Lufthansa Tickets Will Get More Expensive If Booked Through Travel Agents

Yesterday Lufthansa announced that they will be “redirecting their commercial strategy.”

Lufthansa-747-8

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?

Comments

  1. Seth’s article mentioned there was going to be a separate portal or workaround for corporate and TA bookings to avoid the fee. I think this is really to stick it to OTAs.

    Also the notion that cash is better is sort of bunk. There are very real costs to handling cash. It is why most airlines only accept credit cards these days in flight or on the ground for baggage and other surcharges.

  2. Have to agree with AdamH, there are big costs to handle cash.

    Which is why some European LCC/ULCC carriers charge a premium for using credit cards when booking tickets, the price listed are for Debit cards.

    Remember reading that in Denmark some stores also have a credit card use fee, again debit cards are not charged.

    And yes I think this will back fire for LH when it comes to bookings.

  3. This is a continuation of the slippery slope.

    In 30-40 years, if the world survives, air travel on all airlines will be like Ryanair or Spirit (on steroids).

    The monetization is inevitable.

  4. A couple of companies have tried to make it harder to business with travel agents recently only to back pedal a little while later due to the backlash.

  5. Meh. I’d never book through an OTA. anyway. In almost every case I can think of, if I’m going to book an airline ticket, it’s going to be through the operating carrier (unless it’s one of the few instances where I MIGHT buy a codeshare), even if it’s more expensive. If you book through anyone other than the operating carrier, you have to go through who you bought the ticket from if there are problems (unless it’s day of travel). The more cooks in the kitchen, the more chances for the recipe to get messed up.

    And if LH does face these costs, you can’t really blame them for trying to recoup them (although people will). They’re a business, not a charity.

  6. They’re not saying that travel agents are recording record profits, but that the GDS’s and OTA’s are–they are the real target of this move.

    Also, as other posters said, accepting cash is not free or even close to it so that claim doesn’t add up.

  7. This is an enormous and overdue change.

    It is primarily an attack on Amadeus, Gal and Sabre who have been milking airlines for all they are worth in a quasi cartel. These guys haven’t baulked at all from earning 20%+ margins while airlines have languished. In return, the GDS haven’t kept up with the times. Auxiliary products are hard to sell- eg the sky couch product on air New Zealand feast available for many YEARs. It’s understandably galling for airlines to be handing over a substantial part of their operating margin to companies that don’t even efficiently facilitate the sale of their products.

    To emphasise- this is mostly an attack on the gds, not on agents. LH seems to be building a DIY booking portal which aligns with IATAs new Software syntax (called new distribution capability). This allows agents to skip the gds altogether. Expect more of this over the next few years.

    There are two potential ways this backfires. Firstly, these portals have a chequered history. American Airlines tried and effectively failed. Secondly, agents earn commissions not only from airlines directly but from GDS as well. This move could squeeze that second source of cash.

    To be honest, agents and gds both have this coming (though agents are just caught in the middle with this move). Agents in particular complain endlessly that ‘ we are the small guys wanting I support our suppliers for next to nothing and life is a real struggle.’

    BS. Agents earn persistently better margins in most countries worldwide and do very little hard work to make it happen. Think about it- imagine I sold fresh fruit (ie I distribute apples not airfares). I have to manage my own inventory, make sure my product is excellent quality, pay the delivery man and mark up my product when the farmer ten minutes out of town sells direct for cheaper. Travel agents don’t manage inventory (suppliers do- they have an infinite supply on their computers at any one time without any costs involved), don’t have a product to make better (suppliers do) don’t pay the delivery man (the gds pay them) and usually extort suppliers to sell products on their own websites with a margin built in for agents to earn.

    Expect more.

    Info-

    http://www.economist.com/node/21560866

  8. 1. For those who claim cash has a cost–yeah, but it’s less than the 3-5% credit cards charge (speaking as a business owner who does charge 3% if you use a cc).

    2. Lucky, will this have any effect on your Points Pros biz? Since you use our IDs and accounts, it doesn’t count as a TA, right?

  9. Smart move. Southwest has realized this for years and goes step further by requiring bookings only on their own website. No wonder Southwest is largest domestic carrier by number of passengers today and expanding internationally.

Leave a Reply

Your email address will not be published. Required fields are marked *