Analysis: Lufthansa prepared to ride fee storm

Analysis: Lufthansa prepared to ride fee storm

Lufthansa’s imposition of a GDS booking charge is a major challenge for agents. Ian Taylor reports

The world of third-party distribution didn’t end on September 1 when Lufthansa introduced a €16 (£11.30) fee, or Distribution Cost Charge (DCC), on GDS bookings. But airline distribution will be transformed if the charge sticks.

At its most basic, Lufthansa has imposed a penalty for booking indirect. If agents pick up the cost, they lose money. If they pass it on, they risk driving business direct. If they use the Lufthansa agency portal to avoid the fee, they can’t compare prices and schedules except by spending time referring back to a GDS – and if booking for a corporate client, they can’t supply the necessary management information. If they seek to develop an alternative connection that replicates what a GDS offers, they incur technology costs.

Travel management companies (TMCs) are first in the line of fire because of the volume of Lufthansa bookings some handle and the management information they require. But leisure agents can’t avoid the consequences, especially if other airlines follow suit. The fallout could be most severe for smaller businesses that lack the resources to adapt.

Advantage corporate director Ken McLeod has warned: “The distribution network will be irreparably damaged. If successful, this will be replicated across the airline industry.”

Why levy a DCC?

Lufthansa has been explicit. Chief commercial officer Jens Bischof introduced the charge saying: “We need to increase our profits. The costs for using GDSs are higher than for other booking methods.”

The carrier objects most to the incentive payments GDSs make to larger agents. Bischof said: “We’re not willing to pay the bill any more.”

Heike Birlenbach, Lufthansa sales and services vice-president for Europe, said: “The market is ready for more-contemporary forms of displaying content at lower costs.” By that, she means content displayed in the way an online retailer such as Amazon would display it.

The GDSs argue they do provide value and dismiss claims they can’t deliver what carriers want. Travelport head Gordon Wilson insisted: “There is nothing available on Lufthansa direct that you can’t sell with Travelport Rich Content. We did $4 billion in sales through the Lufthansa Group last year. The average price per ticket was three to four times higher than Lufthansa gets across its own network and for that it paid less than 2% of the cost of a ticket.”

What’s the reaction?

A senior industry source described the DCC as “a unilateral declaration of war”. Abta called it “a major step backwards”. Yet criticism has been muted, partly because no one wants to burn bridges but mostly because of fears of legal action. Agents, TMCs and their associations can’t be seen to propose, much less take, collective action or to switch customers to rival carriers unless complying with clients’ wishes.

However, the Institute of Travel and Meetings, which represents UK corporate travel buyers, reported members “will immediately start to move travellers to other airlines”. The European agents and operators’ association Ectaa, of which Abta is a member, has complained to the European Commission.

What happens now?

Lufthansa will be subject to two forms of pressure – from regulators, and thus slow moving, and from the market.

The carrier sells 70% of its tickets and takes 80% of its revenue via agents. So its third and fourth-quarter trading statements, in which it will be compelled to reveal the impact on bookings since September 1, will be of immense interest.

The major battleground will be in Germany and the home markets of group airlines Swiss, Austrian and Brussels. But what happens in other markets, especially the UK, will be important.

Lufthansa foresees a short to medium-term future in which some bookings come via its new portal, some via GDSs and others via ‘direct connect’, or API connections. Birlenbach told Travel Weekly: “We’re aware this could takesome time.”

The carrier expects other airlines to follow. However, none can do so until their GDS agreements expire, and in the meantime will hope to pick up business at Lufthansa’s expense.

Lufthansa acknowledges: “The DCC is a risk for us.” But it believes it can retain its major corporate customers. It appears prepared to withstand trade hostility while it finds out.


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