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.”

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