airlines,” says Orejas.

The pandemic delayed plans to pilot IATA Pay but by the end of 2020 it was given a low-key trial in several European markets in partnership with Deutsche Bank. Dubai-based Emirates was the first airline to adopt it as a white-label solution, which it customised and launched in July 2021 as Emirates Pay for customers in Germany and the UK.

“We started in Europe, but we’re good at scaling up worldwide solutions,” says Orejas. “The Association’s DNA is to be international.” IATA Pay launched more widely in early 2022 in other markets, including India where it partnered with Standard Chartered. To date, IATA Pay has been adopted by 19 airlines, including several major carriers and has gone live in 27 countries. “We have a further 32 airlines at various stages of integration and expect around 45 to 50 to be live by the end of 2023,” he adds.

“We have aggressive ambitions, with the plan for 2023-24 to expand to a further 16 markets. IATA offers financial services in 180 countries worldwide and, ultimately, we want to offer it in every country in which we operate.” Although success will rest partly on how new payment schemes are regulated in different countries. “Europe’s current Payment Services Directive [PSD2] generates some friction and would benefit from improvement. But regulators want new forms of payment to be competitive.”

Modern Airline Retailing was launched in 2022 to support airlines in their efforts to meet rising customer expectations brought on by their experiences in the online shopping world. This initiative builds on NDC but is more encompassing.

The future of the airline sector itself will be a determinant of the success of these initiatives, with some analysts regarding Lufthansa’s purchase of a 41% stake in Italy’s loss-making ITA Airways as the latest evidence of a European industry developing into two main segments – the three major groups of Lufthansa, Air France-KLM and IAG, and a handful of budget carriers.

Certainly, the situation is less clear than in the past and customer behaviour and payment preferences are changing, admits Orejas. “Today, customers want personalisation, efficiency, and a seamless experience wherever they shop, and they want a variety of secure and simple payment options. Airlines are responding to these trends, and at IATA we want to be able to support them.”

The industry is also required to play a proactive role in the global push towards net zero, with initiatives such as the Sustainable Aviation Buyers Alliance (SABA) with its mission to “decarbonise the future of flight” and utilise sustainable aviation fuel (SAF) to reduce emissions.

Carriers have committed to decarbonise completely by 2050 and IATA held its first World Sustainability Symposium (WSS), in Spain’s capital of Madrid on October 3-4. The event aimed “to gather and support the global community of sustainability experts needed to realise aviation’s biggest challenge ever”. Undoubtedly lessons will emerge from this event for other industries too, since transition is rapidly becoming a key agenda item across industry verticals – and the financing of this shift will also increasingly impact the work of corporate treasurers.