Travel Payments

Will Credits Keep Travelers in the Air, on Deck … and Spending?

cruise-travel-credits-refunds

March 8 will mark a watershed day in the travel industry — when the U.S. state department said that citizens should not take cruises.

As Bloomberg reported Friday morning, at least one operator, Carnival, had hoped to keep passengers coming on deck by offering credits of up to $200 to those who go ahead with the planned trips.

The incentive is available for people with cruises that are booked between March 6 and May 31.

The credits are offered in a tiered structure, where credits are tied to the length of a voyage itself: $100 for three to four days; $150 for up to five days and $200 for six days or more.  The credits can be redeemed for beverages or spa services, for example.  And, as has been reported, the company is scanning guests for fever upon embarking.

In travel, in consumer-facing verticals where large gatherings are the norm — think cruises, yes, but also sporting events and concerts, for example — will credits be the new norm? And what will that mean for companies’ finances?

It remains to be seen, of course, if Carnival’s incentives will work. And the moves come after, as CNN reported, the Princess, Disney, Viking and Carnival Cruise lines said that they are offering full credit for cruises booked through the spring, where trips can be re-booked between a year to two years after the original sailing date, depending on the line.

The airlines, of course, have been cutting their flight schedules and have suspended fees that are levied on flight changes or cancellations.  Many of them are offering credits for future travel. Hotels are offering credits for rooms.

Offering credits, as a strategy, is a better option for many of these companies than offering full refunds for trips.  For the cruise lines, offering credits for services on board — while a ding to the top line — at least ensures that berths are not empty and sets the stage for additional monies to be spent by passengers through other means and events while on their trips.  That’s assuming they are incented enough to go through with it all.

For companies that issue credit in lieu of actual refunds, the impact is a pull-forward of revenues and cash flow.  The firm gets to keep the money paid upfront, which keeps operations humming right now.  There’s the off chance, too, that the credit will expire unused, which means the “offset” later on, through a free flight or hotel room, does not happen.  Frequent flyer liabilities are part of balance sheets for airlines and so may provide at least (a bit) of distortion to liquidity.

Beyond the accounting, notes Bloomberg, there’s an issue bedeviling at least some players within the travel ecosystem — specifically the airlines, which are “frantically trying to preserve cash” as they cancel flights and tap their own credit lines.  These same credit cards used in frequent flier programs that use “credit acquirers” to process the card payments also issue the refunds, and they can “hold” cash for trips bought but not yet taken. It’s a measure that allows customers to be reimbursed but can leaves airlines, cruise lines and others from gaining access to the cash they might need if they are in financial straits.  There’s some precedent here, noted the news wire, as during the financial crisis last decade, Frontier Airlines went bankrupt and blamed it on its credit card processor’s holding back cash for its own reserves.

“A card acquirer doesn’t ask for a bigger security deposit just for the fun of it — whatever they ask for will be less than their ultimate liability,” Carl Churchill, managing director of Netpay Solutions Group Ltd., told Bloomberg. “It’s not in their interest to topple an airline or tour operator, but their job isn’t to provide security or capital.”

Choose your metaphor: Rough seas ahead, turbulent skies ahead … and a clear horizon seems a ways off.

 

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