Lufthansa fee for GDS bookings faces challenges

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Lufthansa fee for GDS bookings faces challenges
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Lufthansa Group faces two challenges in its attempt to foist GDS fees onto travel agencies: opposition from travel management companies (TMCs) and a lack of anything more than verbal support from other airlines, especially U.S. carriers.

On Sept. 1, Lufthansa will add a 16 euro “distribution-cost charge” to every GDS booking it receives. It will waive the fee for tickets purchased directly from its airlines’ websites, ticket counters or from its booking portal for travel agencies.

A Lufthansa spokeswoman denied that the airline is shifting distribution costs to agencies, but her reasoning is not likely to give comfort to the retail channel.

“The customer is the one who has to pay the added costs,” she said. “However, the customer has alternative choices, and thus, ultimately, it is the customer who decides in the end which way to go.”

TMCs have foiled similar efforts in the past, notably with Northwest Airlines’ 2004 attempt to share GDS costs with agencies. And while the CEOs of many airlines attending the IATA Annual General Meeting  in Florida last week cheered Lufthansa’s announcement, industry experts said that verbal support did not mean they would be following suit.

“Cheering and actually being able to do are two different things,” said Al Lenza, former vice president of distribution for Northwest and one of the architects of that airline’s unsuccessful attempt to equalize distribution costs.

One reason U.S. carriers are unlikely to follow Lufthansa’s move is that they have successfully reduced their GDS fees in recent years through negotiations. U.S. fees per booked and flown segment hover around $2.75 in the U.S., while they can be as high as $8 per segment overseas.

“I would be surprised if any of them would do anything,” Lenza said of U.S. carriers.

GDSs provide services that are crucial to TMCs: linking bookings with back-office systems, performing mid-office quality control, interline agreements, managing scheduled changes and cancellations, and facilitating duty-of-care agreements. GDSs are also robust enough to handle rebookings generated by flights that are cancelled for weather disruptions or other reasons, whereas airlines’ own websites can be overwhelmed by that kind of traffic. 

The Global Business Travel Alliance (GBTA) also said last week that Lufthansa’s portal would limit comparison shopping.

Bob Offutt, senior technology analyst for Phocuswright, said Lufthansa could offer sweetheart deals to agencies to encourage them to use its portal, calling it a “lock-in strategy, where comparative shopping is almost impossible.”

One reason U.S. carriers are unlikely to follow Lufthansa’s move is that they have successfully reduced their GDS fees in recent years through negotiations.

But TMC-GDS relationships are not just about functionality, Lenza said.

“You could build the best technology in the world and it would be unacceptable because of the millions of dollars of inducements that are shared with them by using the GDSs,” Lenza said.

Atmosphere Research analyst Henry Harteveldt said U.S. airlines are also holding back to see what IATA’s New Distribution Capability (NDC) will bring. NDC lays the groundwork for airlines to sell ancillary products and services through third-party channels.

Some U.S. carriers have successfully shifted their GDS costs to travel agencies. U.S. agencies can integrate their Southwest Airlines Web bookings into their workflow using BookingBuilder. But that won’t work for Lufthansa, according to Seth Perelman, founder and CEO of BookingBuilder, who pointed out that Southwest flights are often  point-to-point, while Lufthansa operates globally.

“Because we’re in the business of helping with non-GDS content, people expect us to have a positive reaction,” Perelman said of the Lufthansa proposal. “That experience tells us that this is something that is going to be extremely difficult for Lufthansa to implement. There are many, many moving parts here.”

Still, Offutt said, Lufthansa is betting that it can build channel loyalty and have people bypass GDS-based channels such as agents and OTAs. Whatever challenges lie ahead, Lufthansa’s move could presage changes in the airline/GDS model to realize some sharing of distribution costs. Shane Downey, director of public policy for the GBTA, said the group is willing to act as a mediator in finding an alternative solution.

Bob Offutt
Bob Offutt

Harteveldt proposed special fares for agencies that would enable them to absorb some distribution costs and still offer competitive pricing. Lufthansa said that besides sharing costs more equitably, it wants to build a modern distribution system that enables more innovative booking. Its spokeswoman said it continues to work with the GDSs.

Nonetheless, Lufthansa has put itself in a tenuous position. Harteveldt said that travel agencies and GDSs generate a disproportionate amount of high-margin, front-of-the-plane and premium-economy tickets.

But Lufthansa’s spokeswoman said that already today, a lot of bookings are not made through a GDS. This is particularly true in markets outside the U.S. She said that low-cost carriers are not all in the GDSs (although two major European low-cost carriers, Ryanair and EasyJet, are) and that even GDSs do not provide full transparency.

“We ask our [travel agent] partners to be open to new solutions for everyone and are ready to support them in this attempt,” she said.

But that could prove tough. Joe McClure, president of Montrose Travel (No. 41 on the 2014 Travel Weekly Power List), said, “Lufthansa did this to cut costs, and they are hoping — betting — their cost savings will exceed the business they are going to lose. I’m not sure I would make that bet.”

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