Fights between airlines and reservation systems are as old as time. Global Distribution Systems (GDSes) have held the upper hand for years, and because of that, they charge the airlines a lot of money for every booking. Airlines, consequently, are always looking for ways to bring costs down by taking bookings directly. (For those want to know more, you can read my distribution series.) Lufthansa Group and its airlines (besides Lufthansa itself, this includes Austrian, Brussels, and Swiss) have decided to hit hard by slapping a fee of 16 euros on every ticket issued in a GDS starting in September. That may sound smart, but it brings a lot of collateral damage with it. This may make sense in the future, but for now it’s a big mistake. Let’s hope this is just posturing.
Lufthansa Group announced the change on June 2 in a very typically dry and bland release entitled “Lufthansa redirects commercial strategy.” (If you fell asleep just while reading the headline, my apologies.) Let me summarize it in plain-speak.
“The GDSes charge us too much. So now we’re going to punish those who use GDSes by slapping on a 16 euro fee to every ticket.”
The problem here is that while the beef is with the GDSes, the punishment hits others just as hard if not harder. Anyone who books through an online travel agent will now pay 16 euros more. It’s really Lufthansa that suffers the most in that scenario because in a comparison shopping world, Lufthansa is going to now look more expensive. People aren’t going to go to Lufthansa.com to see if it’s cheaper. They’re just going to fly someone else. But hey, if Lufthansa doesn’t think it needs that lower-fare traffic to fill up the back of its airplanes, then fine.
But what about all those actual travel agents, especially those that handle corporate and high-end leisure travel? Those are high dollar bookings that are highly desirable. And for better or for worse, travel agents use these distributions systems because there aren’t any better alternatives… yet. Technology is slowly getting there, but it’s not there today.
In the release, Lufthansa had the nerve to say that Lufthansa corporate deals can be booked directly at LH.com. That implies cutting out the corporate agent. Even if the corporate agent does book it, it won’t feed into the agency’s back office systems so it’s going to be a mess for the agencies and the companies.
The same goes for Lufthansa’s online agency portal, which I believe is either new or going to be nearly-relaunched. Sure agencies can go book there if they want, but it’s a huge pain in the butt. First of all, agents are going to have to remember to subtract 16 euros from any price they see in the GDS, since that’s still where they’ll do their comparison shopping. (That’ll be a lot of fun for people who don’t book in euros.) Then they’ll have to go to the portal and book. And since the booking likely won’t go into the back office systems, there will be a bunch more work to be done. In addition, those bookings that require multiple airlines won’t be possible on the portal, presumably. It’s going to result in fewer bookings for Lufthansa.
In short, this is going to piss off some of the airline’s best customers (and the people who issue tickets for the airline’s best customers). It’s probably also going to make United and Air Canada mad since those airlines share revenue with Lufthansa Group airlines over the Atlantic. This is going to hurt their business as well.
That’s why we can only hope that this is truly posturing. Most interestingly, the announcement was made on June 2 but it doesn’t go into effect until September 1. So that gives Lufthansa Group time to extract concessions from the big three GDSes out there, Amadeus, Sabre, and Travelport, before putting it into place.
Eventually, there will come a time where the airlines hold more power in this relationship, a time when alternatives for reaching agencies will be functional and viable. But we aren’t there yet. Right now, Lufthansa Group is just too early to market with this. And because of that, it’s playing with fire.
[Original middle finger photo via Shutterstock]
Google flights, Kayak and similar will not be affected: they do comparison shopping. OTAs, who don’t do so, are the ones to be affected.
Customers overall won’t be affected if they comparison shop.
John Tarik – You think people only use metasearch sites for comparison shopping? People use OTAs for flights primarily because they can comparison-shop. There will be an impact here.
How much are the GDS companies charging for a segment booked via thier channel these days? Isn’t it still sub $5.00 per segment? Sorry, but to me, that seems like a CHEAP distribution model. If I could sell a $1000-2000 (round-trip) product for less than $10 in marketing costs, I’d do it in a FLASH.
$4.09 per segment when booked in the US, $6.49 per segment in the same continent, $7.89 per segment when booked OUTSIDE the US
Add in the costs by the airline PSS and it gets up there.
Depends on what “value” the GDS provides. If it’s just transactional, those fees always get beat down in the end. I don’t think the GDS provides any “marketing” value, so it’s not a valid comparison.
The technical cost is now closer to an AVERAGE of $8 per net booking. The figures quoted here have not taken into consideration additional charges that need to be averaged out. The US model is closer now to $6.50 and non-US is more than $8. (You need to add back in loads of additional fees that the GDSs have placed on the airlines over the past few years. When it comes to unbundled pricing – the GDSs make the airlines look like pussies). hope this helps. I have seen some GDS contracts where the average price is $12 per net segment.
Could be game playing like the airlines like to do to get the GDS systems to lower costs. Other airlines will watch and see how it plays out and if it works, they to will do the same thing.
Most LH flight are short-haul flights. A couple of dollars/segment is quite a lot for a short-haul flight costing 50-100€/segment.
@Gantt Funny question, why you say? Because GDS companies love to threaten litigation to those who discuss the rates charged to airlines.
Rates are negotiated and in theory the most volume client should have the lowest rates but without transparency most have found out that its not entirely true. Imagine negotiating with a team of used car salesmen. Couple that with some favored nation clauses and you are not negotiating with one company but a cabal.
The res fee is not the answer, since it punishes agents. The industry needs a tech solution to the issue that will work for agencies, and no the GDS companies are not interested in a lower cost booking option without their involvement.
I wonder if codeshares could be used to do an end-run around this? If LH/OS/SN/LX flights booked as codeshares with UA or AC or other Star Alliance partner flight numbers, I think this would avoid the fee. This only works though if UA or AC or another partner offers fares equivalent to what LH and friends offer themselves.
David M – Yeah, my assumption is that if you can book a UA/AC codeshare (those codes aren’t on all LH flights of course), then you’ll still get the cheaper rate. But as BookieNJ notes, there’s been a glitch which won’t allow anyone to purchase seat assignments on Lufthansa flights if it was booked as a UA-coded flight. We’ve run into this with several clients so far and our sales contacts just throw up their hands. That’s a dealbreaker for a lot of folks.
Cranky, not being able to select seats on the LH website (and in cheap fare buckets not being able to preselect seats at all) if booked on a codeshare isn’t a glitch. It’s a ridiculous dumbass shortcoming that’s been there for ages.
And it is only for codeshares. If you ticket a multi-carrier itinerary the good old way using each airline’s flight numbers and plate it on 016 stock you can preselect seats on LH.com.
I actually just booked a PHL-MUC trip last week through Orbitz as a codeshare through UA on Lufthansa. It was a great fare (which went up by $600 the next day) but what sucks is Lufthansa won’t allow me to pick my seats on their flights because I didn’t purchase the ticket, which was about $500 more, on their website.
When I log on to the Lufthansa it even says ‘Not booked on LH.com.’ When I click to choose/pick my seats it’s says ‘Unfortunately, seat reservations are not possible.’ I can’t even upgrade, which I’m not going to do anyway since it’s so expensive. You would think the airline wouldn’t care since you’re giving them money, but apparently they do! I don’t get it.
Not only that, but it will very likely be a “K” class fare and not give you any FF miles on UA.
Looks like it’s a “L” fare.
I agree this looks line cutting of your nose to spite your face.
If you’re going to do something like this you need to to it from a position of strength, Delta-like strength. And Delta is strong while Lufthansa AG is a financial basket case. Delta recently pulled its fares completely off some of the metasearch engines and online bookers. According to this BBC article it pulled fares off Skyscanner but put them back when Skyscanner agreed to only link through to Delta.com.
http://www.bbc.com/news/technology-32990724
I checked it out and indeed the vast majority of DL itineraries only link through to Delta (I saw a couple also linked to one third party). That bypasses the GDS by stealth for the retail market (and ensures that only live fares are displayed) while not hurting anyone in the corporate travel industry.
I might agree that the 16 EUR is a BIG charge, but fundamentally I agree that such a charge should be there.
First, Travel agents are middle man whose life the airline shouldn’t make easy by design, i.e. making agents the preferred seller of airlines product. If customers value this service, they pay for that. In the classic approach airlines pay commission from fare, thus giving away part of revenue that shouldn’t be taken for granted from TA point of view. TA should operate with the concept of added value in mind, but this value must be covered by passenger, not airline!
Second, Airline should focus on making ends meet in their business and as such if GDS costs are high, fee to address this channel is the right way to go.
Third, yes – it makes price comparison by agents more difficult, but then again, the industry has seen this change already – LCCs have long ignored GDSes, yet some travel agents do check and compare their websites: after all, a good travel agent is one that knows where to look for what customers need, not one that is capable of using 1 site/system only.
Therefore, to me, all these complaints by Amadeus and Travel agents is just crying about an airline trying to shift the long abused powers by counterparts back to the side which actually enables all these other businesses to exist, they for way too long have had the ability to earn more and easier than airlines themselves. Of course, sitting in the pool of cash (Amadeus) in face of the pool drying out is not a nice realization for them, but if they were less focused on excessive charging of customers (airlines), they would have seen this coming
John –
There are very few airlines out there that pay any sort of published commission. Travel agents learned the hard way back in the 1990s that they had to provided added value and make travelers pay for it. But this method of tacking on 16 euros to the fare is the wrong way to shift that burden.
Travel agents need to be able to provide customers with competitive pricing. This fee does not offer travel agents the ability to absorb that fee and still provide a competitive rate. It has to be passed on to the customer since it’s part of the ticketed fare.
The right way to do this is to completely change the model. Airlines should shift the burden of distribution costs on to the agencies. Then they should simply give net fares to all agents that are below published rates. This net fare is the amount the airline wants to recoup regardless of how the travel agent decides to sell it. Then the agents could mark that fare up as they see fit to cover their costs. This would create a ton of competition in the tech space with companies clamoring to provide lower cost solutions to win business from agencies. But this is probably a pipedream, at least in the near term.
CF, doesn’t that just turn it into a race to the bottom for OTAs?
I’m not sure airlines want the cheapest sleaziest companies selling their products as people will complain that “THIS HORRIBLE AIRLINE @#($@#*$(* MESSED UP” instead of saying “CHEEEEEPIE TICKETS MESSED UP!”
I can see the net fare model working when its bundled with a hotel and a car and a tour package, but I’m not sure how well it’d work out with a bare ticket.
” Airlines should shift the burden of distribution costs on to the agencies. Then they should simply give net fares to all agents that are below published rates. This net fare is the amount the airline wants to recoup regardless of how the travel agent decides to sell it. Then the agents could mark that fare up as they see fit to cover their costs. ”
2 questions:
1) why would an airline want to make Travel Agents their preferred sales channel and give away the opportunity maximize revenue per each seat? By this proposal of yours, you want to get permanent competitive advantage vs airline themselves.
2) Under your proposal, would Travel Agents be ready to contractually guarantee certain pax volumes?
John – Maybe I haven’t explained it very well, but the idea is to shift the cost burden on to the agencies as well. So today, the airlines handle all distribution costs, sometimes kicking back commission depending upon the airline/route/agency. In the future, the airline could instead just say that it needs to make $x net on the deal. That might be 5% below published (I’m just making up a number). But then the agency has to decide how much to mark it up. It would responsible for any distribution-related fees including GDS (or competitor) as well as credit card processing. This doesn’t give the agency a structural advantage, but it does create tremendous incentives for intermediaries to get much more efficient and bring costs down. It gets more complex than this, because of the way incentives are set up today, but in the long run, this structure would work well.
Hi Cranky, Could you sometime write a column about why when booking an international flight (for me starts with AA, then transfers to IB and BA/AA on the return) I cannot reserve seats with IB and BA? And I’m EXECPLAT!! I called the AA EXECPLAT desk and they could not be of any assistance. I wrote a complaint to the Oneworld desk and received a B.S. automated reply. Thank you in advance
Ethel – As far as I know, BA gives free seat assignments at the time of booking to oneworld sapphire and emerald so you should be able to do it.
AA can’t help though. You would need to call BA and make sure your number is in the reservation.
Actually BA and AA are better than AF/KL with DL and I am Diamond. I can write legions on this topic. Suffice to say there are a lot of problems and challenges in the current airlines system that need to be fixed and have not been. Now Airlines are making money they need to invest more to solve these very basic problems. Frankly the GDSs must shoulder a lot of the blame for not listening to their airline customers and preferring to go through the typical legal restraint route rather than investing in their product. All GDSs UNDER INVESTED in their products over the past 15 years. Thus I have no sympathy for the GDSs at all.
Perhaps this is an end run around the GDS’s full inventory/pricing clauses?
Maybe LH just plans to drop all of their prices by $16 Euros so they’ll still be just as competitive, but this way their customers can get a cheaper option by going to LH.com?
Nick – No, Lufthansa didn’t renew its full content agreements so it can start flexing its muscles. Of course, that means it’s paying even more for bookings than it would have otherwise.
This’ll be interesting to watch play out. I’d be curious if they’re able to push more passengers over to their site, might be easiest for flights sold in the EU.