James Shillinglaw | June 15, 2015 12:30 PM ET
Did Lufthansa Jump the Gun?
Earlier this month Lufthansa Group announced that beginning Sept. 1 this year it will start charging 16 euros (nearly $18 at current exchange rates) for any ticket that isn't booked through its own websites, service centers and airport ticket counters. The reason: Lufthansa said it was losing millions of euros paying fees to GDS services and "other partners in the value chain."
Lufthansa Group, which includes Lufthansa, Austrian Airlines, Brussels Airlines and Swiss, said it was enacting its new policy because it believes "the market is ready for this change," according to Chief Commercial Officer Jen Bischof. He went on to assert that while the percentage of revenue generated by the sale of air tickets by his airlines has continuously decreased, "other service and system partners in the value chain are recording increasing margins and returns." He said his company's earnings have been compromised over time, even though it is the actual provider of flight services.
Yes, here we go again! It happened back in the mid- and late 1990s, and now it's happening in 2015. Once again an airline is trying to reduce or even drop distribution costs entirely. This time, however, the target isn't just travel agents, as it was in the 1990s, but the GDS themselves, which if you know your history were originally created by the airlines as a distribution system for airline tickets.
Now, carrying on the trend of "eating their young," an airline is trying to bypass the GDSs, which have created a highly efficient system that sells tickets through travel agents, third-party online websites and corporate travel professionals. Yes, there is a cost to that, but there is a cost to product distribution regardless, something Lufthansa may have forgotten. Is it really more efficient for the airline to move all distribution in-house?
Of course, if Lufthansa is able to pull this off, other airlines may quickly follow. The airline industry is quite lemming-like in its business practices, as we know from past experience. But lemmings also end up jumping off cliffs, as we also know.
When airlines capped and then cut commissions for travel agents back in the 1990s, they lost a fundamental part of the distribution system that had one-on-one access to customers and could actually "upsell" airline seats. Airlines effectively became a commodity, if they weren't already, and third-party online travel websites jumped into the fray to become top airline ticket distributors. Some airlines even decided to get into the act by creating their own third-party website called Orbitz (which was recently acquired by Expedia).
At the same time, many airlines decided to push customers to their own websites to book. And the end result of that strategy is what Lufthansa is doing now: Making customers choose one distribution system over all overs. In other words, Lufthansa doesn't care how customers want to book tickets; the airline will provide the lowest price only on its website.
This goes against the idea of a multi-channel distribution strategy, where customers have the option to book through a travel agent, corporate travel coordinator, third-party website, or through the airlines themselves on their websites or by phone. In other words, customers had a choice. Now, if Lufthansa is successful, they won't. So Lufthansa's move is extremely unfriendly to the customers it claims to serve.
Indeed, those customers won't have the option to compare Lufthansa’s fares with other airlines, unless they want to go look at multiple websites, which is a challenging thing to do these days, since air fares change by the minute. The GDSs at least provided customers with a way to compare pricing, but with Lufthansa's new policy, that won't be the case.
Yes, customers can still use meta-search engines, which compare prices from many sources, including third-party websites and individual airline websites. But if you've gone to the meta-search engines lately, you won't find too many great deals to be honest. Prices are pretty much the same no matter what source you turn to.
Lufthansa's move also brings up even more questions about IATA's vaunted New Distribution Capability (NDC). Indeed, it is moving ahead with its distribution policy before NDC has even been developed.
Three years ago, IATA unveiled plans for an NDC, which predictably created much consternation among travel agents and GDSs. Then IATA agreed to include agents and the GDSs in the development process, or at least consult with them and other airlines to design the system. The goal is to develop a distribution system that can handle the breadth of products now being offered by the airlines, which allegedly will offer consumers more choices.
Lufthansa's move, however, would seem to preempt NDC. Why should agents, GDSs and other airlines help develop a new distribution system for air travel if one or major international airlines is not going to participate in it in favor of its own strategy? And if Lufthansa does want to abide by NDC, why is it rushing forward with its new policy well before NDC is ready for market?
Predictably GDSs have come out against Lufthansa's move. “This new model will make comparison and transparency more difficult because travelers will now be forced to go to multiple channels to search for the best fares," Amadeus said. "Ultimately, the industry overall stands to lose from this distribution model."
For their part, travel agents have protested the move as well and have openly wondered why Lufthansa would put itself in such a situation. “[Lufthansa's] move effectively places them at a competitive disadvantage on airfare pricing," said Barry Liben, CEO of Travel Leaders Group. "Simply put, consumers who comparatively shop on price will pay more to fly on Lufthansa."
ASTA, too, issued a statement saying Lufthansa's move was a blatant attack on the GDSs, the primary channel currently used by travel agents to book airline tickets. ""While still studying the potential impact on travel agents, (ASTA) considers this move by the Lufthansa Group to be discrimination against the channel travel agents choose to use to book tickets for their customers," ASTA said, adding that it will "continue to investigate….[the] potential impact on agency operations, and keep [ASTA] members informed as details and GDS reactions and plans evolve surrounding what appears to be significant channel discrimination.”
In the end, Lufthansa's move will clearly drive up prices for consumers, whether they book directly with the airline or through other channels. That’s going to happen even though fares are already at record levels and don't show any signs of dropping anytime soon. It also will make it harder for consumers to have more options when deciding how to book their air tickets, especially if other airlines follow Lufthansa.
My guess is other airlines will wait a bit to see how Lufthansa implements its plan, as well as how the industry reacts to it. Many have already signed up with GDSs to offer a greater breadth of product even as they await the development of NDC. Effectively they will use Lufthansa as a stalking horse before going in the same direction, if they ever do.
On the other hand, here's a different scenario: Lufthansa could decide on its own that the reaction from its customers, travel agents and the GDSs is enough for it to greatly delay its plan, or at least wait until a viable NDC is available that is acceptable to the industry.
Will that happen? I doubt it.
But I can dream of an airline being reasonable for change, can't I?
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