Lufthansa and the GDS surcharge - risky or inspired?

The big news of the past few weeks is that Lufthansa Group (LHG) has stuck two fingers up at the global distribution systems.

From September this year it plans to add a Euro 16 surcharge to any bookings made via the GDSs, covering both offline and online third party intermediaries.

NB: This is an analysis by Pamela Whitby, editor of EyeForTravel.

The German company also runs Austrian, Swiss and Brussels Airlines, as well as the mothership Lufthansa brand.

The move has been described as everything from "brave" and "interesting" to "harsh", "anti-competitive’, and "counter-intuitive".

Lufthansa Group's official announcement is clear: the aim is to claw back the ‘three-digit million euro’ amount which LHG claims the GDSs cost it each year as part of plans to "redirect its commercial strategy".

Reaction to the news from the travel trade has been largely negative, although as Kenny Jacobs, chief marketing officer for Ryanair, tells us in this exclusive executive interview, no news is bad news.

Travel agent bodies have threatened to boycott, and the possibility of legal action has been raised by the ECCTA (The European Travel Agents' and Tour Operators' Associations).

Unsurprisingly, Amadeus, Travelport and Sabre have criticised the move. Amadeus, which saw the biggest slump in its share price in five years following the announcement, says the move will annoy consumers and lead to fewer travellers flying Lufthansa.

Jitters in the financial markets weren’t unfounded.

As the news sank in, other airlines have come forward (and more are expected to follow) to say they are considering similar moves.

In Europe, Air France-KLM was one of the first, while the Times of India reported that the move had "caught the fancy of some Indian full service carriers" such as Air India and Jet Airways.

In fighting spirit, however, Amadeus, says it doesn’t buy the argument that Lufthansa’s direct channel costs the airline $2 per booking compared with $18 in the indirect channel.

It suggests that Lufthansa is not motivated by costs. Amadeus may have a point.

While there can be no doubt that cost containment is crucial for airlines, in a highly commoditised environment there is a growing view that the industry has become too obsessed with what goes on the spreadsheet at the expense of the customer experience.

While many may believe Lufthansa's move is risky, there is an argument to suggest that the airline has seen into the future and is acting on what it sees as a growing recognition of the need to join the dots for the increasingly connected traveller.

So let’s take a look at what could the rationale be behind Lufthansa’s thinking.

A push to drive more direct sales and ancillary revenues

Lufthansa wants to drive more traffic and it is already talking about upping the ante with merchandising.

At a recent conference in Thailand, Lufthansa’s online sales and mobile services chief Sebastian Riedle pointed out that "in times of declining yield, ancillary revenues represent the chance to strengthen profitability".

The argument goes that outdated GDS technologies have made it difficult for airlines to offer the kinds of merchandising, bundling of services and differentiated pricing that the airlines, not to mention travellers today, want.

And as the online travel landscape has become hyper-competitive – and flights and hotels more commoditised - brands have also recognised that in order to compete they need to carefully segment their audience, and then personalise accordingly.

For airlines, the technology to do this is not there yet.

In the closing debate on the future of distribution at EyeforTravel’s recent European Summit, David Rutnam, who runs the New Distribution Regional Implementation project at IATA, told the audience that airlines today still don’t know who the customer is until they get information on the booking.

However, this is expected to change with the arrival of IATA’s New Distribution Capability (NDC), an XML standard that will enable airlines to deliver rich, personalised content to the market and regain control of their offers without relying on third parties.

That’s something Lufthansa Group is already working on. In a statement the German company said it was "in the process of developing a new booking method to enable its 'sales partners' to connect to their IT systems directly based on IATA’s NDC standard".

One area where we could see Lufthansa sharpen its customer focus is in the arena of business travel. Last year three of its airlines - Swiss, Lufthansa and Austrian Airlines - received top scores at the Business Traveller Awards.

Today, frequent travellers are mostly business people. Many of these are Generation Y, the age-group railing against traditional travel management programmes in favour of an open booking approach.

They are also far more likely to download an app than the typical leisure traveller, who only travels 1.8 times a year.

Business travel is a vital revenue stream for Lufthansa. It is already encouraging corporate travellers to book their individually negotiated contract rates via www.LH.com, as this will exclude the €16 GDS surcharge.

Rebuilding brand loyalty and awareness in a data-driven mobile world

Without a strong brand, and with competition from other modes of transport such as high-speed rail, many airlines have simply become a commodity. And commodities, as we know all too well, are priced by the market and not the supplier; not a position any travel provider wants to be in.

Loyalty has been further eroded not only by the rise of mobile but also changing consumer behaviour.

But all is not lost. Lufthansa says that 50% of its passengers check-in via its mobile app, and the data gathered as a result supported their business case for developing its Apple Watch app. The app was first made available to members of its Miles or More loyalty scheme.

Expect to see more initiatives from Lufthansa to drive loyalty and app downloads. This could involve aggressive TV campaigns, social media competitions or perhaps even themed aircraft like Eva Air did with Hello Kitty - though perhaps not a pink kitten for a German carrier!

If Lufthansa can find ways to get more customers to download its app, it will have access to more data and, as a result, more opportunity for cross-selling directly throughout the travel supply chain – which is where it starts to get really interesting.

Joining the dots for the connected traveller

It’s possible that in what many would describe as a forward-thinking move, Lufthansa could be the first full service carrier to embark on vertical integrating with other travel suppliers.

In a report by IBM, Airlines 2020: Substitution and Commoditisation, a viable response is for airlines to coordinate more closely with other travel suppliers such as such as hotels, airports, and public transportation providers, with the aim of providing consumers with a more integrated travel experience.

Airlines, says IBM, could look to increase margins on “cross-mode, value-added services and will delight their customers by taking responsibility for their entire travel journey – not just the relatively limited time the traveller spends in an aircraft seat”.

Speaking at a recent EyeForTravel conference Ryanair and Heathrow airport said that until now they had not shared consumer insight for legal, technology and business culture reasons.

However, they went on to admit that the tech and legal issues were close to being solved. So when it comes down to it, it won’t be long before all that’s required is a shift in business culture in order to move towards more vertical integration across the travel supply chain.

For an industry where the key verticals have resisted sharing data at all costs, that will be a leap of faith.

Could Lufthansa be right: could the market be ready for it?