The Bundeskartellamt Should Investigate Lufthansa Group’s Anti-Consumer Proposal

Published on : Friday, June 5, 2015

download (1)Lufthansa Group’s (LHG) recently announced a proposal that it would surcharge customers 16 Euros if they purchase a ticket anywhere other than its websites, service centers and airport ticket counters beginning on 1 September 2015 represents a possible abuse of it dominant market position and should be investigated by Germany’s competition authority, the Bundeskartellamt and the EC’s DG COMP.

While many current GDS-airline contracts preclude programs like the proposal just announced by LHG, if successfully forced on the industry, the scheme could spread throughout Europe, North America and elsewhere – antitrust immunized alliances all but guarantee it.

Back in 2006 and 2007, in the U.S. and Europe respectively, major airlines threatened travel management companies (TMCs) and their corporate, university and government clients with denied access to schedules and fares through the global distribution systems (GDSs). The goal was to decrease global GDS segment fees. Those fees have fallen by more than 30 percent since.

LHG claims that the goal of its Distribution Cost Charge (DCC) program is again to reduce distribution costs. However, that claim is belied by the fact that the surcharge would not be applied to the two most expensive LHG distribution outlets – its own airport ticket offices and reservation centers.

DCC is an extension of some major U.S. and European carriers’ relentless war on price transparency and competition, a war that is all about protecting and increasing revenue. LHG appears to be pursuing a five-part strategy to drive new revenue levels – all generated from consumers and the managed-travel community.

Part 1. An ambition of the DCC program would appear to be to drive leisure and business travelers seeking to avoid the 16 Euros surcharge to the walled gardens of LHG’s websites where comparison-shopping does not exist and where LHG would generate higher yields – especially from unsuspecting, infrequent travelers. For managed-travel programs the surcharge represents an indirect price increase.

Part 2. LHG also would seem to want to use its dominant market position to price online travel agencies (OTAs) out of the market and out of business, as many OTA customers would be unwilling to pay 16 Euros when is free. LHG and OTAs are direct competitors in the marketplace for distribution services, which is very positive for consumers.

Strong, independent distributors are necessary to keep airlines honest on their own websites and in their offerings elsewhere to consumers. OTAs uniquely provide consumers with the comparison-shopping tools that keep pricing discipline in the system.

Part 3. LHG’s pilots’ strikes, competition from well run Gulf carriers and an 82 percent decline in net profits for its last financial year could suggest that DCC is merely a public relations stunt designed to shift blame for poor management performance to third parties.

That analysis, however, ignores how unremitting LHG has been in endeavoring to block foreign carrier competition and protect and increase revenue. It has petitioned the U.S. government to deny Norwegian Air International’s right to provide service to the U.S. It likewise is pressuring regulators in Brussels and Berlin to stop competition from the Gulf carriers – Etihad Airways, Emirates and Qatar Airways.

Part 4. Product distribution is a cost of doing business for any industry. Through DCC, LHG is likely attempting to turn a cost center into a profit center first by shifting a significant amount of the cost of distribution to TMCs and onto their clients’ travel departments and then eventually charging for access to their fares and schedules.

Part 5. LHG’s competitors have 3 months to evaluate the proposal. If initially successful with the DCC program, LHG would be able to lock in the new revenues by forcing other global network airlines to follow as LHG would have both cost and yield advantages.

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