Mark Pestronk
Q: Now that it looks like Lufthansa's 16 euro surcharge for GDS bookings will become effective Sept. 1, I am worried about how any shift away from GDS bookings may result in shortfall penalties or lower incentives under our GDS contract. Although we don't do enough Lufthansa business to make any measurable difference, this kind of fee could proliferate. If one or more major U.S. carriers took a similar step, what rights would we have under our GDS contract to renegotiate or terminate due to these changed circumstances in the industry? What other threats do you see to the GDS-incentive model, and what can we do about them?
A: The GDS-incentive model has been under threat from several sources for years, and the Lufthansa-type fee is only the latest challenge. Under the vendors' standard contracts, you have little or no rights to renegotiate or terminate if any such threat becomes real.
By "GDS-incentive model" I mean the basic structure of GDS contracts since 1985: In return for making air, hotel, car, cruise and tour reservations through the vendor's system, the vendor pays you various incentives, chiefly a fixed amount per segment. Conversely, under some of these contracts, especially those for large agencies, you owe the vendor a penalty for each segment below an annual quota.
In addition to the threat posed by the Lufthansa-type fee, I have identified five other threats:
First, a carrier (or any other travel supplier for that matter) could offer an agency an incentive to book outside the GDS. This is what American may have tried to do with some large agencies under its Direct Connect model a few years ago. The American program was probably doomed from the start because the carrier's incentives were too stingy to overcome the loss of efficiency in having to book outside the GDS. Some major airlines may rethink direct connections and make it truly worthwhile for an agency to book directly.
Second, direct connections could become more attractive if they offered increased functionality for agencies so that they could provide more services to their clients. This is the basic idea of IATA's New Distribution Capability, which may work.
Third, any airline can lower its participation level in the system, and the vendor may then lower your incentive proportionately or cut it out altogether, depending on what your GDS contract provides.
Fourth, the carriers may start charging the vendors for ancillary services, including some current services, and the vendors could start charging you for services or functions that you now get for free. All standard contracts allow the vendor to start charging for content that is now provided without charge.
Fifth, the 80-cent, full-content fee, which was rolled out by vendors nine years ago this month, can be raised under all of the standard GDS contracts for any reason, including new carrier-vendor negotiations that result in such a decision.
If you have a standard GDS contract, there is almost nothing you can do to stop any of these threats from adversely affecting your agency.
If you are going to be negotiating a new GDS contract in the near future, your job will be to try to build in some protections against these threats, and you may succeed, depending on your agency's clout.