First Free Story (1 of 3)Join Skift Pro
Lufthansa Group shook the world of airline distribution five years ago when it added a surcharge on ticket bookings made outside of its direct channels. The German airline group made its tickets more costly when processed via the distribution middlemen Amadeus, Sabre, and Travelport.
The German airline group hiked that fee this month for tickets on Lufthansa, Austrian Airlines, Swiss, Brussels, and Air Dolomiti.
So how has the strategy been going? Skift checked in with Tamur Goudarzi Pour, chief commercial officer of Swiss International Air Lines and senior vice president revenue management and distribution for Lufthansa Group hub airlines.
The interview’s newsiest part was the executive’s comments related to Sabre. Lufthansa Group has for months been locked in negotiations over a multi-year distribution contract with the Texas-based company. A deal would likely end separate but related litigation between the companies, experts speculated.
So how positive does Goudarzi Pour feel about his company’s talks with Sabre?
“Active and very positive,” Goudarzi Pour said. “We’re on a very, very good track… We are in intensive discussions. When I talk to the top management of Sabre, I really feel how their mindset has changed toward a tech-driven future.”
Back in 2015 and 2016, Sabre’s then-CEO Tom Klein repeatedly made comments suggesting that Lufthansa’s effort was quixotic and would end briefly in failure. But current Sabre CEO Sean Menke has been changing the tech company.
“There is a history between the companies,” Goudarzi Pour said. “And I feel this has changed completely.”
Goudarzi Pour also hinted during the interview that Lufthansa Group might one day see a time when Amadeus, Sabre, and Travelport adopt its preferred way of creating airfare offers. He hinted that pilot tests had already begun.
In the wide-ranging interview, the group’s top distribution executive touted its debut this month of “continuous pricing,” which he said boosts revenue for airlines and agencies alike. He addressed criticisms many agencies have leveled against Lufthansa Group. He also tried to give proof that the group’s distribution strategy has been a success.
Back when the distribution saga began, Lufthansa Group drove only 30 percent of its distribution directly. By 2018, it generated 45 percent of its distribution directly. Today it drives about 75 percent direct, Goudarzi Pour said.
Those figures are a bit of a fudge. They blend bookings that consumers make to Lufthansa Group brand websites and apps along with bookings made by agencies connecting via the airline group’s new distribution channels.
So will the share gains via the group’s direct connection data feeds and its agent.com internet portal specifically be real and lasting? Goudarzi Pour said yes.
“Every third ticket that we distribute by an indirect channel or intermediary is now sold as an NDC [new distribution capability] ticket,” Goudarzi Pour said, noting that the number was zero five years ago. “That clearly shows success. Over 4,500 agencies have signed up. We have over 70 tech providers that we work with to deliver this NDC content.”
Lufthansa Group cited recent major wins as validating its process. It announced in September that industrial giant Siemens had begun booking some of its business travel via Lufthansa Group’s next-generation data feed, along with help from travel management company BCD and Travelfusion and SAP Concur. Expedia Group went live in August for North America bookings.
“The channel shift we have seen overall has essentially reduced our distribution cost, and we’re on the right track there,” Goudarzi Pour said. “We negotiate with the providers [like Amadeus, Sabre, and Travelport] for new terms whenever the [multi-year] contracts are due.”
Lufthansa Group has faced extra expenses with running its new distribution effort. So has the extra lift been worth it?
“We don’t communicate any cost-of-revenue figures,” Goudarzi Pour said. “What I can tell you is that overall the endeavor is highly profitable for us.”
Some intermediaries have argued that airlines should work with them to provide the new distribution capabilities within their global distribution system, in a process called GDS-pass through. A month ago Air France-KLM announced it had agreed to such a deal with Amadeus, and Travelport signed something similar with Singapore Airlines.
Would Lufthansa consider passing through its content with one of the traditional intermediaries?
“We believe the GDSes still need time to be tech-ready for the end-to-end customer experience, particularly in the corporate sector,” Goudarzi Pour said. “It will take until mid-2021, and in some cases longer. So far, we don’t have any over-arching agreement with any of the GDSes on these terms, and we’re in discussions with everyone. We have trials and tests running, but so far, we’ve not concluded any agreements.”
Lufthansa Group on October 20 began to offer “continuous pricing” through its direct connections, starting with most fares in Europe. This is something it hasn’t offered anywhere before.
First, some backstory simplified for brevity: Most large airlines set their fares in 26 stair-step levels. As part of this traditional airline pricing, each class has a band of fares. When seats sell out in one class, computers typically offer seats in a more expensive class. Airlines can find workarounds, such as branded fares and fare families, but those can be difficult.
Continuous pricing aims to be more precise. It provides customers a fare without needing to round the fare artificially due to a technical limitation in the distribution of offers.
“There is a really big difference between forecasting optimized prices, outputting continuous prices, and being able to deploy it,” said Alex Mans, president and co-founder of Flyr, a startup that sells a revenue optimization system.
“Lufthansa seems to be the furthest along among airlines in being able to sell a continuous price,” Mans said. “Most airlines seem to be constrained by the distribution factor. An airline might do continuous pricing but then be forced to convert it back into booking classes and fare filings because that’s how their distribution pipes are set up.”
Some experts said the standard processes airlines use for distribution are a barrier to progress.
“Lufthansa is a great example of an airline that’s doing something different than the norm,” said Steve Domin, the CEO and co-founder of Duffel, a travel distribution startup.
“Continuous pricing is an innovation that’s only possible through NDC [the New Distribution Capability],” Domin said. “Which is not to say it wouldn’t be possible in the GDS [global distribution system] environment, but it would be much, much harder to do. The fact Lufthansa has invested so much into NDC to build out its capabilities has enabled it to push this kind of differentiation. Their effort isn’t just about surcharges.”
Lufthansa Group said continuous pricing would remain exclusive to all its digital channels, such as its branded sites and its new distribution capability channel.
“Continuous pricing is the ‘new normal’ for us in our revenue steering,” Goudarzi Pour.
But what if some agencies remain skeptical about its value?
Goudarzi Pour responded that Lufthansa Group is supportive of agencies testing continuous pricing. He said it’s bringing transparency to travel agencies so that they see if they really can benefit.
Relatively Cheaper on Fees
Lufthansa Group sparked a trend in similar surcharges by other airlines.
In July, Singapore Airlines said it would coax travel agencies to use its new KrisConnect channel for tickets by adding a $12 surcharge for bookings made on classic agency reservation systems instead, as Skift reported. Aegean Airlines will add a surcharge in January. They join International Airlines Group and Air France-KLM Group, which also levy surcharges. Qantas announced one last year.
Goudarzi Pour said Lufthansa Group charges a lower distribution charge than its competitors, on average, when judged by round-trip prices.
Since October 1, Lufthansa Group slaps on a $21 fee in the U.S. (€19 in Europe), up from $17.50 (€16 in Europe). Meanwhile, Air France-KLM Just increased its fee to $15 (€13) for a one-way ticket. International Airlines Group, which owns British Airways and Iberia, is on a similar fee level to Air France-KLM after increasing its fee last year. Both groups charge more round-trip than Lufthansa Group.
“The surcharge for us is mainly a means to make the distribution costs transparent and to make channels available according to their costs,” Goudarzi Pour said. “It’s transparent for the end-user and the intermediary. It also helps us recuperate some of the extra costs we face in more costly channels.”
But some agencies balk at Lufthansa Group boosting its surcharge during an industry revenue crisis.
“We have not increased our fee for five years,” Goudarzi Pour said. “The increase we’ve recently done was decided before Covid-19. At that point, the average nominal price increase that came year-by-year from the GDSes [global distribution systems], that was actually just reflecting that.”
“It was never a response to Covid times,” Goudarzi Pour said. “Indeed, we are charging an average lower surcharge than most of our competitors…. It’s not about making any other channel less attractive. The main intention is to make the costs transparent.”
Some observers have described Lufthansa Group as taking a carrot-and-stick approach between the perks and the surcharge.
“For me, it’s not a carrot-and-stick logic,” Goudarzi Pour said. “Our attractive portfolio of NDC Smart Offers is just a carrot, something that the customer will be willing to pay for.”
Some skeptics have said Lufthansa Group talks about offering unique content in its direct channels but that, in fact, it puts nothing special there.
“In the end, we will never win on cost,” Goudarzi Pour said. “We will only win on content… Take an example from Covid times: We offered a “bring me home” guarantee [which, for a few months, in the case of a travel warning or a significant deterioration of the coronavirus pandemic at a destination, would cover the cost of repatriation to Germany, Austria, or Switzerland]. We delivered this insurance component as one offer of many via our NDC channels.”
Addressing Agency Concerns
When travel agencies book via Lufthansa Group’s direct connections, they don’t receive the customary incentives offered by Amadeus, Sabre, and Travelport. So some agencies have said they feel that Lufthansa Group and its copycats are trying to squeeze and reduce the commissions and margins they need to do business. They also complain about the costs and time it takes to adopt the new system.
“Obviously, there’s an initial tech development, but we have tech funds where we support agencies that want to do the next steps,” Goudarzi Pour said. “We say, ‘Do it now, don’t wait.’ Particularly in Covid times, the tech advantage that will play out in content and customer satisfaction are key. About 4,500 agencies have done it. We get good feedback about our key account managers being close to those partners and helping them.”
“Also, we have volume agreements with agencies… for certain players in the market,” Goudarzi Pour said. “In Covid times, at a time when there was an undue workload for agencies, we gave out an extra lump sum amount for every rebooking that agency was doing for us as we knew this was a lot of work and was a shared burden.”
Some agencies have said that servicing tickets booked via Lufthansa’s preferred channels is more complicated than through the traditional way via Amadeus, Sabre, and Travelport.
“On the corporate side where the whole end-to-end value chain is complex, we’ve identified nine processes, including servicing, that we have solutions for as discussed in IATA [International Air Transport Association] meetings,” Goudarzi Pour said. “We need industry standards established where possible, or at a minimum, joint agreements. But we at Lufthansa Group have a solution at hand for all the processes that TMCs [travel management companies] or intermediary see as challenges.”
Overall, Lufthansa Group said it feels pride in what it has accomplished so far.
“In the last five years, we have been very steady in our policy,” Goudarzi Pour said. “We never back-tracked on it, and we fulfilled what we promised.”
“One of the messages we have from top management is to look, of course, at horizontal partnerships with other airlines, but we very much will increasingly look at vertical axes of partnership,” Goudarzi Pour said. “That will be a key focus for us in the next years. This includes all stakeholders in the industry.”