Jens Bischof, chief commercial officer at Lufthansa Group, did a webinar today with American travel managers in which he repeated the German airline's commitment to its controversial Euro 16 Distribution Cost Charge (DCC) for tickets booked through global distribution systems (GDSs) and other third-parties.
He spoke on a webinar moderated by Greeley Koch, executive director of the Association of Corporate Travel Executives (ACTE).
The upshot is that Bischof says the DCC has been successful in triggering debate and getting technological partners to plan with it to implement alternative distribution solutions, which the company will be announcing soon.
Lufthansa is also preparing a pilot project in a few weeks with IATA's New Distribution Capability, and will share details on that soon.
The COO also dismissed Tnooz's report of a market share dip in early September, focusing instead on the company's overall revenue -- which he says is in line with forecasts and will be reported with the upcoming quarterly results on 29 October.
Why is Lufthansa doing this?
"I know it has been a very intense discussion. In the last months, not just for our sales force, but also for our joint venture partners United and Air Canada. We have been in a lot of talks with many corporate travel executives to explain the strategy.
"The DCC is only one initial piece in our strategy.... This is not about a fee, but about changing the distribution landscape and our technology-driven sales strategy.
"We're very aware that our new distribution strategy is disruptive... But we simply feel now is the right time to trigger this change.
"New technology, and new customer demands and behavior, require us to go this way. As examples of customer behavior change, we see many a significant amount of corporate customers shifting share to low-cost carriers, whose tickets are already booked outside of the GDS environment. So corporate customers already have a taste for this.
"We feel that competition by a broader choice of distribution alternatives is the best way to trigger this change.
"New technology providers will allow the airlines to offer formerly unseen content, like new services, ancillaries, fare bundles, etc., in a modern, innovative, faster and more cost-effective way than in comparison to the current global distribution system (GDS) technology.
"And these are advantages we want to pass on to our customers."
Yes, but what about the Euro 16 fee? Agencies who want to avoid the charge have to book directly through the airline's group agent portal or use code-share partners, where available.
"To go down this promising and innovative path, we've regained our distribution freedom and ability to make use of new opportunities outside of the GDS world.
"Unfortunately, this freedom does not come without a price.
"Removing the so-called full-content clause from our GDS contracts resulted in significantly higher costs.
"Naturally, the GDSs offer many benefits to both travel management companies and corporate customers.
"In the past, we spread all the distribution costs over all the sales channels. As a result, all customers were burdened with these GDS costs regardless of what channel they used.
"So in order to achieve a fair allocation of these costs, we've decided to differentiate. One, for those customers who need the service options of the GDSs, we apply the corresponding costs for that service and channel. Two, for those customers who do not require these services will consequently not be charged it.
"The DCC is a way to allocate costs fairly and to create an incentive for agencies, travel managers, and technology companies to seek direct connections with the Lufthansa Group.
"This is in line with our overall sales strategy, that customers should only pay for those services they want to use, as our new fare bundles for intra-European flights do since this summer."
Is it fair to the industry to start charging the fee before technological alternatives are fully available? And why can't Lufthansa just cover this as a cost of doing business?
"As you can imagine, we have explored many alternatives. Another option would be just to increase the fares by 16 euro across our business.
"But we wanted to establish transparency and create an incentive for change.
"Technologies won't unfold and appear unless there's an incentive in the marketplace for them to be adopted as channels."
It's not being rolled out in some countries, so there is some confusion among buyers. Why did you time this now?
"It's absolutely correct that the DCC cannot be collected in all markets due to a lack of regulatory approval. We are aware of that, and these few exceptions do not hinder us to work on the strategy globally.
"We definitely are not doing a rollback.
"The timing is because our GDS contracts were up for renewal right now."
When will we see these technological alternatives that supports the travel management company (TMC) model? What's their status?
"We've triggered an important discussion about the future of distribution. In the past four months alone, this topic has gotten more attention by the entire distribution chain -- suppliers, agencies, GDSs, and corporate buyers -- than in the past five years.
"We have invested a lot in direct-connect solutions. We're in very advanced talks with a number of technology providers in order to implement direct connect solutions. I guess I will be able to make announcements on this very shortly."
"There was no off-the-shelf solution available."
"We've also in talks with TMCs and invited them to work on solutions. We expect to achieve results in the next few months."
Corporate discounts aren't loaded into the Lufthansa portal. So how can agents book if the discounts that have been agreed upon aren't loaded?
"There are still some misunderstanding about what's available to our contracted corporate customers. In fact, we are able to make a corporate customer's negotiated fares and discounts available by the so-called closed user groups -- on the agency platform and on Lufthansa.com.
"And of course these are only available to the business travelers and the TMCS managing those client's travels."
When will Lufthansa be able to connect to IATA's New Distribution Capability?
"Well I do believe the NDC is an initiative that will significantly improve the quality of communication between airlines and the distribution partners.
"The introduction of a consistent data standard, which the NDC is, will overcome some of the limitations in distribution.
"An example in this regard is in the area of product differentiation, access to enriched content, and transparent shopping experience for the company.
"We will start an NDC pilot by the end of this year. But NDC is only a data standard. It does not solve the distribution issues in the field of cost efficiency and innovation. NDC is a great match to our strategy."
But doesn't booking direct remove the comparison shopping benefit of using a TMC?
"It's not our main target to shift business to our own booking channels. That's why we're working on the previously mentioned direct connect solutions to provide alternatives to our customers."
Can agents avoid YR surcharge by issuing tickets on other airlines that are code-sharing joint-venture partners?
"The answer is a clear yes. It's possible, and does not counteract our strategy, from my point of view. In some cases, agents issue tickets on code-share flights and issue tickets on the other airline stock.
"At this very early stage, I can see this is an option used, especially in the US.
"I would say it's a little early to evaluate the development. But it's a clear option and a clear yes."
Some industry players thought that if Lufthansa sees a drop in market share, you would rethink. There's been a lot in the press about the loss of market share Lufthansa had at the beginning of September [namely, the Tnooz exclusive report].
"I would say there has been unofficial sales figures by a single GDS published in the media and from my point of view, quite frankly, it's highly unprofessional to project them to describe the overall booking situation of the whole Lufthansa Group.
"Currently we see no significant change on the overall booking situation within the Lufthansa Group and we are in line with the statements and forecasts given regarding the booking figures.
"As you know, the first weeks of September were heavily influenced by a pilot strike action. That of course always hits our booking numbers as well.
"At this point, it's very early to say if there's any significant change. But we certainly will give the public detailed and reliable sales figures with our regular financial reporting, which is coming up shortly.
"I can only say that our guidance and forecast for our financial results for the Lufthansa Group remains stable at this time."
If there was a certain percentage drop in revenue, would that cause you to reconsider the DCC?
"The Lufthansa Group has made a strategic decision. The DCC is one component of that strategy, next to the new bundled fares in Europe and building sustainable relationships with our travel partners and corporate customers.
"We've spoken to many corporate customers. I think we're on a good track."
Do you expect other airlines and alliances to copy you?
"I cannot speculate on this. Lufthansa Group took our own decision. What other airlines will do will depend on their strategies, the status of their GDS contracts, and other factors.
"Already today the trend in the airline industry is not to focus solely on the GDS distribution channel as the only option. Low-cost carriers have a direct sales channel for offering their best prices, for instance, while other airlines differentiate in price levels."
"Lufthansa Group is proud to be in the forefront of new cost-effective solutions in airline distribution."
What lessons has Lufthansa learned from the DCC saga?
"We've received a lot of criticism from our travel partners and our corporate customers, who were extremely disappointed that we did not engage with them before making this strategic decision.
"Would we have liked to do it in a different fashion? Absolutely, yes.
"As we take these concerns, do we think that an earlier announcement would have reduced the criticism?
"No. From my point of view a clear no, there is no perfect timing for a disruptive move like this.
"Due to the confidentiality requirements of doing GDS negotiations, Lufthansa Group was not able to communicate at an earlier stage, even with our top customers.
"Communication was only possible once we entered into new GDS contracts.
"So the path has been very intense so far."
"We're aware that our decision has shaken up the value chain. It will have an impact on procurement processes, IT infrastructure and travel programs. We're aware that it requires change."
"But as I outlined before, we are convinced we're fueling innovation, let us offer new services, and put customer needs in focus. Would we do it again? Absolutely yes.
THE BACKSTORY:
Lufthansa takes GDS booking tumble with new surcharge, rival carriers benefit
Lufthansa blames GDS booking volume drop mostly on pilot strike
LUFTHANSA'S VIEW: The travel industry must accept freedom in distribution
AN OPPOSING VIEW: Has Lufthansa gone mad? Penalising customers is the wrong way
BROADER CONTEXT: Lufthansa and the GDS surcharge – risky or inspired?
Unbundling its airfares, Lufthansa goads IAG and Air France-KLM
Lufthansa debuts direct corporate booking, first via Concur