Why I’m Not Surprised Lufthansa is Declaring Victory

Neil Hammond

By Neil Hammond, Partner

Recently, Lufthansa made headlines by declaring their GDS fee experiment of 18 months ago a victory (as a reminder, here are the details from our coverage in June 2015), the headline impact of which was that the airline added a 16 Euro surcharge or “Distribution Cost Charge” (DCC) per ticket when booked using a GDS.

The success this should come to no surprise for many of our readers since I predicted this in my session at GBTA in Denver last year. As for why I believed this at the outset? Two reasons:

  1. The airline’s ability to grow the business beyond the constraints of what it can sell through the GDS
  2. The direct pressure faced by European airlines from the Middle Eastern carriers render this a necessity

The above reasons stand for other European competitors, likely adding fuel to the rumors that British Airways, Iberia, and Aer Lingus may follow Lufthansa’s lead. With the GDS agreements with several of these carriers coming up for renewal in 2016, the decision point is coming towards them as much, if not more, than they are going towards it.

How does this affect the marketplace?
What is somewhat ironic here is that airlines have for a long time been staunch supporters of forcing bookings through the designated TMC to accurately capture spend; however, they are the very ones breaking the model today. Needless to say, this will be an interesting situation to watch unfold as more airlines make the move to implementing a DCC.

Travel management companies (TMCs) will likely be the most affected by these changes, as an increasing number of booking channels makes the system more complex by driving the need for technological investments on behalf of the travel agencies to aggregate the booking channels.

Airline bookings are typically a very strong area of compliance within managed travel programs. If the TMCs, online booking tools (OBTs) or other players do not provide efficient channel aggregation solutions then we may see compliance issues similar to hotel programs as increased fragmentation increases.

What is the impact of distribution fragmentation?
My fellow partner Will Tate recently used what I think is a great analogy to describe the impact of fragmentation on the TMC market:

Would you prefer to go to a bakery for bread, a dairy for milk, and a butcher for meat?  Or, do you prefer getting these in a one stop location? Which solution offers you the chance to shop competitively and efficiently?  That’s the challenge with fragmented distribution – how can you easily compare when required to look in different places?

An end result may provide some opportunity for some managed travel programs that would then be able to manage market share agreements with the carriers through different channels. I’m not sure the airline industry would be too excited about this, but it would be of their own making.

How should you respond?
Due to our understanding of the nature of GDS/airline agreements in the U.S., we do not foresee this being an issue in North America in the immediate future; however, Europe could shortly see two or three carriers follow Lufthansa’s lead in 2017. For now, we recommend the following:

  • Keep an eye on the activities before and after any future announcement on the different channels. Monitor closely the costs to see if it’s impacting your program.
  • Brace yourselves for some potential strained GDS/airline relationships. Talk to your preferred carriers and also to your TMCs to find out how they may address the problem. Hopefully the responses will be more stimulating that simply passing on fees.

As always, if you’d like more information on this topic, I’d be happy to discuss how GoldSpring can be of assistance in optimizing your airline program. Please feel free to reach out at neil@goldspringconsulting.com.

Back to all news