Lufthansa Redirects Commercial Strategy

With the percentage of revenue being generated from the sale of its flight tickets “continuously decreasing,” Lufthansan Group is taking action to “redirect” its commercial strategy in order to counteract this trend.

In 2015, the Lufthansa Group indicated that it expects to generate an adjusted EBIT (earnings before interest and taxes) of more than EUR 1.5 billion before costs (strike-related action). Its new commercial strategy is being launched to ensure that, in the future, a greater portion of the revenue will be earned from flight operations — the actual area of service to the customer.

Announcing the new strategy, Jens Bischof, member of the Lufthansa German Airlines Board and chief commercial officer (CCO) of Deutsche Lufthansa AG, explained that: “Until now, the percentage of revenue generated from the sale of flight tickets by our airlines has continuously decreased. While other service and system partners in the value chain are recording increasing margins and returns, our airline’s earnings have been compromised over time, even though they are the actual providers of flight services. We want to counteract this trend by refocusing our commercial strategy.”

As a result, the airlines of the Lufthansa Group – which include Lufthansa, Austrian Airlines, Brussels Airlines and Swiss International Air Lines Ltd., (SWISS) — will now offer their services on a more flexible and modular basis, with individualized price options and ancillary services.

The obvious example of this move is the previously announced group-wide new Economy Class fare concept on European flights, to be introduced by Summer 2015, will enable the passenger to select their desired services, with such fare options as “Light,” “Classic” and “Flex.”

For the travel trade, however, the new commercial strategy also includes a clear cost differentiation in the various booking channels.

Currently, the costs for using global distribution systems (GDS) are several times higher than for other booking methods, such as Lufthansa’s online portal http://www.LH.com .

In total, the yearly GDS costs come to a three-digit million euro amount for the Lufthansa Group.

These services, however, are primarily used by other partners in the value chain.

A large number of services are paid by the Lufthansa Group carriers, but are only partly used by them.

Among others, the GDS services comprise functionalities which offer many extra services in addition to the basic features of booking, processing and ticketing.

Such examples include the option of combining and booking world-wide, multi-airline flight offers, as well as an integrated booking and invoice processing.

As of 1 Sept. 2015, the Lufthansa Group airlines will, therefore, include a surcharge – the “Distribution Cost Charge” (DCC) – of EUR 16 for every ticket issued by a booking channel using GDS.

The new charge will not be added to flight tickets purchased using ourown booking channels.

This predominately includes the airlines’ websites (http://www.LH.com, http://www.swiss.com, http://www.austrian.com, http://www.brusselsairlines.com), as well as the service centre and ticket counter at the airports.

Travel agencies will also be able to book tickets without the DCC, using the online portal at http://www.LHGroup-agent.com.

Furthermore, corporate customers will be able to book their individually negotiated contract rates excluding the DCC at http://www.LH.com. Customers of Lufthansa Group Airlines can certainly count on continued fare transparency. The display of the ticket will always show the final fare.

Innovative ancillary services and enhanced price options require suitable sales technology. The technology of our existing sales systems cannot adequately display the individual offers with their variety of product components.

The Lufthansa Group’s airlines are, therefore, in the process of developing a new booking method to enable sales partners to connect to their IT systems directly based on the new IATA data standard NDC (New Distribution Capability).

The first NDC pilot project is currently being tested at SWISS and should begin at Lufthansa during the course of this year.

CCO Jens Bischof explained: “At present, airlines are not yet able to market their services via all sales channels, as it is common in other industries. The contracts and structures have previously prevented any deregulation in many areas. We want to change this with our new commercial strategy and take advantage of greater degrees of freedom in our sales activities, providing our customers with the exact tailor-made services that they are looking for and wherever they are looking for them.”