The travel industry must accept freedom in distribution

If you go out to buy a new car the dealer will tell you the cost for the basic vehicle.

Then they let you select the extras, such as sat-nav and sunroof, so you only pay for exactly what you want.

It is now time for the travel industry to provide the same choices and this is why Lufthansa is introducing its Distribution Cost Charge.

NB: This is an opinion by Christian Schindler, regional director in the UK, Ireland and Iceland for Lufthansa.

In parallel to announcing the DCC, we had numerous talks with our partners and I accept that there is still need for discussion.

There has been a wide variety of reaction worldwide, from consent and approval to criticism and outright refusal.

So it is important to stress that we want to move together with our distribution partners, not against them.

Travel agents are and will continue to be an important pillar in our channel mix. Two thirds of our tickets are sold through this channel.

We would be foolish to put this at risk so will jointly find new ways of collaboration.

We don’t want to demonize the GDSs either.

They offer a worldwide infrastructure and established sales channels but, right now they are too expensive for us and not up to date in terms of displaying our products.

Reactions from the market

We knew our announcement would not be very popular. But what we are aiming for is freedom in distribution.

We must work with all partners to establish free markets with many participants without limiting conditions such as “full content”.

This will allow us to develop a more balanced ratio between price and service. If a customer requests a service they should expect to pay for it within a source-based environment.

In recent years this environment has become out of balance. Customers who want to use a more expensive distribution channel will have to accept this higher cost – and they will see added value in this channel.

Our belief is that in the future airline distribution will be doable at lower cost in general.

Customers, travel agents and distribution partners can all benefit from such a development.

The only losers will be those who insist on stagnation and sticking to the status quo.

lufthansa 747

The Lufthansa Group carriers are going this way alone in the first place, because we are totally convinced about the benefits of more modern, liberal and efficient market structures.

The market is ready for change, for timely distribution formats and more contemporary forms of displaying content – and all this, at a lower cost!

We must respond to the call for change and much more transparency in the market through digitalization and mobility.

Consequently, we have to invest in innovative ideas and possibilities to differentiate and offer customers the individual offerings and personalised products they desire. To do this we need control over our distribution.

Comparisons with other industries

There are numerous examples of industries which are miles ahead of ours in the digital space (such as eBay, Apple and Amazon).

It is crucial that our customer is given a choice of how to buy our products, with the information to enable him or her to decide which channel is the most suitable for their purpose.

Our job is to ensure that the costs are attributed according to the way of booking a ticket.

Of course, you can include or exclude marketing costs and other efforts here and there but our calculations are trustable, conservative and accountable.

The numbers simply show the magnitude of the matter.

We pay a three-digit million Euro amount every year! It doesn’t have to be this way.

There is a range in the distribution cost and our goal is to bring the GDS cost on to the same level as those of our direct channels.

Travel agents will always have the opportunity to avoid the DCC by using our LHGroup-Agent portal.

They do this already for LCC and other services outside of the GDS system. Of course this move requires change and this could lead to a “rocky road”.

But we understand their concerns and are convinced that there are more opportunities than threats.

Transparency and comparison of competitors is not a monopoly of the GDS systems but also possible on other, more modern IT systems.

We do not deny that this requires adaption and change, but the GDS systems are well capable of adjusting to the changing environment and new technological developments

By working together the result will be future development that brings benefit to our customers!

NB: This is an opinion by Christian Schindler, regional director in the UK, Ireland and Iceland for Lufthansa.

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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. Chris Dane

    Mr. Schindler’s analogy of using a car dealership for the LH “price penalty” of using a GDS is equivalent to putting lipstick on a pig and goes to the heart of how little airlines like LH know about their business. The reality is I can go to any car dealership that sells the brand I am interested and pay the same price regardless of options I order and not have to pay a “price penalty” to use one particular dealer because the market will not allow this to happen. Time will tell if the market will allow LH to get away with this move when car dealerships cannot! Moreover, the 16 Euros price does not reflect the GDS cost and is a defacto price increase. LH would be better served to telling like it is…or just say nothing, rather than trying to justify an unjustifiable move

     
  2. AB

    Let me take some steps backward and I am able to add more juice.
    A helicopter view.
    Back in the days, Airlines had a task to plant their systems with agents and so they grouped together and formed GDS. Then GDS became big, airlines had difficulties making profits with high oil prices etc and thought best to sell their GDS shares. GDS became bigger.
    Come WWW – lives changed and airlines found a new direct way to distribute. GDS smelt a rat !
    GDS strategically invested into PSS and got airlines hosted onto them promising better distribution means and rates. Some airlines fell for this option.
    Now airlines are in a catch22 …!
    A few wise ones decided to control their own destiny and not get hosted. Some may agree and other may not but the current times reflect that their decisions were wise, indeed.
    End game is clearer. There are distribution costs that the airlines do not want to bare and these will be transferred to the consumer. Could be the DCC or GDS seg fee or servicing at contact centre or others.
    Airlines are well aware that diret distribution comes at a cost too …. let us not forget.

     
    • Timothy O'Neil-Dunne

      AB – a good perspective. However I think you need to fill in some of the steps.

      Let us start with the economic motivation. Airlines are not in a catch 22 because the majority of airlines are now in a strong position because of the governments permitted mergers. One could say that the governments were less than smart in that they have created monopolies or neo-monopolies in so many cases. In days gone by – the amount of surplus capacity was such that any bum on any seat was good. Now the airlines want to discriminate and acquire higher and higher yielding passengers. As such distribution costs should not really matter. BUT the fat GDS profits and the lack of control irks the airlines. After all isnt it their money?

      Actually i will answer my own question. The issue is more about the control. It still strikes me as being illogical that a commercial enterprise has to distribute its product down channels and at prices that it cannot control. That means that unilateral pricing is supposed to be good. Well frankly that is hogwash. There is a very large dirty secret. Agents (on and offline) are charging prices already that are not transparent and are not necessarily legit. Many intermediaries are marking up published prices.

      i find it ironic that the very people who want price fixing abolished and an end to MSRP are the people telling the airlines they should be in a GDS and charging the same price. No one has a god given right to a price or a right to sell. That has to be at the behest of the product owner.

      There is no such thing as a free lunch but passing on the cost of distribution to the user is a perfectly legit technique. Many airlines already do this particularly LCC or former LCC carriers. Cheers

       
      • Anil Varghese

        ” … No one has a god given right to a price or a right to sell. That has to be at the behest of the product owner.”

        +1 on this!

         
      • Murray Harrold

        Oh! And airline prices are transparent??? Do me a favour. What’s “transparent” about YQ and YR?? agents are transparent, thank you. We only charge what the fare is… And our fee, which we are upfront about. Only the other day : Fare about gbp300 taxes and charges gbp400…. (LON to NKC) Suggesting we charge prices that are not legit is a tad churlish.

         
    • Murray Harrold

      Not quite. BA had Babs which begat Travicom Which begat GAL which agents started to use. AA begat Sabre and LH had, if memory serves, Amadeus. the GDS … In desperation for money, without solving the real issues (eg overpaid pilots, over unionised staff) the GDS systems were sold off (and the reason buried under some officialdom) . the GDS was an exceptionally clever bit of kit that can move anyone from anywhere on the planet to anywhere else on the planet quickly, efficiently and securely. What really irritates techies, is that have not been able to improve on the GDS. Airlines, meanwhile, pi**ed the money from the sales up t he wall. So, take away commission… They somethinged that money up the wall as well. Please do not drag us agents into this. We have changed and adapted…. And thrived. Airlines are incapable of seeing that. They also appear incapable of changing the things that matter. Until they do change – really change – they will be whistling in the wind and listening to the wrong people … The ones promising that they have discovered the holy grail of distribution.

       
  3. Daniele Beccari (@danbec)

    Funnny.
    On the left we have the hotel ecosystem in rage on rate parity, rate parity is the devil. “Hotels must be able to offer different (lower) direct rates, in the name of the consumer”.
    On the right we have the air ecosystem, with de facto rate parity, and as soon as one supplier introduce different pricing, channel pricing is the devil. “Airlines must offer the same fares to everyone, in the name of the consumer”.

     
  4. John Warner

    It’s good to see a Lufthansa directors defending the change they’ve proposed. Change always scares people and organizations that are comfortable. It’s natural that some travel agencies, etc., would be worried about adapting. Looking-back just a decade or so, the air transport, hotel, car rental, etc., industries have already adapted to the change brought-on by OTAs and global vendors like Hahn Air. LH appears to be looking-forward to the tsunami of change that is coming (I.e. already in China, South Korea, Taiwan…) with mobile search. Instead of consumers searching 50X or 100X for lowest fares, they’ll soon be searching 500X while they commute to work, etc., on their mobile devices. LH and other companies will need to ‘contain’ the growth of these expensive ‘search’ transactions…because there’s a cost to this growth. To handle the 5-10X growth of transactions in the expected split-second response times, an organization will need additional routers and servers and other expensive hardware. If annual growth in transactions leads to higher Look-to-Book (L2B) ratios, but not higher bookings, it’s wise to entice consumers to book (and ticket) at their lowest-cost site(s). Why can’t travel agencies use the airline’s agency site? They’ve been doing that for decades with airlines like WN. (WN is the 4th largest airline in the U.S. and consistently the most-profitable airline in the U.S. for more than 30 years.)

     
    • Murray Harrold

      More clueless rubbish. WN (aka Soutwest) may be big – but it is still a limited low cost outfit. An overblown RyanAir if you like. We agents are not frightened of change ( after commission went, agents changed a lot – which is more than can be said for the unionised labour,overblown management and overpaid pilots of airlines) but we are frightened of some of the types trying to change things.
      Let us remember, before we say the GDS systems are expensive and what not…. It is the pricelines of this world that can throw more money at marketing than some airlines have turnover. BUT from what you say you clearly have little knowledge of how travl works. Suggest you spend time in an agency understanding the basics, before commentating.

       
      • John Warner

        Mr Harrold, 44K “tweets” is impressive; clearly you like to share your opinion. WN boards more than 125 million customers a year. They serve many of the ‘key’ business routes (DAL-LGA, DAL-DCA, DAL-MDW, SFO-LAX, etc.) in the U.S. While WN “invented” the LCC category more than 30 years ago, today their customer base is well-beyond that of the leisure base of airlines like FR or U2. In comparison, LH shrunk again last year — and only boarded about 50m passengers. (T2RL passenger data) Clearly LH (and the other airlines in that group) need to do something in a “new” way to reduce costs and stop the annual contractions. (Few people on this site are amateurs.)

         
        • Murray Harrold

          Southwest does not interline. It is basic point to point stuff. I acknowledge their size and efficiency but in GLOBAL terms of moving about the globe, they are irrelevant – which is why they can simply use a web based sales format.

           
  5. Marc

    “There are numerous examples of industries which are miles ahead of ours in the digital space (such as eBay, Apple and Amazon)”
    This comparison is really funny when you know that Apple takes 30% of product price. GDS are actually very cheap in comparison 🙂

     
  6. Riaan van Schoor

    Hi Christian, quite brave of you to write here and I’m sure get a barrage of replies and comments, no doubt.

    Lufthansa is saying the GDS distribution channel is expensive. Have you spend much time with agents to understand why it is so expensive? e.g. how about agents (and not to mention their corporate clients) using a GDS effectively to ensure they book, ticket and crucially upsell your ancillary content in a timely, effective way.

    We see plenty of wastage, unsold opportunities and ignorance of customer historical sales data in the GDS which must contribute to your costs. By helping our customers understand those, and bringing their GDS wastage down, they could potentially demonstrate to the key suppliers like you they are an even more viable distribution channel. Corporates also need to learn that constant changes and cancellations, or leaving bookings un-ticketed is a luxury that is costing you the supplier dearly, I’m sure. So whilst I’m not surprised with your move, I am surprised you’re not digging deeper into wastage and especially ancillary sales (especially where the agent really knows the customer).

    We think an agent in control of their GDS and customer data can be a fantastic sales channel for you, much better than what you’ll be able to achieve on your own.

    Riaan
    agentivity.com – build a better agency

     
  7. murray harrold

    Cobblers. For a start, I am not buying a car (where, incidentally, one can bargain) one is buying an 400mph bus ticket from A to B and maybe more. And if I was buying a car, in case LH had not noticed, the seats, engine, gearbox, boot and bonnet are usually included in the price (unless you are buying, say, a Morgan of course). To suggest there is any analogy is banal. For such an analogy to exist, you would need to say “If you buy from dealer A, then you have to pay 10% more than buying from dealer B”.

    Further (and has been mentioned already) travel is a lot more (especially for agents) than A to B. Very often C, D and E are involved as well. Different airlines with differing amounts of mucking about before and during the journey. Clearly, the Regional Director of LH joins many of those airline Exec’s who have only a tenuous grasp on the reality of how travel works.
    As to John Doe’s comments … he must be a techy. Techy’s grasp of “how travel works” is manifestly even less than that of the aforementioned Regional Director.

     
    • Kevin May

      Kevin May

      @murray – “John Doe” is not a techie, actually… The IP address might disappoint you.

       
  8. Timothy O'Neil-Dunne

    One thing is for certain. LH was quite brave in doing this. Sadly the contract of which Christian Schindler speaks are very opaque – even to the people who sign them!

    Are they as restrictive as LH is making out. Having seen, negotiated around (and in former times also written) some of these over the years. I can assure you that these contracts are highly restrictive. Most other industries would say they are in restraint of trade in their overreaching clauses. I would like to see the industry move to a performance based metric rather than a contractual one. For example bringing standard QoS (Quality of Service) metrics to the relationship. There are many challenges and a lot of hot air being expended on this topic.

    What we should do is to understand what this means. Is this a new open era in distribution driven by LH’s desire for innovation as Herr Schindler so states. Or is this yet another attempt to break the Gordian knot which is really founded by a need for lowering the cost of the GDS segment fee.

    I believe that if the outcome is as happened with the OP fares about 5 years ago. Then this was a lot of noise. I think it would dampen the opportunities for the GDS and airlines ever to be successful in re-invigorating their relationships.

    You be the judge

    Cheers

     
  9. Lilian Tomita

    “Travel agents will always have the opportunity to avoid the DCC by using our LHGroup-Agent portal” – oh yeah. Imagine an agent having direct access to all the airlines.

    The right type of Distribution has played a significant, if not the main, role since the invention of commerce. Two thirds of your tickets are sold through travel agents and all of them will be affected by this change. Not in a positive way.

     
  10. John Doe

    Although I think Christians story contains a lot of marketing talk, the underlaying message is clear: GDSs are too expensive and have way to much control over the profitablility of ticket sales. I can understand that airlines are tired of paying for everything in the online world, both OTAs and GDSs, while they also have all the risks.

    GDSs have none of the risks that airlines have, yet make the most profits and no airline CEO have ever made as much as the GDS CEOs

     
    • Timothy O'Neil-Dunne

      Clearly you haven’t looked at a certain man who owns part of a football club in the UK who also happens to own an airline or two. And then of course there is RB. #Justsaying

       
      • John Doe's little brother

        Didn’t RB once say: If you want to be a Millionaire, start with a billion dollars and launch a new airline.

         
  11. MIchel La Bianca

    Hi, I don’t know Mr Schindler, but obviously he is not very knowledgeable of travel industry systems. It is not just about a booking, it is about changes, cancellations, seats, rebookings , ticketing, etc. etc. . I could go on forever here. But let’s cut it down to a relevant and actual example: Low Cost Carriers generally don’t go on strike and you generally can expect them to fly as booked. LH is under continuous strike mode and how do they then want to inform a booker (aka travel agent) of a strike impacting his/her booking on that famous portal? and what then? yet another passive segment rebooking in a GDS?
    This is ONE of the big advantages of a GDS, it consolidates all components of a reservation from booking to getting the traveler back home in one platform.
    I am not per se against the plan for an additional fee, it will just make LH products more expensive compared to their competitors, but I would expect from the Lufthansa Group and more active role in thinking for the travel agency community to get that process somehow integrated in the place where still the majority of the bookings (online and offline) happen, and that is into a GDS platform.
    Michel

     
  12. John Wardall

    Since when do you buy a car from the manufacturer instead of a retail dealer?

     
    • John Warner

      Tesla is one example where cars are sold directly from the manufacturer. I can ‘order’ the exact model of Ford (engine, options…) on-line, then arrange pick-up at a local dealer. For decades Americans have ordered European delivery of Mercedes-Benz, BMW, Audi, Volvo, etc., then shipped their “used” cards (with lower taxes) back to the U.S.

       
  13. Martin Cowley

    The freedom already exists- to book away from companies that do not understand or appreciate their partners businesses and choose not to reward them fairly. I’m still waiting to see how this ‘new freedom’ will play out. Once you strip away the rhetoric and crusty old platitudes there really isn’t much there.

     
 
 

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