The aviation industry is inherently exposed to numerous external influences, such as fuel costs, the economy, exchange rate fluctuations, natural disasters and political instability, as recent world events highlight. Fraud is another external challenge facing the aviation industry, with major cost implications - although this can at least to some degree be controlled and monitored by aviation companies.
In an exclusive Q&A with CAPA, David Britton, VP of industry solutions at risk management/fraud prevention company 41st Parameter, explains how online fraud is affecting the aviation industry.
1. In 2008, airlines lost around USD1.4 billion to fraud, representing around 1.3% of the world total. Where does this figure stand today?
Overall, the airline industry continues to experience an "attack rate" of 1% - 1.5% of revenue, although some geographies, including the Middle East and Latin America, are subject to rates as high as 3 – 4% of revenue.
2. Given the increasing proportion of business conducted online, are airlines particularly susceptible to fraud compared to other industries?
The attack rate for airlines is comparable to the overall rate for e-commerce merchants selling physical goods online. Two areas where airlines are more sensitive to fraud losses are 1) the perishability of seat inventory, and 2) margins that make the loss of even a single seat to fraud painful to recover from. Ideally, airlines either prevent a fraudster from completing a booking, or are able to discover a fraudulent booking in sufficient time to cancel the reservation and resell the seats.
3. Is it primarily larger carriers that have taken steps against fraud? Are the smaller carriers more susceptible to this type of crime?
All carriers are susceptible to fraud, but it was the largest carriers that pioneered aggressive countermeasures to fight fraud. With fairly strong protections now in place at the majors, fraudsters are shifting their focus to airlines they have an easier time booking with – and the least chance of being stopped at the gate and asked for an alternate form of payment before they can board.
Who is at a disadvantage today? Airlines that fly routes competitive with carriers that have superior fraud prevention capabilities will naturally absorb a disproportionate share of fraudulent booking attempts. At the same time, mid-tier or regional carriers are now becoming the "carriers of choice" for fraudsters.
4. Are particular airline models targetted in fraudulent activities (LCCs? FSCs? Charters?). LCCs, for example, tend to have a higher proportion of bookings made online. Does this expose them to greater risk?
Fraudsters attack based on where and how they have the greatest likelihood of successfully booking and flying, so carriers which have marginal protections in place vis-o-vis competitors will naturally be at a disadvantage. Likewise a carrier that does not have consistently strong protections across booking channels will see fraud migrate to the least-protected channel. 41st witnessed this during an implementation where the carrier chose to deploy enhanced fraud protection against its online channel first, to be followed by the call centre and kiosks. Within a month of the tougher fraud protection being put in place for web-based bookings, fraud in call centre reservations had surged 40%. The following month, both the call centre and kiosk channels were placed under the umbrella of the fraud detection solution and the trend was reversed.
Both full-service and low-cost carriers suffer fraud attacks. Exposure varies by routes (certain cities have a higher preponderance of fraudulent bookings) and on long-haul flights premium cabins are often preferred.
5. Which carrier types manage fraud well?
Managing fraud well means minimising fraud losses while simultaneously not offending or inconveniencing customers. Said another way, maximising passenger revenue by not rejecting valid bookings or cutting off sales too far in advance of a flight to allow time to process manual review queues. Both of these objectives must be met within the constraint of an operating budget for fraud detection and prevention that is appropriate given the size of the problem.
With airlines experiencing fraud attack rates in the 1–3% range, there are carriers that actually reject 8%-25% of good orders because their automated fraud screening methods can’t examine bookings with sufficient granularity to accurately interpret whether a booking request is fraudulent or not.
6. What percentage of airlines would have fraud prevention departments in place?
The Deloitte Airline Fraud Report 2010 states that 52% of the respondents to its survey of IAAIA member airlines (copy available from Schwartz Communications) had "no system to formally detect and track fraudulent attempts to obtain tickets, and only half of respondents had a formal system to pick up unusual transactions or suspicious activities."
Virtually all of the major carriers have systems in place today.
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