How airlines can fix flight compensation payments

By Luke Trayfoot | 29 April 2019

If you've done much traveling in your life, this scenario is probably all too familiar. You crawl out of bed in the middle of the night to get to the airport three hours before your flight's scheduled departure time (recommended). You wait outside for your cab, which is late, and try to stay awake on the ride over. You wait patiently in the long line at luggage check-in, then again at security, and scramble to put your belt back on as a fellow traveler sighs impatiently behind you. Finally, you get to your gate and sit down to wait for boarding. And wait. And wait.

"Delayed."

The words appear on the screen at your gate, along with your new boarding time. But a fifteen-minute delay turns into an hour, then two. Maybe it's not the airline's fault. Human flight is a complex business  and even a minor setback at one airport can mean delays and cancellations around the world. Of course, you don't care about that in the moment—you just want to get where you're going. Time drags as you wait for what now seems inevitable: cancellation. And now you're waiting in another line to find out what the airline is going to do about it.

What is EU Regulation 261/2004?

Back in 2004, members of the European Parliament—presumably haunted by their own travel horror stories—passed EU Regulation 261/2004 (EU 261), a measure designed to ensure that passengers are protected in the event of delayed or cancelled flights. Amongst other requirements, the legislation dictates that airlines need to pay compensation to customers who are subjected to travel disruptions, with payouts ranging from €250 to €600 depending on the severity.

You won't be surprised to learn that the law isn't very popular with carriers, but this compensation scheme has largely been accepted as another part of doing business in Europe. However, an escalating number of compensation claims over the past few years—driven more by consumer awareness than increased disruptions—has created something of a crisis in the aviation industry. Carriers have addressed the growing costs by introducing new surcharges on boarding passes. Insolvent European airlines have pointed to the high costs imposed by the regulation as a major reason for their demise.

Managing flight compensation payments

One of the key reasons that increased compensation claims are so difficult for airlines to handle (aside from the fundamental costs levied by EU 261) is how the payouts themselves are conducted. In order to claim compensation from an airline, passengers are typically required to submit their personal information, banking details, and flight specifics through an online form. Case handlers review the claim and either approve or decline the payout. If a claim is approved, payment instructions are sent to the airline's banking partners and the passenger receives their funds within a couple of days. If a claim is declined—well, next time take the train.

There are some issues with this process. For one, airlines are counting on their passengers to provide accurate information. Carriers rarely have an opportunity to verify account details before sending a payment, and banks don't always explain why a transfer has failed. In practice, this means that payments are resubmitted and returned multiple times before ultimately succeeding—with the bank charging a fee for every failed attempt. All of those unsuccessful payments have an administrative cost, too. Case handlers need to manually review each unsuccessful payout attempt and liaise with the traveler to try to get it right. Meanwhile, the passenger needs to wait weeks (or more) for their compensation.

Payout difficulties are compounded when airlines need to compensate travelers internationally. For example, a European carrier sends somewhere around 30% of their compensation payments to non-European passengers. Without better payment mechanisms in place, the airline is forced to use costly SWIFT wires to accommodate foreign passengers.

These complications, coupled with the fees already outlined by EU 261, highlight why so many airlines are struggling to address the growing number of compensation claims in 2018. And all of this is to say nothing of the General Data Protection Regulation (GDPR), which has created further concerns over how airlines handle customers' personal information and banking details.

A better solution for compensation payouts

Many carriers are still holding out hope that European Parliament will ratchet back the compensation payment amounts, or maybe eliminate them entirely. It could happen. Alternatively, we might see these kinds of passenger protections introduced in other geographies, further increasing the number of claims that international carriers have to deal with. Only time will tell—but waiting for things to change on their own isn't exactly proactive.

What airlines can do right now, though, is improve the way that they handle compensation claims, and the best way to do that is by partnering with a global payout provider. Companies like Hyperwallet can validate passengers' banking information in real-time to help reduce the number of failed payments. If a payment is returned, airlines can be alerted through webhook notifications to ensure faster turnaround for resubmittal. Additionally, traveler information can be tokenized and stored off-site to help address the new restrictions imposed by the GDPR.

Outbound providers offer broader advantages, of course. Airlines can tap into a worldwide financial network to unlock local payment rails in most geographies, reducing the need for SWIFT wires. And with more payment options available—including PayPal, prepaid cards, and even checks—passengers can get access to their compensation payouts in the method they prefer.

Maybe delays are an unfortunate reality of air travel, but they don't have to be an unfortunate reality of payments. Working with a payout partner, carriers can ensure compensation funds are delivered quickly and conveniently—all while helping to reduce administrative workload and cutting costs.

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