The Lufthansa GDS surcharge – how is it going to affect corporate customers?

Lufthansa has announced its intention to surcharge €16 for all bookings made through global distribution systems. That may sound like bad news for corporate customers, who will probably have to pick up the bill, but in the long run it could prove the start of a revolution that has long been needed.
Written on 01.06.2015, 00:00
The Lufthansa GDS surcharge – how is it going to affect corporate customers?

What has Lufthansa Group announced?
LH Group has revealed a new distribution strategy to take effect from 1 September.

  • LH Group airlines (Lufthansa, Swiss, Austrian Airlines and Brussels Airlines) will impose a Distribution Cost Charge of €16 for all bookings accepted through a global distribution system. With a few exceptions for legal reasons, the DCC will apply worldwide.
  • Corporate customers will be able to book their negotiated contract rates via the Lufthansa website without incurring the DCC. Lufthansa is using corporate recognition codes to make sure travellers can access the correct negotiated fares.
  • Agents can book via the Lufthansa agency portal without incurring the DCC.
  • LH Group said it is “in the process of developing a new booking method to enable sales partners to connect to their IT systems directly based on the new IATA [International Air Transport Association] data standard New Distribution Capability.” In other words, it is building a distribution channel that will allow travel agents and online booking tools to connect directly to Lufthansa without going through the GDSs. NDC is an XML (Web-based) standard which allows airlines to make what they sell through indirect channels look and feel like what they sell through direct channels. For example, it would be much easier to sell ancillary items such as checked bags and meals

 

Why is LH Group changing its strategy?

LH Group believes most of the benefits of booking through a GDS go to agents and their customers, not the airline – especially as much cheaper distribution channels are now available, especially via carriers’ own websites. “Presently, the costs for using GDSs are several times higher than for other booking methods, such as our own online portal,” the group said in a statement. “In total, the yearly GDS costs come to a three-digit million euro amount for the Lufthansa Group.”

Airlines particularly dislike the fact that GDSs pass on a very high proportion of their revenues to agents as incentives to choose their systems.

Lufthansa insisted the €16 DCC does not earn it extra revenue. It said the fee represents the group’s average cost of distribution through a GDS (€18) minus its average cost of distribution via its own website (€2), figures which it claimed have been independently audited.

What has been the response of GDSs and TMCs?
Hostile. All three GDSs have publicly criticised LH Group, as have organisations representing travel agents. Their message is that consumers will lose because the cost of the surcharge will be passed on to them or, alternatively, consumers will lose the ability to make price comparisons if they or their agents have to shop through multiple sites to avoid surcharges.

The GDS provider Amadeus, whose share price fell 10 per cent the day after the announcement, also disputed LH Group’s calculations behind its surcharge. Amadeus said the €18 average for GDS fees was too high and the €2 for direct sales was too low.

The TravelpoolEurope perspective – what this will mean for corporate clients
In the short term, the GDSs and travel agents are correct: LH Group’s new surcharge will mean higher prices for the corporate client. However, in the longer term, the story is much more complicated. Eventually, the new distribution strategy could be good news.

This was always going to happen
It is completely understandable that Lufthansa and other airlines want to reduce their distribution costs. This has been coming for a long time. Airlines started to cut travel agency commissions 20 years ago and reduce their payment card costs ten years ago, leaving GDS fees as the obvious next target.

There are two problems with the the fees GDSs charge to airlines. First: in an online world with alternative ways to book an airline ticket, their fees (usually €3.50-€4.50 per segment) are too high. The reason they are so high is the cost of incentivising agents, structural inefficiencies and unacceptably high profit margins.

The second problem – which Lufthansa discussed on the day of its announcement – is that the wrong people are paying the GDSs. It is not airlines, which gain value from distributing through the GDS channel: it is TMCs and their corporate clients. TMCs gain a great system for managing their businesses, while clients gain the ability to compare different suppliers and access management information.

Therefore, we think two things will happen:

TMCs and their clients will become the ones who pay the GDSs
That way, those who benefit are the ones who pay. However, the price will certainly have to be much lower than €16 per ticket. GDSs will cut their fees, because they can afford to.

Alternative distribution forms will emerge
Booking corporate fares through the Lufthansa website is not an acceptable distribution alternative. Airlines’ own sites do not allow fare comparisons with other airlines or provide good management information. Lufthansa needs to provide an additional distribution channel into platforms that can aggregate feeds from multiple suppliers. Some airlines already provide XML-based “API” links direct to online booking tools and TMCs. We will see much more of this happening over the next couple of years. The alternative forms of distribution will also apply downward pricing pressure on the GDS. What is highly regrettable is that Lufthansa did not build a new distribution channel of this kind before introducing the GDS surcharge. It needs to make this a top priority.

Finally, it is worth seeing the big picture. On short-haul flights in particular, airfares are much lower than they were 15 years ago, even without considering inflation. The online booking revolution was partly responsible for the fall in fares (because it allowed low-cost carriers to compete). The airlines reformed themselves in response to the economic logic of competition. Now it is time for GDSs to reform themselves.