GDS Surcharges: What’s A Fair Price?

Now that Lufthansa Group has announced its €16 surcharge for bookings made in the GDS channel, let’s tackle the fundamental issue it raises.

If the GDS channel offers a better value to corporate buyers, then what is  a fair price for using that channel?

GDS Surcharge - Fair Value?

Asked the other way, if booking directly on an airline’s website offers less value than the GDS channel, how much of a price incentive does the airline need to offer its customers?

Lufthansa has set that price at €16.  If the price were €1, the corporate travel industry would still be having a tizzy fit, but only on principle.  You couldn’t credibly claim that the benefits of booking in the GDS-TMC channel are not worth such a small amount.

Just to make this more debatable, assume that instead of setting a surcharge for bookings made in the GDS channel, an airline offered its corporate customers a €100 discount on all tickets booked directly via its website.

Of course the airline would see a huge take-up on that offer, because at that price, the disadvantages of the direct booking have been more than offset by the direct-channel incentive.

The point is that there must be a price at which the benefits of booking via the GDS channel matches the value received.

It is unfair to both the GDSs and the airlines to pretend otherwise.

So why shouldn’t an airline set a price and see what happens?  How else will the market really know what the true value is?

More coverage on this issue here, here, here and here.

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8 Responses to GDS Surcharges: What’s A Fair Price?

  1. Mark Windsor says:

    Hi Scott,

    I’m still not impressed with the carriers approach here. Let’s look at this in two ways.

    First, your $100 discount for booking on the carrier’s website is a non-starter. On a business class fare it’s less than one tenth of one percent (using current D inventory business class fares, DFW to Frankfurt roundtrip). It’s an annoyance, not an incentive.

    Second, let’s examine the REAL airline fare decisions that go unnoticed by almost all the traveling public. Here’s a fare structure for the same D inventory business class fare mentioned above:

    USD7589.00
    856.00YQ
    35.40US – US federal travel tax
    5.50YC – US Customs fee
    7.00XY – US inspection fee
    5.00XA – APHIS fee
    5.60AY – US Security Fee
    9.10DE – German federal tax
    36.80RA – German international travel tax
    46.50OY – German air transport tax
    4.50XF – US PFC

    BASE: 7589.00
    TAX: 1011.40
    TOTAL: 8600.40

    Here’s the same routing, same class, I inventory on American (just so we aren’t picking on LH exclusively, and to prove that they’re all doing the same things):

    USD4665.00
    856.00YR
    35.40US
    5.50YC
    7.00XY
    5.00XA
    5.60AY
    9.10DE
    36.80RA
    46.50OY
    4.50XF

    BASE: 4665.00
    TAX: 1011.40
    TOTAL: 5676.40

    Notice the YQ for Lufthansa and the YR for American. If you want to talk about fair pricing models, let’s start with the air carriers being honest with the traveling public – the people that actually get on their planes – not just how the carriers relate to the GDS/TMC communities. YQ is the designator for a fuel surcharge. In this case, the fuel surcharge is 11% of the LH business class fare. I recently bought a pair of APEX coach tickets for family members where the fuel surcharge was a whopping 52% of the base fare! American uses the designator YR. This designator is undefined so far as I’ve been able to determine. In a moment of unfathomable honesty, and AA tariff agent explained it to me this way: “We can’t call it a tax since it’s not a government applying it. We aren’t allowed to call it a fuel surcharge anymore, and we’re not supposed to call it a fee. To be honest, I don’t know what the hell to call it.”

    You seem to think, Scott, that the 16 Euro charge for booking on the GDS is somehow justified, or that the GDS companies have it coming to them. I disagree. If you want to talk about fair pricing, then start with the airlines that are willing to charge more than half the cost of a coach ticket in fuel surcharges even after the price of a barrel of oil has dropped so significantly in the past year, or 18% of the base business class fare (AA example above), and advertise to the public that they have the base fare for sale. And let’s not forget that POS discounts for corporate accounts don’t apply to fuel surcharges or the mysterious YR fees.

    Airlines are notorious for complaining about literally everything. The cost of distribution is just part of that culture of complaint. To the airlines I say this – set your prices with absolute transparency and do away with the fake fees for fuel or whatever the YR is for, and raise your base prices $20 to cover the cost of distribution. Stop playing the game of nickel-and-dime charges for literally everything (when will they put coin slots on the oxygen masks?), and for Pete’s sake stop whining.

    The GDS’s offer a great deal of value to TMCs, corporate customers, and the traveling public in general.

    • Scott Gillespie says:

      Hi Mark,

      You make a great case on the fuel surcharge front. No question; that’s a tough pill for buyers to swallow. But on to the topic at hand – the GDS surcharge.

      “You seem to think, Scott, that the 16 Euro charge for booking on the GDS is somehow justified, or that the GDS companies have it coming to them.”

      I am not agreeing, or disagreeing, with the amount chosen by Lufthansa. Time will tell if that amount works or not.

      The 100 Euro discount was meant in the context of a typical short haul airfare, likely costing about 300 Euros – a big enough discount that makes using the airline-direct channel a no-brainer. Sorry for not having made this clear.

      The point is that there must be a price at which it makes sense to use an airline-direct channel instead of the GDS channel. The difference in prices between the two channels tells us how much more value the GDS channel creates for the buyers.

      • Mark Windsor says:

        I really think this is the topic at hand, Scott. It has to do with the way an airline prices the product they sell. The distribution systems are part of that, albeit not a core element. It’s all part of the same whole.

  2. I’m trying to think of another product or industry that charges more for an indirect channel, while I’m certain it exists, only other ones come to mind…

    I have a good friend who is in the toy business, obviously he needs retailers to get his product into the consumers hands. He realized (this was years ago) that his margin on goods sold through their own site was much larger than sold through a retailer… they kept prices the same and pocketed the margin (novel idea!).

    Luxury goods… I just happened to look up Louis Vuitton, yep, they sell direct from their website at full retail (I wasn’t sure if they sold direct or not), probably exactly the same price the stores charge… now LV is very selective on who sells their product, because it needs to be ‘displayed’ a certain way, and also sold in a high end store (i.e. one that sells other high end products). WalMart is not an option for LV. Airlines have started taking a similar approach (i.e. being selective on who they allow their products to be displayed on) – i don’t think it was about the airlines cost, but about not making their product a pure price play

    Hotels – interesting, as their margins are 15-25% less in the indirect channel. A large LAS hotel I met with years ago used their direct site to charge more/rack rate. Their theory was, “if people want to stay here, they come to our hotel site directly. We will walk an OTA customer to a better hotel that we get charged $x for because the customer that booked direct with us has paid $x+. A win-win-win (for the OTA customer, the hotel and the direct booker)” So the hotel saw the opportunity to make more through the direct sales channel, not charge more for indirect.

    Merchant Costs outside of travel – This seems pretty relevant as well… The sellers that are making a margin takes the hit on the merchant costs, not the customer. (Note: in non-travel, the seller is making 25 – 75% margin on the product, unlike TMC’s, who are essentially reselling the product at cost). This debate has come up before, but pay me 25% margin and I’ll cover the merchant fee.

    Insurance brokers… not sure they cost more than going direct…. although there are direct only insurance providers in the business (i think that worked well with some airlines in the past… #sarcasm).

    While the way GDS’s price their services today may/may not be relevant, pushing the cost on the reseller, who is essentially doing it for free, does not appear to be a logical solution. The extra value TMC’s provide to customers, the customer pays for (the distribution of the product, in general, is not extra value, its everything else). The extra value for selling through the GDS today, is most likely efficiency for all parties involved (although that may change). Our goal, as a TMC, is to emulate how the airlines sell their product (kind of like LV, we want to present their product in the way they want it presented), if we can up-sell the client as well, that just brings more revenue to the airline (at a small cost via the GDS) – we have started doing this already by offering the UP fares (i.e. First Class tickets) to all clients (if out of policy, then it is up to customer if they can book it or not, however the traveler sees the fare – same as on airline site).

    So, airlines, let us up sell your product to make more revenue/profit for you, and realize (like nearly every other manufacturer/service provider) there is a cost for distribution.

    Those are my random thoughts on this topic…

    • Scott Gillespie says:

      Hi David,
      I see your point. It’s hard to imagine how an airline can support its distribution partners by offering the same product at a cheaper price in its direct channel.

      Many suppliers provide a price umbrella for their distribution partners. Suppliers do this by offering their goods at full retail on their own sites, while allowing their distribution partners to offer the same goods at discounted prices, or they may insist that those partners never discount the goods, like your Louis Vuitton example.

      The difference, to me, is that the products are not really the same. The indirect product, via the GDS, comes with more benefits to the buyer in the form of better agent productivity and service, better shopping comparisons, and better data integration.

      Lufthansa seems to be recognizing the difference, and in effect, discounting its direct-channel price to make up for those product deficiencies. I don’t know if the 16 Euo price is right or not, but the pricing rationale makes sense to me.

  3. Scott,

    I think you want to focus on the GDS surcharge issue here, so I will try to limit my thoughts to that.

    Mark brings up the issue of transparency, using YQ as an example (about which I agree with him). Putting on my travel buyer hat, the issue I have with the GDS is the lack of transparency on how some of the money the airline pays to the GDS flows to the TMC. I would much rather pay the TMC directly, so I know what they are getting, then have this opaque payment to them. Indeed, the largest corporations force their TMCs to rebate all such fees to them, but a buyer needs to have a lot of air spend to get that kind of deal with a TMC.

    I also think that David brings up a key point – the supplier-distributor relationship here (airline-GDS) is broken. The relationship is by far the most negative, contentious and in some case even poisonous I have seen of any industry I have worked with. There is always some tension in supplier-distributor relationships, but it is tempered by a desire to improve the shared business interests of both sides, and these shared interests usually carry the day. I have seen precious little evidence from either airlines or GDS that they even recognize they have a shared interest in improving the travel business.

  4. Robert says:

    You know, it occurs to me there has been a change in industry mindset. Originally it was the TMC’s that everyone thought were doomed with the advent of direct channels, but it seems people have realized they still need TMC’s. If a corporate decides to book direct with an airline through a direct online channel because they are offering a cheaper direct option they inevitably start to go down the track of an in-house agency to look after everything else they need to book, then the economy gets tough and they look to reduce fixed cost, which inevitably is the in-house agency and they end up where they started. It’s the legacy GDS channel that now seems to be the one’s that are being challenged – simply being challenged to distribute inventory in a better, more cost effective manner.

  5. Pingback: Why Lufthansa Will Change Our Industry for the Better | Gillespie's Guide to Travel+Procurement

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