Deloittes say airlines face €440 million fraud loss

A report from Ireland based Finfacts says that fraud is costing the airline industry over €440 million ($600 million) a year, according to a new report out today.

The survey, undertaken by Deloitte and the IAAIA (International Association of Airline Internal Auditors), shows that fraud has increased five-fold since the last in-depth study of the industry six years ago, with 79% of airlines participating in the survey have experienced fraud in the last 12 months.

Deloitte found the average airline loses €2.2 million ($3 million) a year to fraud, with low cost carriers being the hardest hit and the average number of fraud cases for the low cost carriers was over 1,000 a year, compared with around 300 for the network carriers.

Charter airlines, who have few direct sales dealings with the mass market, have the least to worry about.

The types of fraud identified in the survey are varied and include counterfeit or stolen tickets, cargo theft, false baggage claims, frequent flyer abuse and bouncing cheques, however, the biggest losses come from credit card fraud.

More than a third of airlines have been hit by credit card fraud, which accounts for around 60% of all external fraud-related losses, with credit card fraud alone is costing airlines an average of €735,000 ($1million) a year.

Low cost carriers were found to have the highest credit card fraud losses, due in part to the high number of airline tickets they sell online.

Brian Murphy, Head of the Aviation and Transport Services Group, Deloitte Ireland said, “Given the success of low cost airlines in Ireland, the report is a good eye-opener for those operators that are present here – the first step in addressing these problems is identifying the prevalent sources of fraud.”

However, not all the fraud was external with the study finding a rise in the level of frequent flyer abuse, with increasing numbers of employees diverting points to friends and family.

Worryingly for customers, 20% of airlines also admitted cases of internal abuse of passengers’ personal details with 7% saying employees had stolen the identities of the airline’s passengers.

While some of this increase may be due to better detection capabilities, the survey showed that around 60% of airlines have no anti-fraud programme in place, do not perform frequent fraud risk assessments and have no process to track or record fraud, with over a third of airlines discovering fraud ‘by accident.’

Commenting on the findings, Gerry Fitzpatrick, Enterprise Risk Services Partner at Deloittes said, “Our survey shows that current IT systems are not robust enough to keep up with fraudsters who use evolving technologies to continually by-pass controls.”

“As airlines seek to encourage more and more passengers to book online rather than via the phone or in person, they will need to ensure their websites meet data security standards.”

“The fact that 90% of survey participants expect fraud levels to increase or, at least stay the same, during 2007 demands attention, particularly when many airlines are having to deal with tight profit margins.”

“In some cases, with margins already thin, the incidence of fraud could be the difference between making a profit or a loss,” said Fitzpatrick.

The survey findings, covered in detail in the Airline Fraud Survey 2006, a report published this week, enable airlines to benchmark themselves against their peers and understand the key steps they need to take to create a more secure and controlled business environment.

Undertaken at the end of 2006, the survey was sent to the heads of Internal Audit, or in the case of smaller airlines, the Finance Directors, of almost 180 airlines and of those who responded, 76% were network carriers, 17% low cost carriers and 7% charter companies.

Participants covered five continents, comprising 44% from Europe, 17% from the Americas, 12% from Asia, 10% from the Pacific, 10% from the Middle East and 7% from Africa.

The airlines had an average of 127 aircraft and 13,700 employees and average gross revenues for the participants were $4.4 billion and responses have been summarised on an aggregate, no-name basis.

Report by The Mole