Should Airlines Offer Pay as You Fly Fares?

Should More Airlines Offer Pay as You Fly Fares?


Should Airlines Offer Pay as You Fly Fares? A German Transport Minister, Bernd Althusmann of Lower Saxony, has renewed calls to introduce “pay as you fly” (PAYF) airline tickets. “Travelers would be spared a lot of hassle,” Althusmann told the German newspaper Handelblatt, referencing travelers' often protracted delays when seeking refunds for cancelled flights. “The implementation of our initiative would only result in minor additional costs for the airlines.”

Althusmann's remarks have attracted positive interest from Germany's Federal Ministry for the Environment and Consumer Protection, as well as from the German Business Travel Association (VDR). “”Advance payment for air travel is an outdated standard that should be replaced by timely electronic payment,” commented VDR's President Christoph Carnier.

Lufthansa did, in fact, launch PAYF airfares for all of its European corporate clients in March 2021, although it first debuted the concept in 1997 with Siemens, expanding it to a few other large corporate clients. What prompted Lufthansa to greatly expand PAYF in March 2021 to all corporate customers based in Germany, Austria, and Switzerland for domestic and intra-European Union flights?

The pandemic, and the resulting difficulty for travelers (including corporations) in obtaining refunds for cancelled flights, was a watershed moment, especially for companies with cashflow issues and significant travel expenses. Airlines resisted paying cash refunds given the cash they were bleeding, but that pushed cashflow struggles on to travelers and companies. Only after considerable pressure from the European Consumer Protection Cooperation authorities did European airlines refund COVID-19 cancelled flights and unwanted vouchers.

It was an especially sore spot for companies who had suffered over the Air Berlin bankruptcy in 2017, since unused tickets instantly became worthless. Those combined losses, and Lufthansa's financial reset thanks to a EUR 9 billion bailout (which the airline repaid ahead of schedule) prompted the German Business Travel Association to push for expansion of Lufthansa PAYF fares to corporate clients, as a way of guaranteeing that companies wouldn't have to struggle to get repaid for flights cancelled by the airline.

Something to note is that PAYF fares are only available for higher fare classes (making them a fit for corporate travelers who often book closer to their travel date and pay higher fares than leisure travelers). A PAYF fare is often double or triple Lufthansa’s lowest Economy Light fare and slightly higher than Economy Comfort, but less than the Economy Flex fare.


Why Airlines Are Unlikely to Adopt PAYF for Leisure Clients

While many passengers would undoubtedly like to only pay for their flight when checking in, either online before the flight or at the airport, that's unlikely to be an option anytime soon, for a few reasons:

  • Airlines would struggle with passenger load and revenue planning: while most airlines do some overbooking, figuring some passengers will no show or won't make the flight, that's still predicated on primarily non-refundable tickets for the vast majority of travelers. Even if contract terms state that a PAYF ticket is non-refundable, an airline may be unable to collect what it's owed when it comes to leisure travelers, which brings me to the next point.
  • A leisure traveler can cancel the credit card used when booking to the flight before the flight takes place. While travelers concerned about their credit score would presumably not do this, there are probably enough unscrupulous travelers who would try this, causing a huge financial and logistical headache for airlines trying to collect on what they're owed. The PAYF model unfortunately provides perverse incentives to “bad actor” travelers to not commit to the flight they booked since they haven't paid anything yet, whereas paying in advance helps ensure that most travelers do show up for the flight, rather than lose their investment.
  • PAYF is a competitive disadvantage for airlines that adopt it due to the greater financial burden and greater difficulty planning load factors. A rational airline is unlikely to adopt it for leisure travelers unless it perceives a cost to not providing it, for example because it's losing significant market share among high-profit business travelers whose corporations have shifted spend to a competitor airline that does offer PAYF. But leisure travelers aren't nearly as profitable, so there's unlikely to be an incentive to airlines to offer such fares for leisure.

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