How Airlines Are Trying To Thwart Air Ticket Sales Through OTAs And The Possible Ramifications

by Trefis Team
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Airlines And The OTA Tussle

Airlines are seldom happy to sell inventories through third-party online travel agencies (OTAs). The reasons are twofold. Firstly, airlines need to pay a fee to advertise their products on the OTA platform, and secondly, airlines can charge extra or sell features such as seats with extra legroom, frequent flier miles, etc. through their own websites, which is not possible elsewhere.

Many airlines, over the years, have tried luring customers to their own websites through features such as bonus miles, e.g., getting extra miles for direct bookings or discounts on promotional codes (used by airlines such as Frontier Airlines, Spirit, Qatar, Air New Zealand etc.). However, this eats into the margins for the airlines, and hence they are not too keen on these offers. There are yet other airlines who don’t list their fares with the third party travel agents, such as Southwest Airlines (NYSE:LUV) and Allegiant Air. Some airlines don’t go to that extent, but selectively remove fares from certain websites. [1]

See Our Complete Analysis for Airlines And OTAs Here

Airlines’ Measures To Dampen Ticket Sales Via OTAs

However, the recent measures about to be undertaken by certain airlines are much more restrictive for the buyers and more prominently, for the online travel agencies (OTAs). Lufthansa Group (Lufthansa, Austrian, Brussels, and SWISS) has decided to add an $18 fee for any bookings made outside their own websites, starting from September 2015. Instead of completely removing their fares from these OTA websites, Lufthansa is adding a disincentive for users to book through OTAs. Users might search for the best fares through the OTAs and then book through Lufthansa, but will the OTAs be quiet towards this discriminatory treatment? That is the question we need to ask right now.

Lufthansa Group has made an exception for the third-party travel agency, CheapOair and its parent website, Fareportal. Other than Lufthansa Group owned websites, users can book through this OTA without incurring additional costs.

Similar to booking with Lufthansa sites, CheapOair will offer passengers with advanced seat reservation choices, e.g., seats with additional legroom, and seats in better positions with priority boarding. [2]

Lufthansa is not the first airline to put through such a charge. Earlier in May, Delta (NYSE:DAL) was having a similar tussle with the OTAs. Delta withdrew its flight and ticket data from several third party websites. By forcing users to book from its own website, Delta boosts its profits and reduces costs of booking fees to agents. However, OTAs did retaliate against this step. TripAdvisor, CheapOair, and Hipmunk voiced complaints to Travel Technology Association and the latter has sent it to the department of Transportation for review. [3]

Reasons Presented Behind These Charges

Lufthansa aims to avoid fees to global distribution systems (GDS) – software and technology companies like Amadeus, Sabre, and Travelport. According to Jens Bischof, the COO of Deutsche Lufthansa AG, the percentage of revenues generated from air tickets sales has been on a downhill trend. On the other hand, other service and system partners in the value chain recorded higher margins. Hence this step is meant to gain back a part of the revenue. [4]

However, this said, Lufthansa is creating means for travel agencies and corporations to directly connect to its websites through IATA’s New Distribution Capability, and consequently bypass the GDS. The technology, still under work in progress, might face resistance from travel agencies, corporations, and the global distribution systems. [5]

Pertinent Questions

How are Expedia (NASDAQ: EXPE), Priceline (NASDAQ:PCLN), and TripAdvisor (NASDAQ:TRIP) going to react to such a restrictive measure? Will they refuse to feature Lufthansa’s fares on their websites altogether? Or, worse for the users, will they start charging users for searching airfares on their websites to compensate for the dent in their sales? In that case, the pricing transparency and comparison of flight prices might cease to exist. This wouldn’t translate into good economics or fair play. Will the government step in to intervene in these measures? [1]

In 2014, 44% of the 766 million U.S. travelers booked their flight tickets through OTAs, such as Expedia, TripAdvisor, and Orbitz (soon to be a part of Expedia). [3]

Whatever will be the outcome, it is not going to be a pleasant one for either the OTAs or the users if more airlines follow this policy.

Will History Be Repeated?

Earlier, in 2004, Northwest Airlines made an attempt to levy charges on OTA bookings made through GDS. They had to withdraw the plan after criticisms from GDS companies, trade groups, and corporate clients, who threatened to shift away from the carrier. At that time, Northwest didn’t find support from any other airlines and it was about to face retaliation from all four prominent GDSs, a lawsuit, and a potential U.S. Department of Justice investigation. As  a consequence, Northwest had to withdraw its policy. [6]

We shall wait to see what happens this time. Will history again be repeated, or will the airlines finally be successful in bypassing the GDS? The most likely outcome might be a midway solution. Airlines might agree to feature on the GDS powered websites, i.e., on all popular OTAs, with the condition of an increased share of air ticket sales’ margins. This, in turn, might result in a fresh round of airfare hikes, thereby hurting the end users.

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  1. Showdown coming between airlines and Expedia, Priceline, The Seattle Times, June 15, 2015 [] []
  2. Lufthansa Expands Services With CheapOair Even as Airline Pursues Surcharge, Skift, June 16, 2015 []
  3. Delta infuriates travelers by withholding data from booking sites, but sites band together to fight back, Road Warrior Voices, May 20, 2015 [] []
  4. Lufthansa will charge extra if you don’t buy your tickets through its website. Is this becoming a trend?, Road Warrior Voices, June 4, 2015 []
  5. Lufthansa Group to Add Surcharge For Flights Booked on Other Sites, Skift, June 2, 2015 []
  6. Northwest Backs Down: Following Backlash, Carrier Rescinds GDS Fees, Keeps Direct Focus, Business Travel News, September 6, 2004 []
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