This year Lufthansa made a series of small moves that, when looked at together, reveal a doubling down on its multi-front strategy to pressure Amadeus, Travelport, and especially Sabre to conform more to its preferred airline distribution practices. Connect the dots, and it looks like a low-grade war.
“The purpose of a business is to create a customer,” said Peter Drucker, the late king of the management gurus. In that vein, travel technology companies told airlines to “make customers, not war.”
But Lufthansa Group hasn’t listened.
This year it has fought the tech companies by withdrawing some content from them, introducing incentives to agents who bypass them, and pursuing in Texas state court compensation this fall for a separate set of fees it doesn’t believe one of those middlemen, Sabre, should charge it.
Since the summer of 2015, Lufthansa Group has fought a low-grade war on the main distributors of its airline content to travel agencies, namely, Amadeus, Sabre, and Travelport. Lufthansa Group added an $18 (€16) surcharge on tickets booked through the tech middlemen. The airline group claimed the middlemen were hindering it from wooing new passengers and selling more effectively to the flyers it already serves. The companies disagreed.
In January, the airline group said it had shifted about 10 percent of its airline content out of Amadeus, Sabre, and Travelport and into its direct connection channels since it started its effort two years earlier.
Significant money is at stake. Lufthansa Group will pay more than $570 million in fees to Amadeus, Sabre, and Travelport this year, analysts estimate. The German company claimed in a report that its “direct-connect systems are far less expensive, costing a fraction of what it costs to book flights through legacy global distribution system channels.” Lufthansa Group claimed its effort had a “neutral” effect on its overall bottom line so far.
Here’s a recap of this year’s skirmishes.
New Incentives for Agents
This year Lufthansa introduced a $1.15 (€1) incentive on every booking for qualifying agents who sign up for its online portal before the year-end. That move represented its first financial incentive to agents in many years.
In January 2018 it will start paying $1.15 (€1) for each flight that agents book using new technical standards via a type of connection that Amadeus and Sabre do not have a commercial agreement with the airline yet to use.
Lufthansa’s modest incentives are similar to a reward of about $2 that American Airlines is offering agents who book directly with it. They’re less lucrative than the incentives that the travel tech middlemen offer agencies.
Pulling Content Out
A key part of the value proposition of travel e-commerce platforms is that they aggregate all the available airline content, which makes it easier for agents to comparison shop.
This year the German giant has broken with standard practice among large airline groups. Lufthansa Group began withholding some of its content from Amadeus, Sabre, and Travelport. It keeps its cheapest airfares instead for agents who use its online agent portal, its data feeds, or who book via its websites and mobile apps.
In May, Lufthansa, Swiss and Austrian Airlines began setting aside some of their cheapest one-way economy class fares for their brand.com sites. More significantly in October, Lufthansa Group brands ratcheted up the effort by only offering its cheapest business class fares outside of the global distribution systems. It also experimented with discounts of between $5.70 and $11 (€5 and €10) on some tickets agents book direct.
In a related move, Lufthansa has trialed ways it might offer mobile-only fares via consumer price-comparison search engines like Google and Skyscanner and on mobile-first booking app Hopper.
This fall, agents wanting to book lounge access for Lufthansa and Swiss began to have to do so via new technical connections that the airline group has not signed commercial agreements with Amadeus and Sabre to implement and, thus, favor its direct channels by default.
Lufthansa is tiptoeing into content withdrawal, and its pullback is small. Yet if other airlines copy it as a way to encourage agents to book directly, it could undermine a key part of the travel tech middlemen’s momentum.
Lufthansa is winding down its multi-year third-party contracts signed in and around 2013. As it negotiates new contracts, one could imagine it choosing not to renew with at least one of the distribution companies.
One distributor that it might withdraw from might be Sabre. Less than 5 percent of Sabre’s gross bookings come from Lufthansa, so a snub might be more symbolic than not.
Yet other airlines are watching. It’s been since the spring that Sabre has been unable to reach a multi-year contract renewal with Air France/KLM, putting many Sabre-using travel agents in Europe at a cost disadvantage because they must pass along the Air France/KLM surcharge unlike what agencies using rival reservation systems or websites like Google can.
When around 2006 American Airlines had threatened to not renew with all three companies, Amadeus, Sabre, and Travelport had created a so-called “backstop agreement” in which they made reciprocal promises to supply each other with any content that any airline refused to provide the others. American renewed with all three.
Fights Over Tech
In November, travel technology giant Sabre said it would buy Farelogix, an airline distribution technology specialist, for about $360 million in the largest deal in a few years in the airline distribution business.
The industry gossip mill has since been burning with stories of some American Airlines and Lufthansa officials being livid that one of their preferred tech platform for their direct booking efforts will no longer be independent.
Lufthansa Group has used Farelogix’s services as one of its tech providers, along with Travelfusion and i:Fao, to help power its two distribution channels – its direct connection via data feeds and an internet portal.
Sabre has argued in a breach of contract fight against the airline group that the contract requires Lufthansa to slap Farelogix and its peers with fees, too.
It’s not clear how Farelogix’s contract terms with Lufthansa Group might change after Sabre closes its acquisition. It’s also unknown if competitors like Travelfusion, majority-owned by Ctrip, might take up the slack.
If Lufthansa withdrew from Farelogix, it would be an indirect blow to Sabre, the tech vendor’s new owner.
A Suit That May Go to the U.S. Supreme Court
At the end of October, the Supreme Court of Texas heard oral arguments in a dispute sparked by Lufthansa Group against Sabre. A recording of the hearing, along with supporting documents, has since been made available online.
Here’s the backstory: In March 2016, Sabre alleged that Lufthansa’s surcharge breached the contract it had with Lufthansa Group.
Lufthansa Group has alleged that Sabre prodded travel agents to break their contracts with the airline group. Sabre denies this.
The dispute began out of court, but Lufthansa sought a judge to weigh in the matter and Sabre contested the right of courts to make a declaratory judgment in the case. The companies sued each other in Texas court because Sabre is based in Southlake, Texas.
Sabre has tried to have the case dismissed on the argument that state courts don’t have the authority to review it. A trial court denied the request. Sabre appealed, and an appellate court turned Sabre down, too. So Sabre appealed to the Texas Supreme Court.
In oral arguments recently published as a video recording online, Sabre argued that federal law prohibits a U.S. state from enforcing a law, regulation, or other provision that relates to a price, route, or service of a national air carrier.
In the Lufthansa case, Ralph Duggins of law firm Cantey Hanger, who was arguing on behalf of Sabre, said state courts would exceed their authority if they weighed in on the contract dispute.
As context, in 2014, the U.S. Supreme Court unanimously decided that a class action lawsuit filed by a frequent flier against an airline that had revoked their membership in a frequent flier program was invalid because the state couldn’t meddle in what is a federally regulated sector.
It’s up to the Texas High Court to decide if Texas courts have the right to weigh in on the Lufthansa/Sabre dispute.
If either side is unhappy with the court’s decision, that party may ask for the U.S. Supreme Court to review the case.
Why the Case Matters
If Lufthansa wins the appeal, its surcharge will likely stay in effect, though it must then win its separate breach of contract fight, too.
Other industry players, such as Air France/KLM Group and the parent company of British Airways, International Airlines Group (IAG), have imposed similar charges and in September IAG raised its fee about 20 percent to $12 (€10.50) per fare segment.
A Lufthansa legal loss could lead Sabre and its peer companies to challenge their surcharges.
Those surcharges now theoretically affect about one out of every five tickets sold in Europe, though travel management companies are working to carve out exceptions.
Lufthansa’s fight with Sabre over the surcharge and commissions is well known. But less well known is a fight over a smaller fee that, for simplicity, we’ll call a courtesy fee.
After Lufthansa launched its surcharge, Sabre prodded travel agents to book flights through the airline’s direct connection data feeds and online booking portal to avoid the surcharge, Lufthansa has alleged, and Sabre has not denied.
Sabre then asked the agents to enter and describe these direct bookings as so-called passive bookings in Sabre’s reservation system, the airline has alleged.
Sabre didn’t charge its standard distribution commission for these bookings because it didn’t provide its standard distribution services.
However, Sabre took advantage of a loophole that has irritated the airline.
Lufthansa, like many airlines, allows Sabre and its peer companies Amadeus and Travelport to let airlines create a so-called passive booking in the global distribution system.
A passive booking provides itinerary data to the back-office and expense management systems. Passive booking may help travel management programs conveniently print itineraries, generate invoices, and track records.
In the past, Lufthansa, like many airlines, had agreed to let Sabre charge a small courtesy fee for these passive bookings but the assumption was that it would be rare for agents to have to do this.
Once Lufthansa began making its direct channels cheaper, it changed its mind about passive bookings. It doesn’t want Sabre to use the passive bookings process to collect a courtesy fee on bookings done outside of the surcharge via its direct channels.
But the contract language hasn’t changed. So Lufthansa has paid the courtesy fees under protest.
Now it has asked courts to force Sabre to return the courtesy fees.
“This scheme enables Sabre to collect improperly-assessed fees,” the airline group alleged in a court filing. “Sabre told Lufthansa Group that it would charge it for such bookings, even though they are not billable [under the contract terms].”
It’s unclear why Lufthansa believes these particular passive bookings are not billable. The airline hasn’t made copies of the contract language available to the public. During oral arguments, Texas justices didn’t press Lufthansa’s counsel, Reagan Simpson of Yetter Coleman, on this issue.
Sabre denies wrongdoing. It declined to comment for this article.
In 2014, Sabre separately settled a lawsuit with American Airlines for $222 million.
American Airlines, which in the past two years has stepped up an effort to get agencies and companies to book travel directly with it instead of through Sabre and its peers, filed a brief earlier this year in support of Lufthansa’s case.
So, as this look at multiple small moves suggests, Lufthansa looks likely to continue to pursue the art of war against the tech middlemen to the extent it feels that war is necessary to make some more customers.
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Photo credit: Judges on the Supreme Court of Texas walk into the courtroom to hear oral arguments in a case between Lufthansa Group and Sabre. Supreme Court of Texas