Many of us with children have faced the question: “Why do I
have to wear a seat belt?” Most people use them, of course, because there’s no
great alternative for keeping you alive in the event of a serious collision.
Even though seat belts use very old technology, are downright confining by
design and aren’t particularly in step with modern fashion, they do what
they’re designed to do efficiently and affordably. And, frankly, there aren’t
any better alternatives for that.
Over the years, we’ve heard airlines ask a very different
question: “Why do I have to pay for distribution?” But the answer is
surprisingly similar to the reason for wearing seat belts: There’s no great
alternative. While global distribution systems use old technology—by Digital
Age standards—and their interfaces aren’t quite as attractive as airline
websites—yet—they still do what they’re designed to do efficiently and
affordably.
Lufthansa Group recently announced that on Sept. 1 it would
begin adding a €16 surcharge to all tickets booked by travel agents using
global distribution systems. The “distributions cost charge” forces corporate
customers to make a choice between higher fares and lower service.
Lufthansa argues that the rate disparity among booking
channels is justified because costs for using GDSs are several times higher
than for other booking methods, such as airline’s online portals. The idea of
an agency portal is not a new phenomenon. Many airlines have them today, but
few bookings go through them. There’s a reason for that.
What Lufthansa didn’t mention is that agency portals:
- Are not designed to manage high transaction volumes generated by large TMCs.
- Do not offer comparison shopping on competing airlines.
- Lack technical integration with mid- and back-office systems that let companies
keep travelers safe, track expenses and influence in-trip buying decisions.
- Cut down travel agent efficiency and productivity, which
drives up costs for travel buyers.
Over the years, I’ve been audience to a lot of negotiations
between airlines and GDSs. Recently, airlines have negotiated very favorable
terms with the GDSs, resulting in savings for the carriers. Leading up to Lufthansa’s
DCC announcement, all indications pointed to the two sides reaching a mutual
agreement over distribution. There was no indication that negotiations were not
proceeding or that tension was brewing.
Because there’s no reason to think that an airline should
expect to distribute its products without any cost, Lufthansa’s recent gambit
seems more of a tactic for increasing lagging direct distribution. Its strategy
seems to rest in shifting distribution costs to corporate buyers.
It’s worth noting that had Lufthansa chosen to negotiate a
full-content agreement, its costs for content would be less. Its €16 surcharge
is based on estimated average distribution costs before full-content-agreement
discounts are applied. Lufthansa could have negotiated for those full-content
discounts but chose not to. Because business trips average fewer segments than
leisure trips, the corporate share of distribution should be less than leisure,
not more.
Keep in mind that alternative distribution methods aren’t
free. Building out airline websites, keeping website content updated, investing
in agent portals and investing in direct connect technology all come with
significant capital expenditures or resource costs.
Moreover, direct connects require airlines to provide a
special set of programming instructions called an application programming
interface. To date, Lufthansa hasn’t made any APIs available. Even if it did,
it’s hard to understand how the industry would benefit from a major change in
the current distribution model—given that the GDSs already provide the most
efficient and integrated TMC booking channel in place today.
Given the history of negotiations between airlines and GDSs,
it’s impossible to know whether Lufthansa is using DCC as a negotiation tool or
really intends to fully implement its DCC without providing viable options for
corporate travel programs that don’t want to give up the many benefits provided
by TMCs and online booking tools using the GDS.
It seems like a good time for us all to fasten our seat belts.
This report originally appeared in the August 2015 issue
of Travel Procurement.