The bland announcement at the turn of the year that Amadeus and Lufthansa (including Swiss) have signed a long-term full content agreement hides a furious row over distribution costs between the two sides that ran for nearly two years. The two also swapped legal barbs, with Amadeus filing a breach of contract case against Lufthansa and the airline replying with an injunction against the GDS.
Lufthansa, like many other network carriers, has long sought to reduce its cost of distribution with the main target being what it sees as the high booking fees charged by the global distribution systems Amadeus, Sabre and Travelport. And in home markets, where the national carrier has its power base, the tactics have been to get customers to book directly on the airline website and to a find a way of getting travel agents and ultimately customers to pay the GDS booking fee instead of the airline.
Lufthansa unveiled its plan to transfer booking fees to travel agents in early 2008 in Germany and Switzerland to a storm of protest from agents and puzzlement from Amadeus. The giant GDS and giant airline group had been negotiating hard, freed from European rules that regulated the prices in this area up until the end of 2007. But they could not reach a deal.
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For its part Lufthansa launched its "Preferred Fares" scheme in Germany, Switzerland and later in Austria whereby agents could get the airline's cheapest fares but book them directly via is own travel agent portal. Agents could book via GDSs if they signed up to the scheme but had to pay the €4.90 fee. Both Travelport and Sabre quickly concluded deals to avoid the surcharge as agents outside the scheme would be charged €15 for GDS bookings.
The fight has been the dominant feature of Germany's travel market for the past two years as Amadeus started off with around 80% market share of about 50 million bookings and around 18 million bookings via Amadeus per year in Germany and Switzerland respectively, according to Richard Clarke, director at UK IT and distribution consultancy, Travel Technology Research.
Lufthansa's Amadeus Stake
On the face of it Lufthansa's move simply appeared to be aggressive business tactics. But Lufthansa holds a significant 11.57% stake in Amadeus, which analysts believe it will sell in the coming year or so. "This must have been a difficult decision for Lufthansa - it is effectively trading off a short-term cash benefit against long-term asset growth, but I am sure they would have run their numbers," says Clarke. Further clouding the picture is the fact that Amadeus is also a huge provider of IT and distribution services to Lufthansa.
It appears that despite its shareholding in Amadeus, there was a movement in Lufthansa that was determined to tackle GDS costs. And that meant challenging the main GDS provider in Germany. This action came at a cost. "While there was no deal Lufthansa was paying the full price for Amadeus GDS bookings," says Clarke. "To reduce the market share of Amadeus, Lufthansa effectively paid twice: a loss of agency goodwill and then in the loss of asset value of Amadeus in market share that will be hard to recover."
For its part Amadeus responded in 2008 by reimbursing the €4.90 booking fee to agents that were paying it. This was designed to stop price-sensitive agents booking with another GDS to avoid the Lufthansa booking fee. According to Philippe Chereque, executive vice-president commercial at Amadeus, over 80% of its bookings in Germany were obtaining the €4.90 reimbursement in 2008. "This did cost us money, but it cost us money versus [a loss in] market share." Some agents did swap to other GDSs but these were mainly online travel agents and consolidators where price was critical.
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Many agents were reluctant to move to another GDS and wanted Amadeus to remain their main technology provider. Amadeus stopped paying the €4.90 agents reimbursement to agents early in 2009. "Although we had been losing some market share we have been proving to Lufthansa and the market that we were pretty resilient," says Chereque. "The major travel agents [in Germany] such as TUI, BCD, AMEX and Carlson were still using us." Since the beginning of this affair Amadeus has only lost about 10 points of market share, he notes. "This has had a financial impact but it is not the end of the world."
"The resolution of this issue may be more closely related to the widely reported IPO [of Amadeus] in 2010 than to a meeting of the minds," suggests Clarke. "It would make no sense to go the financial markets with this dispute raging. Lufthansa would definitely be the loser."
After almost two years of wrangling, in December the two sides unveiled a full content deal, with no surcharges, that runs until the end of 2014. "This agreement strikes an important balance between delivering distribution efficiency for Lufthansa in a cost effective manner while at the same time maximising our volumes by ensuring unrestricted access to our content through Amadeus, one of our most significant distribution and IT partners," says Thierry Antinori, Lufthansa's head of marketing and sales.
Asked if the new deal achieves the aim of cutting its GDS costs in half Lufthansa says: "Any details of any agreement, including the new LH-Amadeus contract, are confidential, but of course the new agreement reached with Amadeus makes a lot of economic sense for Lufthansa."
"Lufthansa spent some €327 million on GDS fees in 2008 and €614 million in [travel agency] commissions," says Clarke. But he doubts whether it will be able to cut the GDS portion in half as it would like. "In its next financial report its GDS fees will probably be closer to €260 million, but the fall will be as much related to a drop in booking volumes than massive GDS fee reductions."
Neither side will be drawn on the pricing details, but Chereque says it is in line with deals it has been doing with other carriers. The move is important because it brings market stability. "Now we know how we can negotiate with travel agents for the next five years. And we have a full content deal. This is important for the market as it knows that when it books Lufthansa with Amadeus it is sure to get exactly the same content as Lufthansa.com or the call centre," he says.
Who Wins? Who Loses?
So does the new deal mean peace has broken out between the two? The legal cases have at least been dropped. "Lufthansa and Amadeus have been commercial partners for a long time and will continue to be commercial partners in the future," the carrier says. "We believe that the new agreement found between both parties is in the best interest of our companies and the market place."
"It is not in our genes to do anything to impact our customers, be they travel agents or airlines," says Chereque.
Another question is whether other carriers will view Lufthansa's move as a victory over a GDS and look to follow suit. This is not so clear, but it does appear that Lufthansa has made some ground. "The immediate takeaway seems to be that GDS surcharging is an effective tool in bringing markets dominated by one GDS to a more balanced structure and it does seem that the GDSs are unable to enforce their non-discrimination clauses," says Clarke at TTR.
"10% share market shifts are very rare in the GDS business, but actually there are very few airlines in the same position as Lufthansa. For example, Scandinavian and Asian carriers are unlikely to follow: Amadeus declared peace with SAS some time ago, and Abacus [the Asian GDS] is majority owned by Asian carriers," he adds. "Ultimately, GDSs must remain relevant to airlines and agencies alike," says Clarke. "Airlines are dependent on the GDSs and the GDSs are dependent on the airlines. These people need to work together on the challenges that the consumers and corporations and their chosen technologies will throw at them."
After two years the bitter war is over. Both sides took hits but neither emerged a clear winner.
Source: Airline Business
