April 3 - BTC Statement Before The VDR Customer Hearing Committee Regarding Lufthansa Preferred Fares Program

Mr. Chairman, and members of the Customer Hearing Committee, thank you for the opportunity to appear before you today and share BTC thoughts regarding Lufthansa’s so-called Preferred Fares Program, and more generally, distribution system reform and the role of the customer.

It is most unfortunate that Lufthansa has declined the invitation to appear here today before you and its very best customers. Indeed, this customer event offered Lufthansa the opportunity to explain its highly controversial program. It’s an opportunity missed. I interpret their silence as more troubling evidence that this PFP, which should more accurately referred to as an AFP or Abusive Fares Program, is nothing more than an anti-consumer, unilaterally-dictated attempt to increase prices and undermine our preferred distribution practices.

Without any meaningful prior consultation whatsoever Lufthansa announced its AFP, which seeks to overturn and replace the transparent and efficient managed travel model German travel managers have worked so hard to develop over years with their travel industry partners. The new model seeks to shift 100 percent – or more – of the airline’s distribution costs to the customer, and in discriminatorily surcharging one distribution channel, the Amadeus GDS, effectively drive consumers to lh.de.

What’s new here is that Lufthansa is utilizing a direct surcharge on travel agencies to manipulate the marketplace to affect a distribution cost-transfer to the customer, undermine corporate managed travel programs and drive unsuspecting small and mid-size enterprise travelers to its website.

There is no doubt that AFP represents a backdoor price-increase and raises corporations’ costs through new travel management company fees and new process costs. However, the most egregious and insulting slap-in-the-face is the arrogant message to travel buyers that Lufthansa intends to seek to unilaterally re-engineer the managed travel model and it is not even going to consult them; they really do not care what travel buyers think! In BTC’s years of pushing back against abusive airline practices, AFP stands alone in its degree of arrogance. Lufthansa has no compelling counterargument to offer; it doesn’t even have the decency to show up at today’s customer event.

Well, how should travel buyers respond to all this?

Eighteenth century German philosopher Immanuel Kant said, “All the interests of my reason, speculative as well as practical, combine in the three following questions:

1. What can I know?

2. What ought I to do?

3. What may I hope?”

In every major campaign for corporate travel rights, I return to Kant for inspiration.

So here’s what I know. No industry or business, to my knowledge, has ever been successful over time that did not wrap its strategies, policies and culture around the customer. The airline industry seems chronically challenged by this concept, especially when it comes to treating the corporate travel buyer as the über-customer he or she is. I honestly do hope that Lufthansa finds a way to achieve sustainable success; its services are extremely important to the traveling public worldwide.

I also know that bullying customers and using a dominant market position to manipulate and impose one’s will on the marketplace is not a long-term strategy for sustainable success – especially when there are new entrants waiting in the wings. I know that it’s arrogance, in its most pernicious form, to seek to replace outright the TMC – corporate managed travel model without consulting with and securing the support from corporations that are not only Lufthansa’s best customers, but who also largely finance the aviation system through their purchases of airline tickets.

Lufthansa recently told BTC: “Rest assured that we are in constant dialogue with our customers regarding this…,” meaning its new fares program.

BTC polled corporations in Germany and abroad to get a flavor of that dialogue. Here’s a representative sample of what we heard from them:

· It's a nightmare!

· This is a hidden price increase.

· This is a big increase of process costs and loss of transparency.

· It will massively increase the costs to the travel industry, create more work and produce less transparency on fare costings. The industry is being bullied into submission.

· The current distribution system works very well. It is efficient, low cost, and fair to all. Other industries understand that distribution is part of the cost of doing business and the customer understands that it is currently included within the ticket cost.

· Lufthansa is penalizing their best customers, who typically pay premium fares already.

In short, AFP is detested. It is probably the worst-received program in the history of commercial aviation. Why is AFP only being implemented in Lufthansa’s stronghold home markets? The answer would appear to be that a program this toxic could only be forced upon market participants; it would never be willingly accepted or negotiated where there is sufficient competition.

We can also know that the proposed replacement TMC-managed travel model, as embodied by AFP, is deeply flawed from an economic-rationality point of view. In this proposed model, one of Lufthansa’s objectives is to shift its distribution costs in their entirety to the customer, or perhaps turn what should be its own legitimate distribution costs into a profit centre. The cost and inefficiency issues identified thus far by the industry only begin to scratch the surface of the problems for corporate travel buyers should this cost-shifting, free distribution model succeed.

Let’s examine this.

If airlines obtain GDS services for free, economists will tell us that you have created a classic free-rider problem wherein the user of the services has no incentive to do so efficiently or economically because someone else bears the freight. The concept is simple. Anyone who consumes a service that is paid for by someone else has the inherent incentive to over-indulge. Airlines themselves recognize this in their business model, which is why they assess a hefty service fee every time consumers using all but the highest priced tickets make a change.

Let’s look at two examples.

First, today, airlines have a disincentive to make very frequent schedule changes because each time they do, they generate a cancel and a rebook event in the GDS, both of which result in an added charge to the airline as both transactions drive added data processing costs in the GDS – as well as added costs for the travel agency that must notify the passenger. If GDS participation is free to airlines, why would airlines not engage in more schedule-change churn to “maximize” fleet utilization?

Second, and more globally, an airline that knows that the corporation pays the GDS bill, will have no disincentive to demand from the GDSs added functionality the carrier may want – like more ability to sell unbundled products to corporations, like pre-reserved or special seating for a fee, often in an ad hoc, non-standardized way, because for the airline, “price is no object.”

So, with this model corporate travel buyers face the inevitable prospect of runaway costs that they will have very little control over. And of course, if Lufthansa gets away in 2009 with a surcharge of €4.90, in 2010, why not €6 or €7?

Back to Kant, here’s what I recommend corporate travel buyers do:

1. Educate corporate senior management about risks regarding the long-term cost structure associated with business travel activities should the AFP model succeed.

2. Demand that TMCs decide whose interests they serve: airlines’, or corporate clients’.

3. Find a new TMC, if necessary, that commits to representing the company’s interests and work on a market share shift-plan to move business to airlines that respect the customer’s managed travel program needs.

Lufthansa, based upon history, is taking the high-odds bet that corporate travel buyers will remain silent out of fear of retaliation and a resignation that they are powerless. All VDR, ITM, BTC and other organizations can do is empower travel buyers with a seat-at-the-table in Cologne, Hamburg, Brussels, London and Washington as well as a platform from which to amplify buyers’ concerns and needs to airlines’ boardrooms. Ultimately though, it is up to individual corporations, by their involvement and direct action to make the difference.

The success-scenario is very easily grasped. There is absolutely no industry participant, other than the corporate travel buyer, who can decide the fate of AFP. If buyers individually decline to take a leadership position, there will be a bad outcome in the short and long-terms. If with the support of corporate senior management teams, buyers take a leadership position, and say nein to Lufthansa, the outcome will be positive. It’s that simple.

And finally, what shall we hope? I perceive great leadership is here today. VDR, ITM and individual courageous and enlightened travel buyers are saying no, nein to AFP. BTC has been involved in these same kinds of struggles in the UK and U.S. and knows the power of informed and engaged travel buyers; we do not have to be a victim. When corporate travel buyers assert themselves to protect their corporations’ interests the outcome can be favorable for their corporations and all participants in the distribution system.

I welcome your questions.

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