Covid refund wave floods payments systems
What do you do when millions of dollars in payments made to your company need to be refunded en masse? That was the unprecedented challenge that corporate treasurers in the travel sector faced this year as a result of Covid-19.
One of the major financial side effects of the Covid-19 global pandemic has been the extraordinary reversal of payment flows faced by all areas of the travel sector. This was illustrated in April when the director general and CEO of the International Air Transport Association (IATA), Alexandre de Juniac, estimated that the global airline industry owed US$35 billion in refunds to travellers.
Speaking at this year’s EuroFinance International Treasury Management virtual week, Christine Rovelli, SVP, Finance and Fleet Management at Finnish flag carrier Finnair, summed up the issue that treasurers in this sector were facing:
“You always have some refunds, you always cancel some flights, but you never cancel almost all of your flights and refund almost all of your tickets while also not selling new tickets. What happened to the whole industry from March this year was unprecedented”.
According to the Finnair 2020 H1 report published on July 24, between February and June the airline paid over €270 million to customers in refunds for flights cancelled due to the COVID-19 situation. In four months, it has received as many refund requests as it normally gets in three years. By July, the company had processed about two-thirds of the requests and estimated it still had to pay approximately €100 million in refunds to customers.
“Some of the systems that we use as an industry were just not set up to handle that size of reverse cash flow” acknowledges Rovelli. “Putting the system into reverse saw it get completely clogged up, for a number of reasons. People buy tickets for other people, the credit card they used to book the ticket may have expired, they booked through a travel agent, or they use a different form of payment. All of a sudden, it became clear that reversing significant flows for some of these forms of payments was going to require manual intervention – they can cope with limited refunds, but they did not contemplate completely flipping the cash flow around”.
To manage the scale of the refunds, Finnair was able to implement a technology solution in some cases, but not all.
“If the name on the credit card matches the ticket to be refunded, the card hasn’t expired, and there were no other changes to the ticket from when it was initially issued to when it is refunded, you can put a robot in place to automate the process and expedite the payment” says Rovelli. “We do that now and it works for the vast majority of tickets. Where some of the fields are not aligned, we have to manually process the refund. We had to go back to some partners and challenge them about the number of refunds they could process per day. We wanted them to speed up, but it was initially challenging when everyone was working from home”.
Sudden cash flow reversals
The mass cancellations that hit the airline sector had a similar knock-on effect for the wider travel industry. The Q2 2020 report from online global travel company Expedia Group shows that its air business was a 12% detriment to revenue in the quarter. The negative impacts to revenue included significantly elevated cancellations, higher than previously anticipated cash refunds to customers for certain cancellations, and a reduction to previously estimated and recognised volume-based revenues due to lower ticket volumes. Air tickets sold declined 85% in the second quarter.
“The second quarter of 2020 likely represented the worst quarter the travel industry in modern times” says Michael Scott, Treasury Director at Expedia Group. “For Expedia Group, the company faced an incredible increase in cancelations and at one point, the company handled more than 20 million customer contacts over a 10-week period. To better serve customers in this time of need, teams across the company quickly developed new self-service options for customers so they could cancel or change bookings without having to speak with an agent”.
The firm’s consolidated free cash flow decreased by US$2.9 billion in Q2 compared to the prior year period. This was primarily due to a significant use of cash for working capital, as well as a decline in adjusted EBITDA. A driver in the working capital swing relates to the use of cash for deferred merchant bookings as refunds for cancelled bookings exceeded new bookings. Prepaid expenses and other current assets, which included deposits with credit card acquirers to fund customer refunds not yet processed, stood at US$1.0 billion on June 30, 2020.
“Treasury had to manage the cash impact of the high cancellation volumes” Scott explains. “Our cash management and operations teams partnered effectively with our internal payments groups, working through the card networks to stand up a sustained operations process for getting refunds back to travellers. Alongside this, from a liquidity management standpoint, we shortened duration very quickly. This resulted in going to cash over a period of weeks and, like many other companies, we made the decision to draw on our revolving credit facility”.
FX exposure impact
Another unexpected side effect of the huge shift in global travel trends was the impact on Expedia’s foreign exchange (FX) exposures through the dramatic change in foreign currency cash flows.
“The impact of cancellations and the dramatic decline in cross border travel changed the landscape in what our currency exposures are today versus what they would have looked like several months ago” Scott says. “This has changed our sourcing of information and forecasting around FX impact. As a result, we continue to examine available data sets from a forecast standpoint, while considering the overall impact of booking trends and cancellations. In normal times, we have predictable seasonal patterns. Given the variation brought on by the pandemic, we find ourselves examining the exposure analysis more, all while considering the data and analytics available to us”.