Don't cry foul over airline surcharges Playing percentages ... airlines are riskier for banks. Qantas and Virgin Australia currently charge domestic passengers $7.70 and Jetstar and Tiger $8.50 if they choose to pay for their one-way ticket using a credit card. Like the taxi industry, the airlines have attracted criticism over the size of these surcharges. This criticism will be tested over the coming months by credit card schemes as new surcharging rules, introduced by the RBA, allow the schemes to restrict airline surcharges to the merchant service fees airlines pay to their acquiring banks. Is the criticism of airline credit card surcharges warranted? In short the answer is no. Surcharge percentage The loudest critics of airline credit card surcharges talk about passengers that pay an $8.50 credit card surcharge on a $50 low cost airline ticket and claim that the 17per cent surcharge is significantly higher than the 1per cent to 3per cent paid in other sectors of the economy. It's true, there are some passengers that are likely to have paid a 17per cent credit card surcharge - in fact I did it two weeks ago on a Jetstar flight from Sydney to Melbourne. The proportion of passengers paying such a high surcharge percentage, however, is likely to be very low. In the main part this is because there are few passengers who pay anything close to $50 one-way for a ticket. Fares of this type are usually offered as enticer fares on relatively short leisure routes with very strict fare conditions. Fare conditions The vast majority of passengers will pay two to three times this one-way fare depending on the distance that they travel, the fare conditions attached to the ticket and the ancillary services that they buy. The more flexible are the fare conditions, the longer the distance travelled and the more ancillary services bought, the greater will be the fare "package" that is paid and the lower the credit card surcharge percentage. For example, a passenger flying Sydney-Canberra on Qantas with a flexible ticket, which is a typical passenger on that route, will pay between $245 and $379 today for travel in one month's time. The credit card surcharge for this passenger is between 2.0per cent and 3.1per cent. A passenger flying between Sydney and Perth on a Qantas flexible ticket will pay between $469 and $1,418 one-way. The credit card surcharge for this passenger drops to between 0.5per cent and 1.6per cent. A passenger flying Jetstar between Sydney and Melbourne on a $55 starter fare who decides to buy ad-on services such as hot meals, seat selection and full ticket flexibility will pay $244 in total, with a credit card surcharge percentage of 3.4per cent. Average fares Using estimates from recent half yearly financial reports, which indicate that the domestic revenue per passenger kilometre is 21.8 cents for Qantas and 14.9 cents for Virgin Australia, the average domestic revenue per passenger earned by both carriers is likely to be between $180 and $290 one- way. At these fares the average credit card surcharge percentage for Qantas and Virgin is likely to be between 2.7per cent and 4.3per cent. It's difficult to extract domestic yield information from low cost carrier financials so it's not possible to make an objective assessment of their average credit card surcharge percentage. If I was a guessing man however, I would estimate that the average revenue per passenger of low cost carriers is around half that of Qantas. If this estimate is correct the credit card surcharge percentage for low cost carriers averages around 5.9per cent. Surcharge and risk These credit card surcharge percentage estimates would still appear to be above industry averages -but there is an explanation for that. The credit card service fees paid by merchants are not only a function of the tangible costs of acquiring credit card transactions but also the risks associated with said transactions. Acquiring airline credit card transactions carries with it a more elevated level of risk to banks than the acquiring of credit card transactions in other sectors of the economy. This more elevated risk results in a premium entering merchant service fees paid by airlines. The reason acquiring airline credit card transactions is riskier can be largely put down to events that unfolded as a result of the collapse of Ansett. Ansett collapse When Ansett collapsed, passengers that booked their flight by credit card prior to the collapse for travel thereafter had their money refunded by the bank that issued the credit card. The issuing bank then had the money refunded by Ansett's bank, which happened to be the National Australia Bank. The credit card refund buck stopped at NAB. NAB is estimated to have lost in the order of $100m because of the collapse of Ansett. To prevent this from happening again, all banks that acquirer credit card transactions are likely to have increased the merchant service fees paid by airlines. In fact, it wouldn't be surprising if the credit card merchant fees paid by airlines are 3 to 5 times the industry average. And low cost carriers, with their more elevated chance of earnings difficulties as a result of their tighter margins and shorter history in the market, are likely to pay higher merchant service fees than full service carriers. Estimated credit card surcharge percentages of between 2.7per cent and 5.9per cent would therefore appear to align with the acquiring risk profile of airlines. He is now managing director of Webber Quantitative Consulting and Associate Professor at the University of Sydney Business School, and contributed this article to BusinessDay.