It has taken two years, but two major global carriers have now started to put the squeeze on the old airline distribution model.
Is it an attack by Lufthansa and British Airways on the Global Distribution Systems or just a way to gain some distribution freedom?
And, indeed, what’s the fuss all about?
NB: This is an analysis by Joacim Berntsson, strategic business development manager at Paxport.
First of all, some background.
In June 2015, Lufthansa Group announced that a booking made with any of its airlines on the GDS (Amadeus, Sabre and Travelport etc.) would come with a €16 fee on every issued ticket, the so-called Distribution Cost Charge (DCC).
At the same time, Lufthansa started providing an API to travel agencies and chosen technology partners for direct distribution.
Since then the travel industry has waited to see what’s next - will someone follow suit to support Lufthansa in their distribution strategy or will they struggle on their own and eventually have to abandon the DCC concept?
Last week we got the answer, with IAG-owned airlines British Airways and Iberia announcing they will be charging a Distribution Technology Charge (DTC) of €9.50 per ticket on bookings not made through an NDC-compatible API.
Does this mean war?
In short: not really, this should be seen in the light of contract negotiations with the big distribution systems, they are far too important to these airlines but it will give some leverage in negotiations.
Of course, every shifted booking potentially saves a few bucks and how successful Lufthansa has been with its strategy is only known to themselves.
But it makes sense that someone is doing something, looking at figures from IATA on the return on invested capital in the value chain created by a purchase of an airline ticket, airlines end up with 3% (the worst) - the GDSs supposedly with 26% (the best).
What can be achieved?
It is worth asking what airlines can do to be more profitable.
I believe there are three things:
The first is to lower your costs but such a tactic is often instantly passed on to consumers to be competitive.
Minimising cost is a state that airlines constantly finds themselves in.
That leaves airlines with two options: fill your planes and make more money per passenger.
The first one can be expensive as it requires extensive sales efforts and/or lowered fares which increases the break-even load factor and that is a risk to any airline.
If an airline can be more competitive with normal sales activities/channels, then it would need to be more dynamic with fares and even be able to have targeted/personalised fares.
To do this, they need better control and freedom with their own distribution - "content becomes the new currency".
What’s included when buying an airline ticket has also become more and more complex to understand, that’s the other perspective of being competitive – to show customers that even if they don’t have the lowest fare, an airline might have the best product as some services are free but are sold as ancillary services with a competitor.
Which nicely links us to the third way: make more money on every passenger – unbundle the product and sell services with high margin while the fare remains competitive.
But it is not an either-or question - it’s about being able to do both dependant on market, reseller, customer etc. - again being dynamic.
Old legacy systems were built to display fares, not the bundled or the unbundled product.
So, having an API can give airlines better access to technology providers acting as "value creating hubs" (VCHs) – these can take your products and services to the market in a fashion that the consumer understands and expects.
This is where the so-called New Distribution Capability (NDC) comes in, the programme initiated by IATA to create a standard in the way the different industry players communicate with each other (at a system level).
NDC is a great initiative, but don’t let the three-letter abbreviation blind you, it is just a standard to enable a more dynamic and customer-centric distribution, to be competitive and to get back in the game of e-commerce, that is what these two carriers are trying to achieve.
Finding new markets through distribution freedom
On another note, having an API available will also open a new market for airlines. In areas where the old legacy systems are lacking some functionality, predominantly in the leisure market and especially when it comes to dynamic packaging, there is a market that not all airlines reach.
This market is far bigger than many think and to be able to reach it an API to an independent fare aggregators or VCHs are a pre-requisite.
Of course, an airline can propose to resellers to use its API but there will be a lot of APIs to connect to and even if NDC-compliant, there will be a lot of work on the reseller side, not just in formats but fare structure, ancillary services etc.
If an airline wants to connect to a market where an airline's traction is not that big, fare aggregators or the VCHs are the quickest, and potentially only road to take, as being available in the same API as carriers with more or a lot of traction in that market is important.
We see a lot of APIs in the market, but challenging the commercial model – enabling resellers to make money on providing a value to your passengers and help finding new markets, customers and revenues to you as an airline seems so much healthier than making money from a technical provider trying to buy market-share in distribution.
This is what these two airlines are doing – manoeuvring to find distribution freedom and challenging a model that has been in place for more than 30 years making airlines fall behind in the development of merchandising and meeting customer expectations.
Exciting times ahead – good luck, Lufthansa Group and British Airways/Iberia.
NB: This is an analysis by Joacim Berntsson, strategic business development manager at Paxport.
NB2: Airline distribution coffee image via BigStock.