Special Report: Study reveals ‘true cost’ of air fare distribution

Special Report: Study reveals ‘true cost’ of air fare distribution

Carriers make inflated claims of distribution costs, a study has found. Ian Taylor reports

Airline claims that increased direct distribution will slash their cost of sales are pulled apart by an ‘Airline Distribution Costs’ report published this week.

The report by aviation consultancy Infrata, published on Tuesday, notes: “Airlines claim direct distribution can be up to four times cheaper than indirect . . . [and use this claim] that direct distribution is ‘cheaper’ to support their position to competition authorities and the public. However, no rigorous resting of this assertion is available.”

The study addresses this by offering a typical assessment of the costs of direct sales by a “network carrier” such as British Airways as €2.56 per booking segment.

Infrata’s estimate of the ‘true cost’ of direct distribution by the same carrier is €12.56 per segment, much closer to the cost of sale through a GDS (€14.21).

It argues: “The total cost to the airline involves numerous non-accounted for categories – [in particular] the airlines ignore how much it costs them to acquire customers.”

They also ignore payment and credit card costs, the costs of customer service, online and offline advertising and marketing, and the costs of technology.

The study concludes: “When costs are properly accounted for, overall channel costs are very similar.”

Despite direct sales enabling carriers to cut GDS costs and agents’ commission, incentive and override payments: “The cost differential is much smaller than airlines contend.”

Indeed, Infrata suggests the greater an airline’s direct distribution, the higher its costs owing to “a substantial increase in average ads’ costs to pull customers from current channels, increased costs of customer service that agents provide, credit costs, fraud costs and the cost of managing customer changes”.

It concludes: “Going direct does not reduce costs; in fact, in several cases it increases costs.”

No doubt some airlines will challenge the findings. But the Infrata estimates flatly contradict the claims of IAG-owned British Airways and Iberia and of the Lufthansa Group.

BA and Iberia will introduce an £8 fee per ‘fare component’ on GDS bookings from November 1, claiming the fee – or ‘distribution technology charge’ – is to cover the “additional costs applied through these [GDS] channels”.

The airlines say agents, OTAs and travel management companies (TMCs) can only avoid the fee by booking direct or committing to or using a connection based on airline association Iata’s ‘new distribution capability’ (NDC).

Despite a series of recent announcements of NDC deals between BA-Iberia and some leading travel management companies (TMCs), this will see most GDS bookings of BA flights attract an average surcharge of £16 per return fare from Wednesday next week.

The Lufthansa Group imposed a €16 fee or ‘distribution cost charge’ on GDS bookings more than two years ago – in September 2015.

It claimed at the time: “The costs for using GDSs are several times higher than for other booking methods.”

Lufthansa’s results for the subsequent year, 2016, reveal the group’s GDS distribution costs actually rose year on year despite the revenue from the fee.

Presumably the group also incurred higher costs from pursuing its NDC-based, direct-connect distribution strategy on top of this.

The Infrata report suggests the carriers’ cost-saving rationale for this strategy is bogus – that the airlines pursue direct distribution less to cut costs than for “the avoidance of neutral price comparison”.

Hence, the European Technology and Travel Services Association (ETTSA) and the European Federation of Travel Agents’ and Tour Operators’ Associations (ECTAA), which commissioned the report, have called on EU regulators to enforce existing rules to defend comparison shopping.

Infrata claims to have modelled “objectively and accurately the impact of moving sales from indirect to direct channels” and it concludes:

A large network airline with a big home market, such as British Airways or Lufthansa, can expect “negligible potential cost savings” of €0.11 per booking segment or “less than 1% of distribution costs” from driving more sales direct.

A large network carrier with a small home market, such as one of the Gulf carriers, can expect to “add 11% to the cost of each booking” or €1.14 (£1.01) from driving sales direct.

A regional airline, such as Flybe, could expect to see an increase in booking costs of €0.52 (46p) or 4% per segment by shifting more distribution direct.

This is because “the cost of customer acquisition, online marketing, technology development and customer service increase considerably”.

The report concludes “promoting direct distribution [is a way to] deliberately try to avoid neutral and transparent price comparison”.

As it happens, the European Commission has already confirmed it is examining the issue in relation to Lufthansa and the GDS surcharges were due to be discussed in the European Parliament this week.

It is hard to see both MEPs and the European Commissioner failing to take the side of consumers on this.

More: Airlines accused of inflating direct sales savings

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