Lufthansa To End German Commissions

<B>Lufthansa To End German Commissions</B>

By Amon Cohen

Germany will become the next European market to see its dominant carrier move to 0 percent commission.

Lufthansa has announced it will scrap traditional percentage-based payments, beginning Jan. 1, 2002, and introduce a system of flat booking fees similar to what British Airways introduced last month in the United Kingdom.

No more details have been given, and negotiations to fix the new booking payments are continuing between Lufthansa and German travel agency and tour operator association DRV. Lufthansa said it will make a definitive announcement by the end of this month.

TQ3 Travel Solutions, by far the largest business travel agency in Germany, has expressed concern about the timing, as this will leave only seven months for agents to prepare for the considerable technical, financial and cultural changes. BA gave the U.K. market 11 months notice, later extended to 14 to ensure all systems were satisfactorily in place.

Lufthansa, in common with most other airlines in Germany, currently pays 5 percent commission, rising to 7 percent on certain long-haul business routes. Meanwhile, in Switzerland, dominant carrier Swissair has announced a payment cap on its 7 percent commission rate starting next January. Short-haul flights will earn a minimum commission of $11.50 and a maximum of $43; long-haul flights will pay a minimum of $11.50 and a maximum of $104.

Swissair had considered emulating BA's so-called Fresh Approach model. Yet, even this more modest reduction--effectively reducing the average payment to 6 percent--will have significant consequences for corporate customers, according to Peter Schmid, head of international business management for BTI Central Europe. "We are preparing our clients to move to transaction fees," he said. "We were working on the borderline of profitability with 7 percent but we will cross this border next January, especially for customers who make numerous changes to their itineraries."

Schmid said the Swissair move effectively would be a price increase, but hoped it would be accompanied by a more positive attitude from Swissair toward corporate negotiations. "Given Swissair's financial problems, the last thing the airline wants is a battle with travel agents," he said. "Swissair is monopolistic and has not really been prepared to negotiate with corporate customers, taking the attitude that they will fly with Swissair anyway. Many customers are happy that Swissair is under pressure and hope good things will come of it."

Lufthansa is under pressure too, owing to a damaging pilot strike that has caused widespread disruption. Corporate clients also are unhappy about the impending move to zero commission. Unlike the United Kingdom, where corporations welcomed Fresh Approach as a rationalization of travel remuneration structures, German companies regard Lufthansa's strategy as little more than effecting a price increase. Asked if she was pleased with the news, Deutsche Bank head of global travel Christiane Heck replied, "Absolutely not. We will be getting a lot less money, so we will be going to Lufthansa to negotiate our money back. Everyone is unhappy with the situation."

Michael Kirnberger, chairman of German business travel association VDR, confirmed that most travel managers are unhappy about the prospect of zero commission. "It is a development we cannot stop, but Lufthansa has to face the fact that this has a direct impact on companies, not just on travel agents," he said. "We will negotiate very intensely to make sure we do not lose."

The conversion to zero commission will be the final stage of a rapid transformation of German corporate travel to a more modern approach, having been perceived to lag behind European pacesetters the United Kingdom and Sweden during the 1990s. "Corporate clients have improved their travel management very quickly," said Marc Hildebrand, president and CEO of TQ3 Europe, Middle East and Africa. "Five years ago, travel management was unknown, with a few exceptions in very large companies."

Hildebrand attributes the relative historic backwardness of Europe's most advanced economy to a protective market--especially on domestic routes dominated by Lufthansa and Deutsche Bahn, the German railway company. Rail accounts for around 20 percent of TQ3 Germany's turnover and a considerably higher proportion of its transactions.

German business travel has had two other dominant forces. One is the Lufthansa AirPlus card, which has been all-powerful in the payment card market thanks to Lufthansa using it as the vehicle for its corporate incentive scheme. The other is Start, the national marketing company for Amadeus--again with heavy Lufthansa ownership. "Start has provided a complete service to travel agents, which never needed IT departments because it provided back-office and ticketing systems and all their other requirements," said Hildebrand. "The downside was many agents failed to invest in IT. Then, corporates started to ask for things Start did not have and the agents realized they did not own Start and could not respond quickly."

Among factors Hildebrand said have transformed the market are the Internet, which has brought technological alternatives to Start, and the competition now posed on domestic routes by BA-owned Deutsche BA, which launched in the mid-1990s. Deutsche BA now has one-third of TQ3 Germany's domestic air spend, although its inability to gain a foothold at Frankfurt airport is hampering growth.

Attitudes among German corporates also are changing. Hildebrand believes VDR and the Association of Corporate Travel Executives have helped spread travel management practices. Furthermore, German companies are shedding their traditional insularity and adopting global strategies, leading to greater consolidation of travel programs.

The increasing adaptability of German corporates was demonstrated on the first day of 2000 when TQ3 switched 90 percent of its travel volume overnight to a fee basis. Hildebrand said travel managers easily will adapt to zero commission, but warned that agency fees will be radically redefined with much greater service segmentation. "We are not anywhere near where we need to go with price differentiation," he said.