Lufthansa has been heavily criticised for introducing its Distribution Cost Charge (DCC) to GDS bookings, which comes into effect today (1 September). However, adding a charge like this is nothing new; in fact it has helped low-cost carriers build the success we have witnessed in recent years, including one under the Lufthansa Group itself.
Back in June Lufthansa caused ripples throughout the aviation industry. The largest European airline, boasting a 60-year history, announced a flat fee of €16 for all bookings that go through a GDS system and therefore a travel management company or travel agent. The fee does not apply if the customer books directly through Lufthansa or one of its associated airlines — Brussels Airlines, Austrian Airlines and Swiss Air Lines. Lufthansa has introduced this fee in an effort to offset the distribution cost when using the GDS in the wake of increased options. It argues the fee is substantially less than what would be charged when booking through a traditional TMC and GDS system.
Travel management companies/agencies, industry associations and GDS companies were quick to condemn the move. UK-based agency consortia Advantage Focus Partnership and the UK's GTMC have been vocal against the fee while the European Travel Agents Association (ECTAA) and the Association of British Travel Agents (ABTA), which have some TMC members, have issued a formal complaint to the European Commission. Their main argument is that this fee "will constitute a significant price increase for consumers and will put all travel agents at a competitive disadvantage compared to the direct distribution of the airlines concerned."
It is important, in light of this critique, to consider the reaction to carriers such as Germanwings when they implemented a similar GDS distribution fee. The only differentiator between Lufthansa and Germanwings is a perception of the latter as an example of a low-cost carrier (LCC). These airlines are already associated with a GDS point of sale (POS) fee of anywhere between €7.50 - €15.00 per segment depending on the channel and ticketing options used. Therefore in a worst case scenario this is double the proposed Lufthansa fee for a round trip if purchased via the GDS. This begs the question: why has Lufthansa been criticised for its announcement to such a degree?
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Lufthansa has faced more criticism than low-cost counterparts ©wallix/iStock
For the answer to this, we need to look back roughly 15 years, to a point where airlines began to question the monopoly of GDS systems. In the late 1990s and early 2000s, the air travel market was rocked by the emergence of new airlines such as Ryanair and easyJet. These budget carriers made the decision — unheralded at the time — to not work through a GDS system, subsequently avoiding the premium fees charged by the GDS to distribute their product.
It worked out very well for them. Ryanair and easyJet are now very successful and they have pioneered the model that the client pays for the product and services they value. In recent years they have signed up to GDS platforms and implemented a POS fee as a result. In 2008 easyJet reduced the fee to a fixed €4 per seat. Ryanair does not have a POS fee but does reserve its lowest fares for its own website.
Yet when you listen to conversations about this type of carrier, you do not hear whether it is a "competitive disadvantage compared to the direct distribution of the airlines concerned" to pay a €30 point of sale fee for a roundtrip flight [in the Germanwings case] via your favourite travel agency as opposed to booking direct. It looks like the rhetoric around Lufthansa and its 'significant' fee needs to be toned down a little.
The obvious difference in reaction between this initial rise of the POS fee and the announcement from Lufthansa is in what constitutes a low-cost carrier or a 'traditional' carrier, which is becoming indistinguishable. Lufthansa, as one of the most respected and established airline groups, is simply not expected to engage in the same behaviours as the younger, brasher, budget carriers.
But what really is the difference in modern air travel between, for example, Austrian Airlines and Ryanair? Both offer really low, competitive fares, both have ancillary fees and both are marketed heavily to business travellers. Distribution is one of the few last remaining differences, with labour costs and international routes often based on legacy contracts and treaties. We all know that Ryanair would very much like to start transatlantic routes and 2015 has seen many labour disputes and strikes in the Lufthansa Group, which leaves only distribution costs left to adjust.
With disruption comes the ability to innovate and find new routes to market that were previously unavailable under existing constraints. The firm division between traditional and low-cost airlines is being rapidly eroded. Most would agree that this is for the benefit of the consumer and for the innovation in the air travel industry. It's worth bearing in mind that the GDS system, which airlines traditionally operate in, is almost 70 years old — a system which was already seen as antiquated 20 years ago when the industry moved through the first internet boom.
The POS fees have not slowed down the growth of any low-cost carriers, and as far as I am aware TMCs and travel agencies have found multiple solutions to integrate or complement these fees. It has been 20 years since that first internet boom and there is an on-going debate that the GDS is a dinosaur that will eventually disappear. If you need a refresher, just do a Google search for 'global distribution systems dinosaur' and take a look at the more than 400,000 results that are presented.
The Lufthansa Group is still the largest in Europe, but Ryanair and other low-cost carriers are fast catching them. They need to fundamentally alter the system for travellers to book with them, or risk fast being overtaken. Pushing the cost of GDS distribution to the traveller is an already accepted practice in this market, which has paid great dividends for the younger airlines and their increasingly large market share.
Airlines will always need a streamlined way to sell their tickets, and - although they may seem currently at odds - both TMCs and the airlines need to find a way to coexist and collaborate. With the boundaries between different types of carriers becoming ever-more blurred, Lufthansa looks poised to lead a fundamental change in air travel, streamlining its process and relaying the benefits to the consumer. No other traditional airline has come out and said they will follow suit, but a poll at the IATA AGM earlier this year suggested they would consider it. As forever asked in business: why pay more when you don't have to?