Is Lufthansa Serious Or Just Negotiating? Why A Few Direct Connect Bookings Will Save Millions

If you were following the travel news last week, you have probably already heard about the big Lufthansa news. Starting on the 1st of September, all airlines of the Lufthansa group are going to add a 16€ fee to every booking made via GDS. The “Distribution Cost Charge” affects Lufthansa, Austrian Airlines, Brussels Airlines and Swiss International Airlines, but will not be added to tickets purchased through their own website, airline ticket counters or service centers. Many people are upset about the change, but Jens Bischof, chief commercial officer of Lufthansa, is convinced that “Somebody’s got to do it” - So Lufthansa did and decided that it’s time to focus on its commercial strategies.

Amadeus immediately expressed its shock and claimed that the changes were “completely unknown” to them and that they do not have a new contract with the Lufthansa Group. ”LHG’s true intentions were not shared with us”, stated a memo which was e-mailed to Amadeus customers after the news became public.

Since Lufthansa won’t have a full content deal, their fares are more than likely going to differ between direct and indirect distribution channels. It might give the LHG more freedom, but will put travel agencies at a huge disadvantage. The market is in rage and many worried TMCs have been calling us since Lufthansa’s announcement, asking for our NDC/GDS capabilities and requesting demos.

The way I see it Lufthansa is just following negotiating tactics with the announcement of the GDS fee. I’m sure that a full content deal will be available in about three months – of course under better terms. The tactic of promoting direct distribution and benefit from cutting costs is also described in my book in detail:

Value Creation in Travel Distribution (Excerpt) – Chapter 3.2

Direct distribution

Increasing numbers of commercial air carriers consider high distribution fees to be a thorn in their sides.

Assume that an airline pays USD 12.00 per booking to the GDS while it pays only USD 3.00 to an alternative provider. In this example, the airline handles 100 million passengers each year and processes 50% of the bookings directly, most likely via their own website. This leaves 50 million that are processed by the GDS. That means USD 600 million in fees. If the airline were to move 5% of this volume to alternative channels, USD 22.5 million would be saved. On the other hand, its negotiating position vis-à-vis the GDSs would be much better and certainly USD 12.00 can be much more easily reduced to USD 8.00 per booking given the GDS’s risk of losing their entire business. Based on this example, actively supporting an alternative provider would mean the airline could save over USD 200 million per year - while the alternative provider would receive USD 7.5 million in financing annually - a considerable sum for start-ups – and this is just one airline considered.

That means that while low-cost carriers (LCCs) are increasingly maneuvering their inventory to the inventory unit of the GDSs (easyjet, Jetblue, We stjet), major airlines are trying to exert more control over their distribution actively influencing the distribution unit of the GDSs. This again highlights the logic and importance of separating inventory management and distribution.

Michael Strauss is CEO and worldwide director of travel at Pass Consulting Corp. This post originally was published at his company's Travel Industry Blog and is reprinted here with permission.