Lufthansa Adjusts Corp. Programs, Eyes Expansion

Frankfurt - Lufthansa German Airlines in November raised its prices while reducing corporate discounts in an effort to improve its revenues amid the global airline industry downturn. However, German-based accounts are being offered more customization in their corporate contracts and new arrangements that factor in revamped travel agency compensation programs, ahead of full elimination of traditional commission payments still slated for next January.

Meanwhile, Lufthansa is eyeing more global agreements to leverage its anchor position in the 13-member Star Alliance it co-founded five years ago and a batch of new flights to U.S. gateways. The carrier has 33 such agreements with multinational clients and a year-end goal of 45. The vast majority of these individually crafted deals—covering multiple countries of origin—are Star Alliance agreements that include at least one other alliance carrier.

Global agreements are handled by 14 account managers, including two each in London, New York and Paris and eight in Frankfurt. Another 10 account managers focus on other larger key accounts based within Germany. Key account management immediately enacted a hiring freeze after Sept. 11, but did not cut any personnel as Lufthansa, like many others, trimmed its workforce.

"They have been excellent in terms of working with our unique program and I consider them to be in the top three of all airlines in flexibility," said Caro Cook, senior transportation officer at the International Monetary Fund.

Within the domestic German market, Lufthansa late last year began raising fares and, at the same time, cutting corporate discounts. "We feel we have a responsibility, not only for the economic development of the company, but for the industry as well," said Wolfgang Schmidt, the carrier's vice president of corporate key account management. Schmidt noted that as most clients understand harsh market realities exemplified by the collapses of Sabena and Swissair, Lufthansa similarly understands the adverse economic situation that has prompted its clients to travel less and shift business from premium class to economy.

"As a consequence of the economic situation and for competitive reasons, our Germany-originating scheme—which generates 80 percent of our corporate revenue—has been individualized," Schmidt said. "In the past, we used to offer a standard contract, but we have recently moved to keep standardization to an absolute minimum."

For many more of Lufthansa's top 500 accounts, that means individualized corporate pricing by way of volume-based percentage discounts for specific city pairs. Top clients also are offered fixed fares, though Schmidt conceded such rates are not as attractive due to current market conditions.

The remainder of Lufthansa's Germany-originating accounts, some 3,000 corporate clients, generally receive back-end percentage incentives on a sliding scale based on revenue. A corporation must have a minimum annual volume of 50,000 euros to be eligible for a corporate program.

Meanwhile, starting later this year, corporate accounts will receive monthly settlement information via the Internet, replacing paper reports currently mailed every other month. Smaller accounts that do not qualify for traditional volume agreements can use an Internet-based program, similar to many offered by U.S. carriers, to build incentive points for free travel, upgrades and other loyalty rewards.

On the travel agency front, Lufthansa's plan to eliminate traditional commission payments still is on target for the beginning of next year (BTN, July 16, 2001), though the exact date is uncertain. Schmidt said some accounts will be hit harder than others, notably those with management fee agency arrangements and/or a high level of intercontinental travel. "Of course, corporate clients plan to be compensated," Schmidt said. "We have to consider every single client in bilateral negotiations and consider their individual travel portfolio."

German travel agents already lost any override payments they had been receiving after the European Commission last year deemed such programs illegal. Instead, Lufthansa is developing new agency incentives, including a flat payment for booking e-tickets already in effect except for international net fares. The carrier will explore additional incentives throughout the year.

After Sept. 11, Lufthansa backed off its Pay As You Fly program, but expects to expand the program, currently in use at a few dozen top German accounts, to other countries by year-end. "Bringing it beyond Germany may be ready in November for the winter schedule," Schmidt said. "The latest would be spring of '03." Also frozen after Sept. 11 were installations of onsite corporate checkin kiosks. The program had grown to 13 locations before investments were cut, but Lufthansa now is pushing ahead and hopes to double the number by year-end.

In the United States, Lufthansa has roughly 250 corporate accounts, many of which are tied together with Star partner United Airlines. Most U.S. deals are based on revenue goals, though larger key corporate and agency agreements also may include market share goals. Smaller companies can use Corporate Mileage Plan, an incentive program relaunched last year.

Mathias Friess, Lufthansa director of sales in North America, said the carrier—with only an 8 percent share of the North America-Europe market—has not been able to increase prices, but some corporate discounts have been raised and others lowered based on performance.

Meanwhile, the carrier on Friday launched service between its Munich hub and New York JFK, replacing service to Newark that was canceled after Sept. 11. Flights between Munich and San Francisco will restart March 31, while the newest route, Boston to Munich, will begin May 1. Lufthansa on March 31 will restore and/or add flights between Frankfurt and nine U.S. gateways.

"Every capacity decision we have made was targeted at the business traveler," Friess said. "We now have the same amount of seats in business and first class as last year." Friess added that Lufthansa may boost flight options from Newark and hopes to increase its North Atlantic share to 10 percent.

While the company still may eke out a full-year 2001 profit when it reports figures later this month, a recent Standard & Poor's report said losses are expected for 2001 and 2002. The report added, however, that Lufthansa in the long term, "is well positioned to recover and to take advantage of the difficulties of financially weaker competitors."

One competitor not at all in financial dire straits is Irish low-fare carrier Ryanair, with which Lufthansa has been engaged in a nasty marketing and legal battle. Expanding quickly, Ryanair last month launched service from Hahn Airport outside of Frankfurt. Lufthansa said most Frankfurt-area business travelers won't drive an hour to Hahn, nor will many corporate accounts look at Ryanair as a potential preferred alternative because it lacks a large network.

Lufthansa is said to be ready to start its own low-fare operation to compete against Ryanair and others, but Schmidt said there are no concrete plans.