British Airways, Lufthansa and a smell-the-coffee moment over distribution

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.

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Viewpoints

About the Writer :: Viewpoints

A founding principle of tnooz was a diversity of viewpoints from across the spectrum. Viewpoints are articles by guest contributors from around the travel and hospitality industries. The views expressed are those of the author. and do not necessarily reflect those of the author's employer, or tnooz and its partners.

 

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  1. Murray Harrold

    You may well be right. There are two issues, here: 1. Airlines fail to understand that I, as a coal-face travel agent, could not give a rancid road-killed rodent how I book flights – GDS, NDC driven or any other way. What I care about, is that whatever I am supposed to use works 110% of the time and has the full functionality of a GDS in terms of interline, MCT’s – the whole cherbang. If anything, at present (that’s “at present”) NDC tends to restrict me to one specific airline, which is worse than useless. Further, NDC inspired solutions seem (that’s “seem”) to think that point and click is a good idea and further, miss the point that I want the question that I want to ask, answered and not the question that any given system may *think* I want answered. GDS supplies raw information in a highly visible and straight forward way. It is also a matter of what is relevant. Certainly, in business travel, the best flight is the flight that gets my client where they need to be, when they need to be there – any other input is basically, irrelevant. Now, in absentia of NDC (and many travel techys, with respect) grasping how business travel works, simply slapping on charges is at best counter-productive. The charges have been added for one reason and one one reason alone – they can.

    Secondly, there is a communication issue. Travel tech is very good at communicating with, well, … travel tech and anyone else who is good at grade A marketing-rubbish-speak. I have looked at “Paxport” and it is a very good site and I am sure what Paxport offers could be of great value. Trouble is, having looked at it, I do not have the faintest clue as to what it and so, you, do for a living. Agents of all ages and size, from the humble chief cook and bottle washer (aka blue-screen jockey) to the great TMC’s are primarily travel folk, we understand travel and we understand booking travel. We know how to get from Paris to Addis or from Khartoum to New York, where we get lost, is when some very good travel tech stuff is couched in travel tech terms; we have no idea what half of it really can do and have no idea if we are talking $50 or $50,000. Remember who you are talking to. Travel Tech needs to design their (website) offerings in a format and language the travel industry (aka “your potential customers”) can understand, present your product and services in a language travel can understand and (given that travel agents of most ilks – save for a few) give travel a clue as to what sort of numbers are involved.

    This would, more as likely, improve uptake of new technology which can only benefit technology providers and product suppliers alike.

     
 
 

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