What does that mean in practice, and what’s causing this?
Jens Bischof, member of the Lufthansa German Airlines Board and Chief Commercial Officer (CCO) of Deutsche Lufthansa AG, says: “Until now, the percentage of revenue generated from the sale of flight tickets by our airlines has continuously decreased. While other service and system partners in the value chain are recording increasing margins and returns, our airline’s earnings have been compromised over time, even though they are the actual providers of flight services. We want to counteract this trend by refocusing our commercial strategy.”
Basically, Lufthansa’s revenue generated from actual ticket sales has proportionally continuously decreased, while they’re making up for it by generating revenue in other areas. Meanwhile other partners in their value chain (like travel agents) are apparently recording increased margins (I have a hard time imagining that’s true, but that’s the claim here). Lufthansa wants to get back to the “core” of their business, which is making money selling airline tickets.
And one way they’ll do that is by adding a 16EUR fee for every ticket issued by a booking channel using the GDS. Here’s an explanation of that:
The new commercial strategy also includes a clear cost differentiation in the various booking channels. Presently, the costs for using global distribution systems (GDS) are several times higher than for other booking methods, such as our own online portal www.LH.com. In total, the yearly GDS costs come to a three-digit million euro amount for the Lufthansa Group. These services, however, are primarily used by other partners in the value chain. A large number of services are paid by the Lufthansa Group carriers, but are only partly used by them. Among others, the GDS services comprise functionalities, which offer many extra services in addition to the basic features of booking, processing and ticketing. Such examples include the option of combining and booking world-wide, multi-airline flight offers, as well as, an integrated booking and invoice processing.
As of 1 September 2015, the Lufthansa Group airlines will, therefore, include a surcharge, the “Distribution Cost Charge” (DCC) of EUR 16 for every ticket issued by a booking channel using GDS. The new charge will not be added to flight tickets purchased using own booking channels.
This is an interesting move. On one hand, should passengers booking through Lufthansa directly be “subsidizing” the ticketing costs associated with those booking through other channels? Of course that’s not a totally sound argument, given that airline revenue and inventory management is so complex that everyone is paying different amounts for what is ultimately the same product.
Credit card surcharges come to mind, for example. Ultimately the cost of accepting cash is lower than the cost of accepting credit cards. At the same time, when we get to the point where a majority of people are paying by credit card, shouldn’t it just be built into the cost? I’m not sure if this is similar or different, though ultimately I can’t blame Lufthansa for at least trying.
Lufthansa claims that their yearly GDS costs are well over 100 million Euros. So I guess they’ll soon find out whether that amount is more than the revenue they’ll lose from having higher fares through travel agents. After all, when other airlines don’t have those fees and consumers are comparing prices side-by-side, Lufthansa will seem like a less attractive option.
What do you make of Lufthansa’s (rather bold) move to charge for those booking through other channels, rather than eating the cost?