Skift Take

After years of hype, Air France-KLM finally plans to take stronger measures to prompt corporate travel agencies to adopt next-generation methods of processing bookings. Yet its serial delays underscore how hard it is to make industry changes.

Air France-KLM said on Thursday it would postpone until as late as October 1 a plan to add a $28 (€26) roundtrip surcharge on corporate travel sales agencies that don’t use a data exchange method it prefers.

The Franco-Dutch group was backpedaling from a more aggressive launch plan. Last month, the airline group said it would add a surcharge to corporate bookings by May 1. France’s business travel employers’ association protested, Preferente reported.

Air France-KLM said on Thursday it would continue to pursue a carrot-and-stick approach to business travel agencies, using a mix of fees and exclusive content to encourage more agencies to adopt the newer methods. It said that more than 20 percent of its plane tickets sold worldwide by corporate travel agencies already came via newer, more modern forms of selling.

“Air France-KLM is on a promising pilot phase with all global TMCs [travel management companies] and key local business agencies to jointly prepare the transition [to the newer method],” said a spokesperson.

Air France-KLM now hopes to do to corporate travel what it has done with leisure travel. In 2018, it began pushing leisure travel agencies to switch from using old technical methods, known by the shorthand “Edifact,” to a newer process referred to loosely as the “New Distribution Capability, or NDC.” It slapped a surcharge on leisure bookings done via the old way. It recently raised this fee to about $14 (€13) one-way.

Air France-KLM is one of about a dozen airlines that believe they’ll sell more using the more modern form of data exchange. Edifact is a legacy process made through the global distribution systems Amadeus, Sabre, and Travelport, which said they have begun offering the new distribution capability as a new option. But commercial terms remain a point of dispute with airlines.

“Business agencies are strongly committed to moving toward [the new distribution capability],” an Air France-KLM spokesperson said. “However, business travel being a particularly complex ecosystem, its global readiness is not completely achieved yet.”

That may be the understatement of the year so far.

The Move May Drive Consolidation of Agencies

Some critics say the reality for smaller agencies that sell flights on Air France-KLM is a gaping hole in income where global distribution system incentive payments, which were typically a few euro per ticket, used to be. That could be a pretty big hole if you’re a French or Belgian agent.

Some other carriers pursuing similar moves, such as Lufthansa Group, have arranged to offer some incentives to ease the transition. But that financial aid is likely temporary. If the new distribution methods don’t significantly boost revenue per transaction on average, some smaller agencies could be forced to fold or merge with larger ones.

By September, the airline group plans to end so-called private-channel deals, which let high-volume corporate travel agencies, such as Expedia Group’s Egencia, avoid or minimize the surcharge.

Of course, the public will never know if “the big guys” — meaning the largest travel management companies — will renegotiate their contracts this year in other ways to get a compensatory commercial advantage that small-and-medium-size agencies won’t enjoy.

One key haggling point has been who should pay for the cost of upgrading the technology. In September 2020, Air France-KLM signed a deal with Amadeus that suggested an implicit split among airlines, technology partners, and online and offline travel agency customers. Air France-KLM will add a surcharge of only “a few euros” per ticket for agencies using the new content via Amadeus.

Some critics, such as L’Echo Touristique, said Amadeus’s connectivity isn’t yet ready in full. However, it wasn’t clear whether the issue was compatibility with agency mid-and-back-office systems or something else.

New Air France-KLM Products for Agencies

Air France-KLM is not just using fees to change agency behavior. It’s also trying to woo agencies by promising a better experience in the new channel.

The group said on Thursday it plans to introduce “new products, such as seat bundle fares,” for travels agents connected via the new distribution capability.

For economy class tickets, agents are now offered a “dynamic ticket bundle,” described as exclusive packages and named “Standard Plus” and “Light Plus.” These packages can include seat upgrade options.

For the first time, the airline group generates these packages “dynamically.” That means that the features and choices vary depending on the passenger’s tier in the airline loyalty program. Prices also vary on the request itself, with different prices per destination, for instance — rather than the same price for the same product for everyone.

Choices include an upgrade to a roomier seat, additional checked bags, a premium meal, lounge access, or a contribution to sustainable aviation fuel — all elements an airline could include in a package.

“For the group’s corporate customers traveling for work and booking directly on Air France and KLM airlines’ websites, the dynamic ticket bundle will be offered taking into account their negotiated fares,” said a spokesperson.

If that seems as confusing as Beyoncé’s “Freedom” lyrics, welcome to airline distribution.

More Variety in Pricing for Tickets

Air France-KLM also touted the debut of so-called “continuous pricing,” which it said boosts revenue for airlines and agencies alike thanks to offering more price points, exclusively via agencies that book with the new distribution capability.

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. But no airline has publicly released data proving there is a significant bump in revenue per transaction, on average, for agencies adopting the new techniques.

Some industry observers remain skeptical about airline efforts to change how agencies book travel. Tom Klein, a senior managing director at Certares who used to be the CEO of distribution giant Sabre for many years, is one of them. Klein said at Skift’s 2022 Megatrends event in January in New York that airline executives simply care much less about distribution than about running their operations safely, efficiently, and with military-grade precision.

“Distribution gets talked about in the board room maybe once a year, at best,” Klein said. “That means it’s hard to change.”

A case in point: Air France-KLM’s 2021 financial statements show the company spent about $420 million (€385 million) on “commercial and distribution costs.” That was merely 2.6 percent of its total group revenue of about $15.5 billion (€14.3 billion).

Several other analysts agreed with Klein that distribution costs are a low priority, as a general rule, across the approximately 190 commercial passenger airlines worldwide that matter the most.

Many smaller agencies also balk at what they fear will be a loss of their profitability in the new world.

The global distribution systems such as Amadeus don’t seem worried, either.

“With regards to NDC, we expect this penetration to be low for the coming years,” Luis Maroto, president and CEO of Amadeus, said in February. “We are in some areas implementing NDC as part of our contracts. But still, there are a lot of parts of the inventory that will require time to be really implemented on NDC. So it’s still low. [NDC] volumes are not having an impact on our economics positively or negatively.”

Yet vendors such as Accelya, AirGateway, Kyte, Travelogix, and dozens more — who hope to profit from selling new tech to airlines or travel management companies — strongly disagree. They said there’s been an upswelling of interest from clients in the new forms of distribution.

The upstart vendors point to a few recent announcements as proof. For instance, Finnair said it would force all agencies to use the new methods “by 2025,” and Hawaiian Airlines recently adopted a surcharge and added “exclusive content.” The spread of new distribution talk to mid-sized carriers is presented as a sign that the movement is spreading across the industry.

Thursday’s announcement underscores that Air France-KLM Group does see distribution a C-suite priority but that steps to make changes are happening fitfully.

If Air France-KLM truly does what it says and herds a majority of corporate travel volume into the new distribution capability, it would be a remarkable change affecting the processing costs and profit potential of hundreds of millions of dollars of annual revenue. But we’ve been hearing about this process for a long time now, and skepticism remains understandable.

November 16, 2022
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Tags: air france, air france-klm, air france-klm group, air france/klm, airline distribution, business travel, corporate travel, corporate travel management, distribution, gds. global distribution systems, klm, ndc, new distribution capability, sabre, travel agents, travelport

Photo credit: A KLM aircraft on the runway. Source: KLM.