The airline industry has been watching Lufthansa’s 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.
International Airlines Group, parent company of British Airways and Iberia, may make a similar move this year, according to interviews on a background basis that Skift did with industry executives and investment analysts.
If it does, British Airways will benefit from the work the German flagship carrier has done. By pushing direct connections to travel agencies that don’t book direct, Lufthansa has prompted many travel management companies (TMCs), other travel companies, and aggregators to develop the “middleware”, or technical plumbing and data feeds, needed. Now that those connections are becoming available, they could be used by other airlines, too.
And Lufthansa also did the hard work, risking the ire of travel agents, by imposing a surcharge on bookings that weren’t direct.
Some industry observers thought Lufthansa would lose millions of dollars and significant market share after it added a 16 euro ($18) fee on bookings that go through the large booking software companies — Amadeus, Travelport, Sabre, and Travelsky — used by tens of thousands of travel agencies worldwide.
Lufthansa says the impact of the surcharge has been negligible.
In the past year and a half, Lufthansa has signed up more than 100 travel companies, aggregators, and technology providers to its alternative, direct channel. That’s the most extensive effort at direct connections of any carrier since American Airlines tried — and failed because of resistance — to install direct-connect technology with agency customers half-a-dozen years ago.
Airlines have balked at copying Lufthansa’s move until they see how well it does. Lufthansa is now saying that it is having “success.”
In its earnings report Thursday, Lufthansa said it is weathering the shift without pain to its bottom line. While in 2016, it faced higher costs for computerized distribution systems (a rise of 38 million euro, or about $41 million, over the previous year), the company says the share of direct bookings at its network airlines, particularly in their home markets, has “continually increased.”
The company says in its annual report: “The proportion of direct bookings continues to go up steadily. The appeal of increasingly individualised products and the trial application of a new revenue management system show great revenue potential…. Negotiations on direct bookings with customers, tour operators, travel agencies and technology providers are delivering a steady stream of successes. Demand has also increased for complementary services such as upgrades, baggage services, hotels, rental cars, and insurance.”
In other words, Lufthansa says it is making up what it loses by adding a surcharge on tickets booked via third-party channels (and thus depressing sales). Like other airlines, Lufthansa has to pay the IT middlemen a fee for each booking that comes through the third-parties, which covers the cost of investing in technology and aggregating demand (especially for high-priced, complex itineraries). Lufthansa says these fees cost it “triple-digit millions of euros” a year, and it wants to avoid them.
For their part, the third-parties say Lufthansa and other airline skeptics are vastly underestimating the technological expense involved in distributing air content. Amadeus alone spent more than 3.5 billion euro (about $3.77 billion) on research and development, mostly software work for airline distribution, between 2004 and the end of 2014.
BRITISH AIRWAYS MAY BE NEXT
As noted, the rumor among industry professionals is that there is a chance IAG may pursue a similar path to Lufthansa’s. IAG’s contracts with the so-called global distribution systems are up for renewal in the first half of this year, making it an opportune time to negotiate.
One sign of IAG’s interest is that it has been investing heavily in the technology that would be necessary to make such direct connections.
IAG has created more than 60 open APIs to make it easier to connect with external partners and suppliers.
As a sign of its growing interest in direct connections, in September 2016 British Airways enabled Kayak, the travel search engine, to sell both direct and connecting flights and pay for their preferred seat via the Kayak website and without the involvement of third-party technology companies. It did a similar deal with price-comparison site Skyscanner a year earlier.
There has been no official comment from IAG or British Airways about what a new distribution strategy might involve, though the company said in last November’s quarterly earnings call that it plans to reveal it’s plan this year.
IAG CEO Willie Walsh said, “We are not going to model this on what anyone else has done because we are not the same as Lufthansa, for example. What they have done may have worked for Lufthansa. It is not necessarily what will work for us.”
Some industry analysts interpret that to mean that IAG will pursue the direct connections without adding a surcharge on third-party bookings as long as it can get favorable pricing terms from the global distribution systems. The latter traditionally have fought these changes vociferously.
But if Lufthansa clears the legal hurdles surrounding its direct connection strategy and can succeed financially at it, IAG and other airlines may have reason to adjust course as their global distribution contracts expire. If IAG succeeds, Air France/KLM might be next to follow.
In the U.S., United and Delta both use in-house central reservation systems, a fact that makes it easier for them to adopt the direct connect technologies to link with travel management companies. While United has signaled it wants a better deal with the reservation middlemen, it is unclear how unhappy either airline actually is with the status quo.
