These days, most of us jump online to book flights and holidays, and generally have our credit card handy. For a merchant , the average cost to process a customer’s MasterCard or Visa credit card payment is less than 1% of the value of the transaction, or about 2% for Diners Club and American Express charge cards. The merchant, such as an airline, pays a fee, with the amount largely determined by the card scheme’s interchange fees.
But some airlines charge much higher fees that bear little relation to these average costs. Qantas and Tiger Airways emerge as the worst offenders, although the other carriers are no angels either.
Please note: this information was current as of September 2009 but is still a useful guide to today's market.
"Convenience" and "service" fees
Qantas charges service fees of $7.70 including GST per passenger for domestic bookings, and $25 per passenger for overseas trips. So if you book flights for your family of four’s return trip from Sydney to Melbourne, putting the single transaction on your credit card, you’ll pay a $30.80 credit card fee. If the trip is outside of Australia and New Zealand, the fee will be $100.
Tiger charges what it terms a credit card “convenience fee” of $6 per passenger per flight for domestic travel, and $5 per passenger for international bookings. So the credit card fees for the above examples would be $48 and $40 respectively.
Keep in mind the airline’s cost to process such transactions is based on the value of the booking and type of card, not the number of passengers, the number of sectors flown, or whether the booking is for return flights. The policy employed by Qantas, Tiger and other other airlines for surcharging is analogous to a supermarket applying a separate credit card fee for each child you brought on your shopping trip, and not on the value of your shopping bill.
Here are a few more examples of how these surcharges add up:
- On a $200 MasterCard or Visa credit card booking for one passenger to fly from Sydney to Melbourne return, Tiger’s fee is $12 and Qantas charges $7.70, including GST. Assuming the airlines’ costs to process that transaction is 1%, or $2, the Tiger credit card fee is about six times the cost, and the Qantas fee is about 3.5 times the average cost to process a transaction of that size. And we’ve used a fairly high airline processing fee to be conservative – 0.89% is the average merchant fee to process MasterCard and Visa credit card transactions, but the big airlines may pay less. The profit would be lower for charge card (Amex and Diners) transactions.
- On a $1000 credit card booking for four passengers flying from Sydney to Melbourne return, Tiger’s surcharge is $48. Assuming the same 1% charge to process a MasterCard or Visa transaction, Tiger's surcharge is nearly five times the average merchant fee for such a transaction. Qantas charges less – $30.80 – which after tax is still nearly three times the average merchant fee for MasterCard and Visa transactions of that value.
- We calculate the airlines’ costs to process some very large credit card transactions (for example, international flights) may exceed the surcharge they pass on to customers. It seems that the fee for small value transactions — for example internet special deals for domestic flights — are subsidising the fees for larger transactions.
Steve Burns, Commercial Director of Tiger Airways Australia, says the convenience fees vary depending on the mode of booking customers choose. “Different forms of payments have different levels of associated costs and administration and the fee also covers fraud prevention and bad debt.” However, we’re not convinced by this argument, as credit card schemes cover the cost of fraud and bad debts that airlines may experience as a result of accepting cards.
Burns continues that “‘Tiger Raw’ fares booked with an Australian-issued MasterCard debit card do not incur a convenience fee. Administration levels associated with debit cards are lower, and this is reflected in the fee differential versus credit cards. Tiger Airways is the only airline in Australia offering a fee-free credit or debit card payment option to all passengers booking online.”
Qantas claims the credit card fees it collects do not recover its costs in processing the transactions. “We do not derive net revenue from the fees,” said a spokesperson. “Our collections are lower than the costs we incur for accepting credit cards. The vast majority of our credit card sales are transacted with higher than average merchant service fees (for example, Amex, Diners and Premium, Corporate or International Visa and MasterCards) and use of these card types continues to grow.
“In addition to standard interchange rates published by Visa and MasterCard, which vary by card and transaction type, Qantas also incurs other card transaction fees. The overwhelming majority of our card transactions are treated as card not present transactions by the card providers and therefore incur higher merchant service fees.“
Citing commercial reasons, Qantas did not disclose to CHOICE the value of average domestic and international credit card bookings or the average number of passengers. The company also declined to disclose the merchant service fees it pays, but we assume a huge merchant such as Qantas, which processes vast numbers of credit card transactions, is in a great position to negotiate very low fees.