From Volatility to Resilience: Rethinking Risk in Travel Payments

The world of aviation is a fascinating one. From the outside, many see the airline industry as a success story with commercial aviation connecting all corners of the world. 

We often hear about expanding networks and growing passenger numbers in the news. Even COVID could not dampen its success with stories of demand recovery abound and IATA reporting growth in passenger numbers every year since 2020.

Many companies want to take part in the lucrative and resilient sector that is airlines and travel. But as they begin taking a closer look, they come to realise that beneath the growth is a structurally fragile financial model - one they can neither make sense of nor know how to handle. 

The Hidden Fragility Behind Travel Growth 

Recent geopolitical tensions and the resulting fuel price increases bring this financial fragility back into stark focus. History has shown a strong correlation between rising fuel costs and spikes in airlines failures. So much so that we are already seeing many airlines being flagged as high risk for insolvency, and prominent airlines like Lufthansa scaling down their schedules by cancelling tens of thousands of flights. More vulnerable airlines are now seriously reviewing their next moves. 

That travel mostly operates on a prepaid model only compounds the issue, which primarily impacts airlines, travel intermediaries and cruise companies. The long delivery time between customer payment and delivery of the service (i.e. the travel date) results in an accumulation of risk over weeks and sometimes months.

That risk then spreads through the chain from travel suppliers through to acquirers, payment providers and (where applicable) travel intermediaries, ultimately landing on the consumer. As consumers, we are often not aware that the money we have paid is not necessarily being set aside to be refunded in the event that the planned travel cannot be completed. 

This uncertainty around what happens between booking and service delivery creates what I call a “vicious cycle”. 

The Vicious Cycle of Perceived Risk 

Travel is perceived as high risk due to the forward delivery risk, so seasoned acquirers in the space often guard against this risk by demanding guarantees, rolling reserves or other forms of security.

However, without clear visibility on the actual risk, there is a tendency toward overcollateralisation. This prompts acquirers and payment providers to enter the travel sector to offer far more attractive terms and conditions in order to attract airlines and travel merchants to their books.

These attractive terms and conditions, however, are not based on data. As a result, these providers find themselves caught by surprise when conditions change. The reaction is often a sharp pull back from the market, leaving many airline and travel merchants “homeless” and facing more restrictive terms with those willing to house them.

Regardless of whether providers are overly risk tolerant or overly risk averse, this vicious cycle damages the entire industry.

It is disruptive to travel businesses and makes an already low-margin industry face unnecessarily restricted cashflow, which can lead to systemic risks during times of stress. Even for healthy businesses, growth can be restricted by the safeguards imposed around perceived risk, rather than demand. More broadly, this cycle can lead to reduced competition due to higher barriers to entry and higher costs for travellers. Ultimately, this cycle reinforces the self-fulfilling prophecy that travel is a risky market too complex to manage. 

From Risk Visibility to Industry Resilience 

The question then becomes: How do we move from payment relationships driven by perceived risk to ones grounded in actual risk? 

The goal is not to eliminate risk, but to understand it. 

Understanding true exposure and managing it in an informed way can create an industry that is more resilient. The industry will continue to face shocks from fuel crises, geopolitics and other macroeconomic events. Airline failures will inevitably remain part of the landscape, but they need not be catastrophic for the industry. 

The fundamental truth is that doing business means accepting a certain level of risk. Risk levels will always vary, but when risk is properly understood upfront, it can be managed with precision rather than fear or instinct.

Understanding the actual risk requires data. For travel, this is primarily payment transaction data and booking data - not just captured at the moment of booking, but tracked as risk evolves over time as travel plans and schedules change. Other aspects, such as seasonality, are also crucial to consider in ensuring a proportional approach to managing risk.

However, data itself is not enough - trust is also critical. Some degree of data exchange is already happening now, but without a shared understanding between the parties, it can breed mistrust rather than confidence. Ensuring mutual visibility creates trust, lays the groundwork for more open conversations and enables proactivity (from both sides) instead of reactivity.

Extending that visibility further can also enable more efficient risk transfer at an industry level. Risk visibility is not just about protecting and growing businesses but also protecting travellers.

Some examples:

• Ensuring refunds and chargebacks are not overpaid 
  
• Knowing that a travel intermediary has fulfilled its supplier payment obligations, and with a form of payment that provides protection against supplier failure 
  
• Leveraging insurance solutions at scale that enable proper diversification of risk 

The question is not whether risk exists, but how it is managed. The travel payments industry needs to move from reactive risk management - where risk is estimated or assumed - to proactive risk management that is grounded in transparency, shared visibility and a single source of truth. 

Livia Vité
CEO