Dear DG for competition in Brussels, lend us your ears!

Tom Bacon pens an open letter to the European Commission in Brussels to help with the investigation into allegedly anti-competitive and collusive airline practices

Dear Directorate-General for Competition 
European Commission, Brussels

An Open Letter

It was reported in March that your division began an investigation of certain practices in airline distribution.  A potential concern was raised of anti-competitive or collusive activity. In an effort to help you with your work, let me frame some of the distribution challenges that airlines face. Specifically, I first want to discuss Lufthansa’s new booking fee before tackling IATA’s ‘New Distribution Capability’.

LH Booking Fee

Lufthansa introduced a new higher fee for customers booking through GDSs (Global Distribution System), the computer system underlying traditional travel agencies and online travel agencies.  Lufthansa argues that this new fee is necessary because their cost of distribution is so much higher through such channels - due to the booking fees the GDS’s impose on their airline partners.  Although this is the first such fee assessed by an airline, airlines have repeatedly attempted to mitigate the high cost of GDSs. A point to note:

  • GDS-based distribution channels typically account for over 50% of all airline bookings so most carriers feel they need to be present in these channels even if they, like Lufthansa, consider this a very high cost distribution channel.  These channels include most business travellers, who  tend to utilise corporate travel agents, and price sensitive travellers, who compare fares across all carriers on online travel agencies.

Many carriers, besides Lufthansa, have sought greater ‘direct’ distribution to avoid the GDS fee. From a legal standpoint, in the US a few years ago, American Airlines and USAirways each sued SABRE, a leading GDS, for anti-competitive practices. Although American subsequently withdrew the suit, USAirways (which, in 2014 merged with American) announced late last year that they would continue to pursue the case.  The US carriers identified a few of what they believed to be anti-competitive practices by GDSs, including, for example, ‘full content agreements’.  These agreements require that, for an airline to participate in a GDS, the airline must offer the same fares through the GDS as it offers on its own direct channels.  Some airlines would prefer to offer their customers lower fares if those customers book through direct channels – reflecting the lower distribution cost – but the GDS contracts generally prohibit offering fares through direct channels that are not available in the GDS. 

  • Lufthansa alleges that they are abiding by the contract by offering the same fares in all channels and that the new passenger fee is not explicitly prohibited.

IATA New Distribution Capability

Currently, airline distribution through third parties, including the GDS channels noted above, has limited access to new airline ancillary fees (bag fees, change fees, fees for ‘big seats’ or onboard meals). This translates into both more limited price transparency for customers and less revenue opportunities for the airlines.  IATA, an organisation comprised of airlines across the globe, has developed a new XML-based standard for use by airlines and GDSs in making ancillary fees more accessible via third-party channels; this is being tested by multiple airlines. A couple of points to note:

  • GDS’s have historically provided tremendous price transparency for customers – the lowest fare is highlighted for customers based on the search criteria he selects.  All airline options can easily be compared based on flight times and price. This unique price transparency has contributed to the commoditisation of travel – competing primarily on price and therefore driving the industry to focus more on costs than on customer service.

  • With the growth of ancillary fees, including bag fee and others, customers need to be able to compare the relevant fees alongside the fares, something that isn’t always available based on current GDS technology. Thus, via GDS’s, full price transparency has deteriorated, something the new NDC was designed to fix. For example, Spirit Airlines is a leader in ancillary in the US and participates in many online travel agency sites.  Spirit often offers lower base fares than other carriers but makes up for it with additional service fees, including a fee for carry-on bags.  The base fare – what would be shown on most third party sites – represents, on average, only 55% of what the customer pays in total.

The reduced ability to sell ancillary through third-party channels compounds the distribution cost issue for airlines relying on third-party channels: through agencies, the airlines see both higher channel cost and lower total revenue. Airlines have even more incentive to drive passengers to book direct.

Airlines trying to address a channel profitability problem

Airlines want more customers to book directly on their websites, not through third-party sites. This is due to both higher channel costs through GDSs and, currently, less ability to communicate and sell new ancillary services.  However, due to GDS contracts, airlines have had limited ability to incent customers to come to their websites.  Lufthansa is combating that with a new fee.  On the other hand, IATA is facilitating new ancillary revenue streams through third party sites, an initiative that could lessen airlines’ concerns about third party booking.  Both initiatives are ways to address a problem airlines have with third party distribution channels.

The actions the airlines are taking, both the LH booking fee initiative and the industry-wide NDC initiative, are logical responses to an existing distribution challenge. Although neither initiative is guaranteed to successfully address the problem – most of such change-oriented initiatives involve risk and require multi-faceted implementation plans – neither is representative of anti-competitive or collusive behavior.

Sincerely,

Tom Bacon

Former Airline Commercial Executive and 
Current Consultant to the Travel Industry

 

Regular EyeforTravel columnist Tom Bacon is 25-year airline veteran and industry consultant in revenue optimisation. His views are his own. Questions? Email Tom at or visit his website

Related Reads

comments powered by Disqus