The announcement last week by the Lufthansa Group that its
airlines will add a fee of 16 euros to every GDS booking starting Sept. 1
triggered deja vu for Henry Harteveldt.
“It’s 2002 all over again,” said Harteveldt, Atmosphere
Research Group’s travel analyst. “We’ve been having these discussions and
arguments and temper tantrums for more than a decade.”
Harteveldt was not suggesting that he didn’t take
Lufthansa’s move seriously.
“It should not be overlooked or underestimated by anybody,”
he said. “Lufthansa is one of the largest airline groups in the world. … This
action is going to be looked at and studied by other airlines. Travel agents
continue to issue the majority of reservations for network airlines like
Lufthansa; it’s a significant step to take on one of their distribution
channels.”
Harteveldt said he understood Lufthansa’s frustration with
both the cost of doing business with GDSs and the inability of GDS technologies
to offer the kinds of merchandising and bundling of services the airlines want.
“My concern is the action Lufthansa is taking,” he said.
“They are penalizing the wrong party in the process.”
That party, of course, is the travel agent community, which
overwhelmingly uses scale determined by the number of segments they book.
Travel industry lawyer Mark Pestronk said that if agents
bypass the GDSs to book Lufthansa, it could mean lower segment incentive
revenue and possibly result in significant shortfall penalties. He added that
for large travel agencies, especially corporate ones, the GDS segment typically
represents its most important income stream.
“It’s probably the biggest single source of revenue,” said
Pestronk, who writes Travel Weekly’s Legal Briefs column. “It’s certainly the
most reliable, because the travel agency can predict how much they will be
going to get; typical contracts with GDSs are three years for small agencies
and five years for big ones. No travel supplier paying commission is contracted
for five years.”
Pestronk said that travel agents can’t win when booking flights
on Lufthansa’s airlines. If they book on a carrier’s site, they lose money
through inefficiency, lost productivity and lost segment fees. If they book
using a GDS, they will end up with a net loss on the transaction.
For that reason, Travel Leaders Group CEO Barry Liben called
Lufthansa’s new strategy “at best disappointing and at worst
counterintuitive.”
“Their move effectively places them at a competitive
disadvantage on airfare pricing,” Liben said. “Simply put, consumers who
comparatively shop on price will pay more to fly on Lufthansa. For the vast
majority of our clients, the economics will dictate that we book them either on
other carriers that serve those routes or through codeshare partners.”
ASTA last week was still studying the move’s potential
impact on travel agents but said it considered it to be “discrimination against
the channel travel agents choose to use to book tickets for their
customers.”
ASTA also noted the curious timing of the move, considering
Lufthansa is developing a new booking method to enable travel agents to connect
directly to its IT systems based on IATA’s New Distribution Capability (NDC)
standard.
“IATA’s NDC is still in the development stage, though some
limited commercial implementations do exist, so the timing of the Group’s new
booking method is unclear,” ASTA said in a message to its members.
Beyond the practical implications of the new strategy,
agents pointed to the lack of good will it exhibited from Lufthansa toward the
travel agency channel.
Mike Estill, COO of the Western Association of Travel
Agencies, said, “When finally the bias toward American-flagged carriers by
American agents is at its weakest point since the beginning of deregulation,
one would think this would be a time of relationship building. … not bridge
burning.”
Lufthansa’s position
Lufthansa’s position is one that had long been held by the
airlines: that GDSs cost too much and employ dated technology.
“We have two strategic targets,” said Jens Bischof,
Lufthansa’s chief commercial officer. “To be able to display the content, the
price and the product in the channel we think is the most promising for selling
our product and services, and to more evenly distribute the cost of services in
the travel chain.”
Bischof said that the GDS channel’s high costs were not
commensurate with the value it offers in the transaction chain and that the
costs for using GDSs are much higher than for other booking methods, such as
the carrier’s own direct-booking portal. Lufthansa Group said its yearly GDS costs
amounted to “three-digit-million euros.”
“While other service and system partners in the value chain
are recording increasing margins and returns, our airlines’ earnings have been
compromised over time, even though they are the actual providers of flight
services,” Bischof said. “We want to counteract this trend by refocusing our
commercial strategy.” The airline also said its first NDS pilot project is
currently being tested at Swiss Air and should begin at Lufthansa “during the
course of this year.”
GDS response
In response, the GDSs countered that their technology was
more than adequate to meet the airlines’ needs and offered the industry’s most
efficient way to shop.
“Many of our airline partners, including the Lufthansa
Group, are now also taking advantage of our suite of industry-leading
merchandising solutions,” Travelport said in a statement. “These solutions
allow airlines to connect to us and display and retail all of their content,
including their ancillary content, in a flexible way that meets their business
needs.”
Sabre said: “We stand behind the significant value we
provide airline customers and agencies around the world.”
Amadeus, in a memo to its customers obtained by Travel
Weekly, also challenged Lufthansa’s distribution cost claims. “Amadeus does not
recognize these figures: They have no relation to our current or previous
agreements,” it said. In addition, it
said the 2 euro “direct-distribution cost” that Lufthansa cited, “seems to be significantly understated.”
“We do not know how LHG has reached this number, but we
believe the technology and internal costs to LHG alone for direct distribution
are above [2 euros]. Furthermore, this figure seems to omit the substantial
cost of online traffic acquisition, commonly understood in the industry to be
[15 to 20 euros] per ticket. Therefore, it seems LHG is driven by reasons other
than cost.”
Amadeus continued: “We believe that this is an industry
issue and to progress will require a constructive dialogue amongst all players:
airlines, travel agencies, travel buyers and technology providers.”
Harteveldt agreed with the value of dialogue but said the
GDSs must recognize and own up to the limits of their technology. “This may be
the action that’s needed to wake the GDS up and get them to realize airlines
are deadly serious about changing the business model for distribution,” he
said. “Hopefully this will lead to thoughtful discussion and intelligent
solutions that respect agencies’ need to do their job.”