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Lufthansa’s new GDS fee which comes into effect on September 1 has opened a new chapter in the debate on airline distribution
Lufthansa Group’s announcement in June that it would be charging a €16 fee for all bookings made through global distribution systems (GDSs) certainly caught the business travel community off-guard.The charge, known officially as the Distribution Cost Charge (DCC), was due to be introduced for all bookings for Lufthansa, Austrian Airlines, Swiss and Brussels Airlines flights from September 1. And it’s fair to say the decision was not positively greeted by buyers, travel management companies (TMCs) and the three major GDS providers.
Lufthansa says the charge is easy to avoid by using the websites of its individual airlines or a dedicated agency portal; but this has created more cries of anguish from the industry, which claims these options are inadequate as they do not provide the kind of management information (MI) and traveller data that corporates need to keep track of both spending and employees.
Ruediger Bruss, global travel buyer for Germany-based tyre firm Continental, sums up the feelings of many when he describes the implementation of DCC as being “a fare-hike in disguise” and criticises Lufthansa’s alternative booking channels as being not fit for the purpose of booking business travel. “Transparency is no longer given and important booking data is no longer available, especially data needed for duty-of-care purposes,” he says.
Mark Cuschieri, chairman of the ITM, believes that Lufthansa’s move is a “negotiating tactic” to secure a better deal with the GDSs and an attempt to force behavioural change among consumers. “We do not believe it is fair and just that corporate customers should be used as pawns in this game,” he says. “They are caught in the middle and will most likely be the ones that absorb the extra cost associated with any reckless change to the distribution model.”
ECTAA (the European tour operators’ and travel agents’ association) has even gone as far as to file a formal complaint against Lufthansa with the European Commission on the grounds that DCC constitutes “a significant price increase for consumers and will put all travel agents at a competitive disadvantage”.
Much of the criticism of Lufthansa seems to centre around the way Europe’s biggest airline has gone about introducing DCC, with no consultation or warning before the initial announcement in June. However, Christian Schindler, Lufthansa Group’s UK and Ireland director, told BBT: “There were good reasons why we couldn’t talk to anyone earlier. We needed to respect timeframes and clauses everywhere.” Agreements had to be signed off by authorities in all countries in which the airline operates, before Lufthansa could make the announcement, said Schindler.
There is also the perception of failing to provide suitable direct channels as viable alternatives to using the GDSs. But Lufthansa points out it is working to improve these direct portals, and things are changing quickly, with developments such as the airline’s deal with expenses firm Concur to provide data from direct website bookings to travel buyers through the Triplink tool.
The Future of DistributionLooking beyond these short-term issues, will Lufthansa’s move be followed by other airlines as they look to take more control over their distribution channels and associated costs? Or will buyers successfully switch capacity away from Lufthansa’s airlines to such an extent that the company will be forced to think again? Also, what does it mean for IATA’s long-running New Distribution Capability (NDC) project to improve the selling of flights and ancillary services through third parties?
Much of the condemnation of the DCC fee has been focused on the amount. HRG’s chief information officer, Bill Brindle, says: “If it was only one or two euros, I don’t think anybody would be that bothered about it. But €16 is a significant increase in the cost of using the GDS channel.”
Lufthansa’s Schindler says the figure of €16 was reached following analysis by external auditors to find out the difference between the airline’s costs for GDS bookings and those made via other channels. “The GDS is much more expensive than the other sales channels,” he says. “The €16 is not the cost of the GDS charge but the difference in cost. From our point of view, this puts the sales channels on the same cost-revenue ratio. As with any company, we want to have a choice as to where we distribute and to whom.”
Unsurprisingly, the GDSs have reacted strongly to Lufthansa’s move, with Sabre saying that the charge “disadvantages consumers and travel agencies”, while Amadeus claims it will make “comparison and transparency more difficult”, as travellers will have to search multiple platforms to find the best fares.
Decius Valmorbida, Amadeus’s vice-president of distribution marketing, warns that corporates could be forced to pay even higher costs than the €16 charge, due to the likelihood of extra handling fees from their TMCs. “Even if a TMC uses an alternative direct IT solution, the costs they will incur due to the inefficiencies and IT costs would also likely be passed on to corporations,” says Valmorbida.
He adds that airline websites cannot offer the same levels of service and MI provided by GDSs. “It is a technique used by the airline to extract more money from the consumer for no additional value, as with fuel surcharges in the past.”
Alex Cousins, director of client services for Chambers Travel Management, adds: “We’re not averse to the concept of GDS fees, but a €16 fee per ticket is exorbitant and potentially more than the transaction fee levied by most TMCs.”
Opting outThere’s already evidence that buyers will vote with their feet. Graham Ramsey, chief executive of ATPI Group, says: “The reaction from clients has been pretty negative and we are being asked to move Lufthansa business to other carriers. I think Lufthansa could lose a lot of business unless they become very competitive on pricing. You have to go through a GDS to deliver MI – otherwise you would have to re-key it into a website at extra cost.”
Continental’s Bruss confirms that his company will use alternative carriers on routes across the Atlantic and to Asia where competition is strong. “Within Europe, it is not always practical to shift volume – we have to see what is possible and evaluate on a route-by-route basis,” he says.
Bruss also thinks it is unlikely that many of Lufthansa’s competitors will follow its lead and introduce their own GDS fees. He believes that a lot of airlines know and value their corporate business enough to refrain from introducing such fees, “which create more harm than benefits”.
Several major carriers, including Emirates and Delta, have ruled out adding their own GDS fees. However, Russia’s Aeroflot has stopped accepting direct card payments for GDS bookings to cut costs, while Air Astana CEO Peter Foster says he has “no doubt” other airlines will follow Lufthansa in charging fees for non-direct bookings.
Willie Walsh, CEO of British Airways’ owner International Airlines Group (IAG), says he “admires” Lufthansa’s move, adding that it will be interesting to watch how it plays out. “We have deals with our GDSs, which clearly we will honour, but we’re always looking to negotiate more effective deals for distribution,” says Walsh. “The issue of distribution cost is something we intend to address.”
Some believe Lufthansa’s position is purely a negotiating stance to get a better deal from the GDSs. But HRG’s Brindle thinks it is part of a move by airlines to gain “more control over their distribution”, which will play out over the next five to six years – a process which may be helped by the emergence of NDC-powered platforms.
“It may be that they reach agreements and this channel surcharge might be lower than €16, but I think they will still be fighting for the right to distribute how they wish,” he says. “The buying process will change over time, although GDSs won’t just disappear as they will continue to evolve. It may be that corporates will have to start having more discussions about which channels they use to book.”
Airlines vs GDSsThe tensions between airlines and GDSs have been growing in recent years as carriers have increasingly made more revenue – an estimated US$38.1 billion in 2014 – from unbundling their fares and offering services such as luggage, food and drink, priority boarding and seat selection as add-ons.
This move has been hugely profitable for airlines but selling these services through GDSs is still in its infancy. The solution is supposed to be NDC, which continues to trundle on with more airlines beginning pilot schemes in the last few months, including BA.
IATA’s CEO, Tony Tyler, says: “Agents have access to sell only a small portion of the innovations and ancillary products that are being developed. Our global research shows that most of the ancillaries on tickets purchased through agents are actually sold via the airline’s website. NDC is intended to address this by creating the standards that will make it possible to equip agents with more information to better serve clients.”
He stresses that NDC is “not something that’s competing with traditional distribution system providers” and adds that it is a technology “standard”, or code, designed to allow agents to sell a wider range of airline ancillaries. Indeed, GDS owners are working with airlines on some NDC projects.
Taking advantage of increased IT and giving travellers more personalisation have also been cited by Lufthansa as reasons for adding the GDS fee. The airline is due to start working on an NDC project by the end of 2015, focusing on the “dynamic bundling of products”.
But Paul Tilstone, who runs business travel consultancy Festive Road, says the increasing adoption of NDC “will not drive airlines’ distribution strategies”, but will “enhance the distribution channels that airlines will want to go down anyway”.
Market forcesDirect connect, where a dedicated link is created between an airline’s systems and a TMC, has also been mentioned in this debate. But this requires investment by agencies, which may then be passed on to the client.
So what would ultimately make the airlines follow Lufthansa and change their own distribution strategies? There’s no doubt they would like to benefit from lower GDS costs, and they will be watching carefully in the next few months to see if Lufthansa’s move pays off or ends up hurting the company financially. The market, it seems, may decide.
The industry may get some idea of how it’s working out for the airline at November’s GBTA Conference in Frankfurt, when Lufthansa’s CEO, Carsten Spohr, is due to speak. It will be intriguing to see what sort of reception he gets from buyers.