Lufthansa insists it won't retreat on its plans to impose a €16 GDS booking fee from September. Ian Taylor hears why
Heike Birlenbach is adamant. Lufthansa’s imposition of a €16 Distribution Cost Charge (DCC) on GDS bookings, announced last month, “is not a negotiating tactic” and the airline “does not aim to roll back”.
Birlenbach says: “Lots of partners believe it is a negotiating tactic and all will be normal by September 1. It won’t. We aim for a difference in distribution.”
Asked why, she says: “The new players – the Googles and Amazons – have great power in terms of possible reach. They aren’t in travel now, but they could offer all kinds of things. If you purchase something on Amazon, you get a perfectly personalised offering; it can tailor offers. We’re not allowed to. So our first aim is content freedom.
“We don’t want to demonise the GDSs. They offer a worldwide infrastructure and established sales channels. But right now, they are too expensive for us and not up to date in displaying our products. The market is ready for more contemporary forms of displaying content, at lower cost.
“We have to look at the value the GDSs provide to us and I don’t see the difference a GDS makes [to a booking]. Their value is in the back-office provisions.”
Lack of value
Birlenbach told the Advantage Focus Champions conference in Frankfurt last week: “Airlines return about 4% on capital, GDSs about 20%. Our GDS costs are about €350 million a year. We don’t get enough value for that.
“A full content agreement does not fit with personalisation. It has to be possible to differentiate services.”
She tells Travel Weekly: “The €16 is based on our new [basic] agreements [with the GDSs]. The pure distribution cost [direct] is €2. The average GDS cost [under the new agreement] is €18.
“The DCC is the difference between our [distribution] cost and the other channel’s distribution cost.”
Lufthansa’s DCC will apply on all bookings regardless of fare class. The charge will be per booking, not per sector, with no additions for changes.
It will apply to Lufthansa, Swiss, Austrian Airlines and Brussels Airlines fares, but not to Lufthansa subsidiaries Germanwings and Eurowings, which have their own GDS agreements.
“Where we had full content agreements in place, we had a discount [on the GDS fee],” adds Birlenbach. “This is now eliminated, but content freedom has a higher value to us. It is the most important aspect – the main pillar of our distribution strategy. The DCC was not the starting point. It’s a risk for us, but it’s the only way we can go.”
Lufthansa’s suggestion that agents use its new agency website as a way to avoid the €16 charge has been roundly ridiculed.
Birlenbach says: “We’re aware this is not the solution. We don’t believe we have the competency to copy what a GDS offers. But we have thousands of agents registered on our website already.
“We’re not aiming to pull all customers to Lufthansa.com. We’ll look at the possibilities of direct connect. Maybe the GDSs will come up with something different that costs less. We would like alternatives that are not so costly.
“There is an opportunity for the GDSs to rethink their model. We don’t believe there will be no work for GDSs.”
Birlenbach acknowledges that about 70% of Lufthansa bookings come via GDSs and says: “This is a risk. We’re aware it’s not easy.
“From September 1 will be most risky for us, until we have alternative connections for corporate customers and agencies. But if we stand still, we believe we’ll be thrown out of the driver's seat. If Lufthansa is to move into personalisation, it has to be linked o distribution freedom. We have to take that risk.
“There is a higher risk in standing still and not developing the industry by putting personalised offers in the market.”
Asked how the market has reacted, she says: “There has been a variety of reactions, from consent and approval to criticism and refusal. Some are very upset. Some have said they will boycott. However, there are also discussions with agencies who say they would like to direct connect with us.
“We’ve conducted numerous talks with partners and continue the talks. We realise there is a need for discussion. We want to move together with our distribution partners, not against them.”
She insists: “Travel agents remain an important pillar of our channel mix. We will not put this at risk and will jointly find new ways of collaboration. Agencies definitely provide value for customers beyond what we do.”
So what percentage of bookings does she foresee coming via the new portal, via direct connect or other alternatives and via GDSs?
Birlenbach says: “There are so many possibilities, we are not targeting one direction. We could follow all these [channels]. We believe there will be some movement to get direct connections.”
Failed to deliver
When it is pointed out that the GDSs argue they can deliver what Lufthansa wants, she insists: “I would be surprised if the GDSs can do everything we want. They have not been able to deliver everything. If they invested more, they would not have a 20% return on investment. If they invested like we do in new product and new services, they could do more.
“It’s not that we aim to eliminate the GDSs, but we don’t believe they provide the highest value.
“Immediately we communicated [our decision] to the GDSs on June 2, we began discussions regarding options. Are they able to offer something different? We continue discussions, also with agencies, to look for opportunities to direct connect. We’re aware this could take some time.
“Sometimes you need disruptive change. Before there was no need for GDSs to move or for agencies to look at direct connect. How long before we have better options? That is difficult to predict.”
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