Guest columnist Tom Bacon considers the pros and cons of Lufthansa’s recent decision to impose a charge on those booking via GDS

Of course, pricing based on cost differences is a no-brainer. Why, in general, should you subsidise those customers who cost you more at the expense of customers who are cheaper to serve? That’s the rationale for bag fees, change fees and onboard meals.

However, in travel distribution, it is normal for airlines to charge all customers the same independent of the cost of the channel they use. This makes it easier for customers – they can use whatever channel is most convenient without worrying too much that they may be paying more.

In contrast to this historic policy, Lufthansa recently announced an attempt to build cost differences in the pricing by channel. They said they would pass on the GDS cost to travellers who book through travel agents and OTA’s.

An old reference point

Let’s look at some history here. In the 90s, airlines moved away from paying commissions to travel agents; airlines had been absorbing the cost of commissions (10% of the ticket or more) rather than passing it onto travellers in a fee or surcharge. Agent distribution was 80% prior to this change so the cost savings of not paying commissions was huge. There were multiple ramifications of the change:

• Consolidation of travel agents.  Many smaller agencies disappeared or were acquired by larger firms
   
• New agency fees. Users of agencies came to expect a service fee paid by travellers for arranging travel. Airlines had no role in setting or collecting the new service fees
   
• Lower reliance on agencies for travel distribution. Today, the percentage of airline revenue sold by legacy carriers via traditional agencies is less than 40%. Online agencies have, of course, replaced much traditional agency distribution but even combined, traditional and online, agencies represent approximately 60% of total distribution for traditional/national airlines
   
• GDS pass-through. A portion of the booking fees, paid by airlines to the GDS, can, in fact, end up getting passed through to larger travel agencies as an incentive for using their GDS

Is Lufthansa’s move, one that comes decades after the elimination of commissions, similarly strategic? And will it work this time around?

I expect a number of carriers not to match this initiative; and the carriers that don’t will therefore offer lower costs for travellers booking through agencies

I expect a number of carriers not to match this initiative; and the carriers that don’t will therefore offer lower costs for travellers booking through agencies – which could unravel Lufthansa’s initiative. But, against all odds, what would happen if Lufthansa was fully successful in this initiative and most airlines followed suite? What would ‘success’ look like? I would expect that the fee increase would dramatically impact bookings through OTAs, or maybe half of all GDS bookings, but that the industry would ensure that most traditional agencies not feel much of the effect.

OTAs as a distribution channel

The least profitable is typically the OTA channel since OTA travellers tend to be seeking the lowest fare yet the distribution cost, including GDS fees, is among the highest. Here you would expect to see huge change:

• Fewer bookings, greater ‘billboard’. The ‘billboard’ effect, touted by OTAs, says that many travellers search on their sites but then use the airline-specific website to actually book; thus, in some cases, the OTA acts more like ‘billboard’ than a booking engines.  Lufthansa, apparently, doesn’t think the impact of this is significant enough to give the OTAs a break. Other airlines may have a different view. But if the billboard effect increases, OTA bookings will decline and they may no longer have an economical position
   
• More ‘meta’. ‘Meta’ would logically replace OTAs as the favoured channel by price sensitive travellers. ‘Metasearch companies, like Kayak, offer the same low fare comparison as OTAs but they direct passengers to the airline’s own websites for booking. This avoids the GDS cost of OTAs; they have negotiated a lower referral fee with airlines
   
• Increased merchandising opportunities. A huge benefit of moving travellers from OTA to airline direct booking is capitalising on new merchandising opportunities.  In fact, ‘ancillary’ revenue can easily exceed $20 per passenger – in fact, the lower perceived ancillary opportunity may be as large a reason for LH’s initiative as the GDS fees. Of course, the industry is working on improved merchandising on third party sites (IATA’s New Distribution Capability, for example).

Note that many airlines have tried to reduce dependence on OTAs for a long time. Most initiatives have failed, as airlines do, in fact, often need these price-sensitive passengers and can use capacity controls to match these passengers with otherwise empty seats.

Traditional agencies as a distribution channel

Ultimately, however, I would not expect most business travellers, oriented toward service-intensive traditional agencies, to see much change.

• Businesses still value the work of the travel agent. Despite the elimination of commissions and new online travel management, corporate travel remains very much focused on traditional agencies. If distribution through traditional agents has fallen to less than half of what it once was it may have little room to fall further
   
• Unlike OTAs, travellers who use traditional travel agents are among the most profitable for airlines. They pay among the highest average fares. Lufthansa cannot afford to lose its share of such corporate bookings. Although Lufthansa has announced that its corporate customers can continue to receive its negotiated rates through direct bookings, this is unlikely to placate all such customers – and other airlines may have more difficulty offering this work-around.
   
• Lufthansa’s special agreements with both its largest travel agencies and its largest corporations will likely be modified to reduce the impact of the new fee on these important customers.

Potentially, smaller businesses, unable to negotiate an offset, will modify their behaviour and adopt a direct relationship with Lufthansa in place of use of traditional agencies. Often, however, these smaller businesses also pay higher fares and enjoy healthy competition where multiple airlines aggressively seek their business.

What’s the aim?  

OTAs have been among the least profitable channels. Airlines have relied on them as a platform for fare comparison and selling seats in competitive markets. Although roughly half of GDS distribution is traditional agencies, Lufthansa’s initiative is more aimed at these OTAs. If Lufthansa is successful in getting the industry to move with it, expect success in moving travellers away from this less profitable channel primarily to metasearch engines. However, do not expect much effect on traditional agencies since the industry is likely to modify its deals to preserve higher fare business passengers.

Tom Bacon has 25 years experience in the airline industry and when not penning a column for EyeforTravel is an industry consultant in revenue optimisation. Email Tom or visit his website