Company Profile: How Continuum solves the FX margin mystery for airlines

The Irish ancillary revenue specialist's chief executive Eamonn O'shea explains how its technology is helping airlines tap into an ancillary revenue stream that could be crucial for a return to profitability post COVID

“Where there’s mystery, there’s margin” and for a global sector like travel which famously survives off skinny profits this is a mantra that ought to strike a cord.

Continuum, the Irish foreign exchange revenue optimisation specialist, promotes this concept as it strives to educate airlines and retailers not to ignore this ancillary revenue opportunity.

Eamonn O’Shea, chief executive of Continuum, says firms like airlines that take all the risk in generating cross-border transactions really ought to be benefitting, rather than the banks.

And, as firms focus on profitability post COVID, he believes now is the time to unravel the mystery of how to turn international payments into a revenue stream.

“Airlines were the pioneers of cross border commerce being global in nature,” says O’Shea. 

“If you look at some of our main airline customers, they’re pricing in up to 40 currencies but the card schemes will only settle in 17. 

“So, the idea of being priced in one currency and paid in another is something they've been used to for many years. They're very experienced in that. 

“Equally on the treasury, foreign exchange side, they're also very experienced because even in a good year pre-COVID profit forecast for the industry would be around 5.5%, which is ridiculously small when you compare it to retail at 40% plus. 

“The idea of managing currencies, and low profit margins is something airlines are very used to. 

“Add to that they’re buying fuel, which next to staff is the biggest cost in an airline, so they have to get that right, they have to hedge, they have to pay overfly charges, they have to pay for leasing. 

“That means they’re exposed to the dollar and management of that has been critical and is nowhere near as sophisticated within retail as it is in the airlines. 

“We take a view that within that small profit margin the airline is providing a product, it's recruiting the customer, it's taking the risk on fraudulent transactions, it's paying the payment costs etc. 

“Yet, within that flow of costs for merchant acquiring, for fraud, alternative forms of payment, authorisation, etc there's an untapped revenue stream - the foreign exchange margin on cross-border transactions. 

“It's the airline providing that whole infrastructure, taking the risk recruiting the customer, providing the product, so they should be entitled to any ancillary revenue stream. 

“We move the profit from the card issuing bank to the airline. If a US passenger is flying from London to Amsterdam priced will be in sterling because it's departing out of London. 

“However, the customer will want to pay in US dollars because American tourists invariably do. 

“You can change the currency to US dollars, the customer can now pay in the currency of their choice and the airline can apply a competitive margin compared to the issuing bank. 

“The airline retains that profit, which it's entitled to because it's providing the infrastructure. It could be a very, very important ancillary revenue stream. 

“That ancillary revenue stream on multicurrency payments can be higher than other third party commissions like hotels, car rentals, insurance, or tours.”

Continuum developed its technology in 2005 and considers itself to be a pioneer; the “alpha innovator” in its field, like Apple, much copied but rarely bettered.

Today it works with 23 airlines, embedding its technology into their treasury systems to optimise the efficiency of payments and derive additional revenue from them.

The solution was developed for airlines and Continuum says it has built up considerable domain experience having integrated with various single currency GDSs and PSSs.

Like all third-party providers it must overcome concerns about the potential disruption integrating an external system can cause and what O’Shea terms ‘putupwithitis’.

There’s also complicating factors like airlines may not want to convert all their foreign currency because they need a store, particularly US dollars, to pay their main expenses.

Continuum estimates the opportunity is “massive” and that only 12% to 15% of airlines are generating revenue from cross-border payment transactions.

Many still manage this complexity internally with small FX departments, something O’Shea says is “not best practice” because it creates counter-party risk between acquiring a trading banks.

“We have this expression at Continuum: ‘where there's mystery, there's margin’. And that still applies to foreign exchange, but only really to foreign exchange. 

“If you look at any large enterprise merchant, whether that's an airline, an OTA or a retailer, whatever it might be, they’ve got all their costs tied down. 

“Then you look at foreign exchange and in some cases, with some enterprise merchants, they don't even know what they're being charged. That's where there's mystery and margin. 

“We say to them if even in a good year you're making 5% profit margin but on all cross-border transactions there’s that same 3% to 5% margin you're not aware.

“There’s a certain ‘putupwithitis’ but now, obviously, there's much more focus on cost within the airline industry since COVID.” 

O’Shea said Continuum’s biggest competitor is usually the airline that believes it is able to do what it does itself.

“Some of the clients we work with today were saying that for eight, nine, 10 years before they came onboard with us having realised that this is more difficult than they thought. 

“It’s build or partner, that’s their decision and we say you’ve got better things to be doing, and you take by far the largest portion of the generated revenue. 

“It's a genuine risk reward model where we don't charge set-up or implementation fees or for software licencing. It's purely on revenue generated and the airline gets the lion's share.”

And O’Shea said the benefits are felt outside of the company with the customer able to pay in the way and with the currency of their preference.

“So it's not just about the revenue, it's about giving customers local payment pricing, and local payment method. If you do that you'll get a 20% increase in conversion and you get an 8% increase in average transaction value.”