One year since Lufthansa’s Distribution Cost Charge – what we’ve learned

Holger Taubmann

Senior VP Distribution, Amadeus IT Group

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One year ago, the Lufthansa Group announced its Distribution Cost Charge (DCC) and challenged the mainstream business model for airline distribution. Last June, Amadeus made it clear that we did not believe in a strategy that ultimately penalises the traveller for the channel they use to book a trip, or on an approach that makes comparison and transparency more difficult. Nothing has caused us to change that opinion.

Nonetheless, the DCC is a part of the distribution landscape. We respect the Lufthansa Group’s decision and the determination behind its commercial strategy. Lufthansa has a strong technological heritage and a clear understanding of its potential. But the industry’s current evolutionary shift – towards a future that can genuinely deliver on its promise of a richer and more personalised experience for passengers – demands more than technology alone can deliver. These are complex commercial challenges and success will depend on both great technology and strong relationships with a range of partners.

One year since this announcement took place, we look back and reflect on what has changed for the travel industry and for Amadeus as a leading global distribution partner. Here are some of the lessons we’ve learned:

1. Direct distribution costs money.

Direct bookings do not come with the functionality provided by the GDS, so an airline going direct will miss out on interlining, data transmission and full passenger records. Without partners helping with distribution, investments must be made in marketing and online advertising to acquire website traffic. And finally, time must be spent working with valuable corporate customers to develop technology that ensures they can book flights with an airline’s new systems. Direct distribution requires a heavy investment. Distribution is not free, no matter how you do it.

2. After a year of debate, no new business model has been defined.

All participants in the travel industry have looked into Lufthansa’s proposition. Many were willing to try things out. There were workshops, projects and tests. Unfortunately, things did not go as planned. Our travel partners have seen that current connectivity solutions have many limitations. After one year of discussions and trials, the travel agency community is not clear or confident that direct connect is the way forward.

3. One thing that has been clear, however, is that the value of the GDS has appreciated over the past 12 months.

Despite the doomsday scenarios prompted by the DCC, we see evidence of GDS growth in everything from financial performance through to the number of airlines signing new distribution agreements. And the reason for this is quite simple: in our global industry, the GDS remains the most efficient and cost-effective means of distribution.

Our global distribution system gives airlines and travel providers 24/7 free display all over the world and the ability to book flights in real-time at an estimated average cost of 2% of sales. There is barely a more efficient distribution mechanism in any other industry. Proof of its value is that it channels an estimated 50% of all global air bookings (including LCCs). It also represents an even higher yield per passenger (we estimate approximately 40% higher on average) because many indirect bookings represent corporate travel, complex itineraries and long-haul travel.

4. The age of personalised travel is already here and it is thriving on indirect channels.

The charge against the GDS, of course, is that it doesn’t deliver airlines the merchandising capabilities they require to sell the range of ancillary services required to truly personalise their travel offers. This is simply not the case.

Amadeus now offers three solutions to support our airline customers in merchandising: Amadeus Ancillary Services, Amadeus Fare Families and Amadeus Rich Merchandising. We have more than 100 contracted airlines for either one of our three solutions for the indirect channel, and more than one in every two airline bookings made through Amadeus is eligible for ancillary revenues.

5. Our merchandising technology is delivering for airlines.

We observed a 95% growth in ancillary sales through indirect channels last year. For airlines, this can make a big difference; we estimate that on average, the sale of an ancillary service will represent a revenue uplift of between 10 and 15%. The average ticket price can increase by 20% when a Fare Families service is sold. In other words, airlines today are increasing their revenues, they are achieving this growth with the GDS as a partner, and we are investing to ensure that this trend continues well into the future.

Travel is a global industry. The large-scale distribution capacity of our travel seller network increases our relevance to providers. In turn, it allows for revenue generation that supports our ability to invest in new technology and innovation. This virtuous cycle helps us maintain economies of scale that support sustainable growth for the entire travel industry. We were founded almost 30 years ago because four airlines had the foresight to see what we could achieve if we worked together, and our continued success is a testament to that vision.

Amadeus Ancillary Services

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