Skift anticipated that British Airways and Iberia would copy Lufthansa's pioneering move to push middlemen further out of the distribution chain. But the move is still eyebrow-raising because it defies two years of predictions by the distribution systems that Lufthansa's effort would fizzle out.
British Airways plans to add a surcharge on some tickets, a move that could help reset airline relationships with the powerful global distribution systems.
On Friday, International Consolidated Airlines Group (IAG), parent company of British Airways and Iberia, said that it will add a fee of £8 (about $10.63) per leg of a trip on tickets that are booked through the three largest middlemen for distributing tickets to travel agencies: Amadeus, Sabre, and Travelport.
Skift reported in March we expected a move like this from the airline group.
IAG’s new surcharge, which goes into effect November 1, follows a pioneering move by Lufthansa in September 2015, when the German flagship carrier was the first to risk the ire of travel agents and implement a surcharge of 16 euro (about $17.80) on bookings that weren’t direct. Northwest Airlines, which merged with Delta, tried something similar in 2004 but never went through with it because the backlash was too great.
The British Airways and Iberia decision comes during the same period that IAG is negotiating with Amadeus, one of the travel technology distribution platforms, over the renewal of its multi-year distribution contract. It isn’t clear then if the move is an IAG negotiating tactic or if the airline group would implement the fee in November.
The airline industry has been watching Lufthansa Group’s steady performance since summer 2015, when it launched a major investment and commercial effort in direct-booking connections with the corporations and travel agencies that buy high volumes of its tickets.
After Lufthansa added its fee on bookings through the global distribution systems, many industry watchers expected Lufthansa Group to lose market share by having made these tickets more expensive than competitors’ fares.
But in recent months Lufthansa Group has said that it has not seen an overall loss, thanks in part to its having signed up companies like Siemens to book tickets directly through the airline and to skip the fees charged by third-party distributors like Amadeus.
Amadeus estimates those surcharges to average about 2 percent to the cost of a ticket. and says that the fees airlines pay the distribution systems have been declining over the years.
By pushing direct connections to travel agencies, Lufthansa and now IAG are prompting many travel management companies), other travel companies, and aggregators to develop or secure “middleware” to bypass the established distribution systems for some processes.
For example, on Thursday giant travel management company HRG, a division of Hogg Robinson Group, said it was technically capable of integrating British Airways content without using the third-party platforms.
Concur, the travel and expense management giant, also said this week it can handle IAG fares directly.
IAG says it will launch a portal for the trade to buy tickets directly from it shortly, in a move similar to Lufthansa Group’s launch of a site for such purposes.
Now that direct connections are becoming available, they can be used by other airlines, too, such as Ukraine’s flag carrier, which in April became the only other airline to level a distribution surcharge.
Lufthansa’s move to add a surcharge led to Sabre, the U.S.-based middleman, to sue it in a Texas court. The case has been in a state of limbo.
IAG chief executive Willie Walsh was scathing about the airline distribution middlemen in his recent earnings call with investors.
He said the current arrangements among the carriers and the distributors must change. “We’re prepared to take some short-term pain to get some long-term structural change in that relationship,” he added.
There was early selling of stock in the three distribution companies on Friday, after IAG made its announcement.
According to a Credit Suisse investment analyst’s report from April, the issue is not so much whether companies like Amadeus can thrive as much as the impact to their stock prices as the distribution shifts may trim earnings expectations.
The Credit Suisse analysts forecast that each 1 percent change in distribution contribution means an approximately €13 million loss to Amadeus in pre-tax earnings.
The analysts expect IAG to look to shift at least 10 percent of volume out of the middlemen’s hands to justify its efforts. Less would not be worth the effort, given that the middlemen could retaliate by driving up the fees on the contracts for the other tickets that go through their third-party channels, plus the cost of investing in technical connections.
They also estimate that Lufthansa, Air France-KLM, and IAG cumulatively represent 15 percent of Amadeus’s distribution volume. So if Air France-KLM copies the move of its European peers, earnings may be disappointing.
Amadeus and its peers may take comfort that, so far, many of the bookings Lufthansa has shifted to direct connections have been “local” or “regional” bookings. That limits the potential damage because these tend to be cheaper tickets than ones on transoceanic trips.
Distribution fees aren’t the whole story
While IAG’s announcement kept things vague about the purpose of its effort, several factors are driving its move beyond the fees that middlemen charge on tickets they process.
Cost savings is not the primary focus: Most estimates agree that airlines can only hope to cut cents on the dollar out of these transactions. Witness how Lufthansa has seen the results of its effort to be a financial wash so far.
At issue, instead, is a sense of fairness and control. Airlines are idignant at the power of the three major middlemen, who have a lock on distributing at least half of all flights that agencies book worldwide.
Another issue is technological sophistication, which some airlines say the third-parties have not kept pace with. Witness the comments of United’s new president in February, when he expressed doubt that the third-party technology providers could keep pace with distributing new airline products, like economy class seats, effectively.
The airline industry has been facing deflationary pressure on its highest-priced tickets. By controlling its relationships with customers directly, it aims in the long-run to be able to stabilize pricing.
New technology solutions providers such as Farelogix have prompted airlines to want to copy other businesses and use new tools to do more direct-to-customer sales, which, in turn, provides useful data and analytics that can be used to improve the product, bolster pricing, and provide more personalized services.
Of all of these, maintaining pricing power with key corporate customers is a critical issue. Being able to maintain prices on high-end corporate tickets will become increasingly important as the large carriers lose business to upstarts like Ryanair.
About half of air travel in Europe may be done by low-cost carriers within six or seven years, according to forecasts.
Middlemen caught up short
In 2015, when Lufthansa announced its fee, the then-CEO of Sabre, Tom Klein, had scoffed. He predicted the effort would not be copied by others and would fail.
“This will turn out to be another proof point of the stability of the GDS industry,” he said, adding that It will take time to play out…”
Sabre said Friday in a statement that it found the news disappointing and that it will continue to seek an agreement “that delivers value and meets the revenue needs of the IAG airlines.”
Similarly, two years ago an Amadeus executive had said at a public forum that Lufthansa had lost the trust of travel agencies and that its move was doomed.
Amadeus was more sombre and conciliatory in an emailed statement Friday. “We do not think that a surcharge is in the best interest of travelers….We continue to be engaged with IAG to find a sustainable, long-term agreement that suits all parties,” the company said.
Earlier this month, Amadeus’s CEO Luis Maroto spoke with Skift about the threat of these potential shifts. Here’s an excerpt.
Skift: Can Amadeus successfully manage the shrinking of its distribution business in a profitable, stable way? A few investment analysts are wondering if the airlines’ push for direct connections will prompt a sharp drop, rather than a slow decline.
Maroto: I do not expect a sharp drop in the GDS [global distribution system].
Of course, you have a dramatic challenge. You have direct sales. You have many different new ways today of selling tickets. Fine.
Yes, the reality is that the GDS has been growing less than passenger traffic has grown, and therefore, it is shrinking as a business.
The fact is that the GDS is growing less than the traffic is because there are other ways of selling tickets that have been growing faster.
But those trend lines have been happening for many, many years. We’re not surprised. There will be alternative channels and, maybe alternative ways of selling.
But all of these things, like the “direct connects” that you mention, are not new. I mean, you know about how American Airlines, at one point in the U.S, tried to circumvent the GDS, in the mid-2000s.
Skift: Lufthansa has been creating direct connections with corporate travel agencies to avoid using companies like yours. There are rumors that other airline groups may try similar efforts.
Maroto: Is there going to be a general drop-off, like in the case of Lufthansa and the others, you ask?
With all due respect to the people that are representing those companies, I don’t think these developments are as significant as has been represented.
The GDS provides substantial value to airlines. It aggregates content and provides this content to travel agencies. I don’t see any other more efficient or better alternatives for that today.
Yes, the GDSs will need to evolve in functionality. But we have evolved before. Today we are much better at helping the airlines to upsell really and to really maximize their offer.
Skift: Many industries have gotten disrupted by the internet. Taxis by Uber etc. Retail by Amazon. Newspapers by Google AdWords. Are you sure Amadeus won’t be disrupted?
Of course, there is always a risk that there is a disruption in any industry, as we have seen with the challenges the Internet has presented to many industries.
I cannot say nothing will happen that may impact our business in the coming years, that’s clear.
However, what I may say is that nothing you mentioned is going to represent a sudden drop of whatever amount for our company.
Meanwhile, Sabre’s new CEO, Sean Menke, made a similar case on behalf of companies like his, in an interview earlier this month with Skift.
Skift: What is your response to talk of airlines wanting to reduce the role of third-party companies like yours in distribution?
Menke: From the airline side, the GDS value proposition is as strong as ever. A Bank of America Merrill Lynch analysis issued in 2016 found that GDS pricing has fallen approximately 20 percent over the last ten years, due to the deregulation of the GDS industry and fee structures that incentivized carriers to provide full content offerings via the GDS.
But with that said, while the carriers’ focus over the past several years on driving branded/bundled fares and ancillaries exclusively via direct channels has generated new sources of revenue growth, we believe that opportunity is becoming saturated.
By ignoring indirect channels, carriers now realize they have been leaving money on the table, which is why there has been significant growth in carriers making ancillary and branded fare content available through the GDS.
Tapping into the full potential of indirect channels to sell branded/bundled fares, ancillaries and customized offers – especially to business travelers who are less price sensitive than leisure travelers – provides the opportunity to drive new revenue and growth for airlines.
To help airlines realize the opportunity, Sabre is investing in content acquisition and shopping capabilities while agencies are making investments in their mid/back-office systems to properly ticket and fulfill ancillary and branded fare transactions.
Relying heavily on the direct channel while valuable customers continue to shop via indirect channels also ignores a basic rule of retailing: when a customer has his or her credit card in hand and is ready to spend, let them spend!
Don’t tell them to come back later or go down the street. Make the sale and close the deal. The GDS can facilitate that transaction quickly and efficiently. The explosive growth of mobile is changing the landscape. Consumers want marketplaces.
The Sabre GDS has been the Amazon of travel, and as we see, consumers are embracing marketplaces more than ever. We help our airline partners get in front of consumers wherever they are shopping, at a very low cost of customer acquisition compared to the all-in costs of other tactics.
It’s our job to continue to enhance the value proposition for the Sabre GDS in this e-commerce environment, and we are focused on that and believe it will continue to thrive.
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Tags: british airways, distribution, iag
Photo credit: International Airlines Group chief executive Willie Walsh expressed scathing remarks about the airline distribution middlemen in his recent earnings call with investors. IAG