Is the LH PFP a Threat?

The BTC has been sounding the alarm for Corporate Travel Managers and TMCs about the Lufthansa Preferred Fares Program (PFP). I encourage people to read up on this important development in travel distribution realignment.

The bottom line is that LH wants to finally create a ring fence around distribution costs. Their ultimate goal is to shift the cost burden from their side of Operating Expenses to the Distributors of their products. Fine in theory rather more complex in practice which is why this program is difficult to understand and complex to implement.

My personal sense is that this is just another battle in a longer war. LH is determined to reduce their cost structures and improve their bottom line through cost re-deployment. They are well within their rights to do so. But be careful what you wish for. It may just come to pass. If or rather when it does - then I believe the realignment may not necessarily be in favor of the airlines.

The more interesting battle is what is happening behind the scenes between Amadeus (in which LH has an 11.5% share) and the airline. The Travel Managers and the agencies - both corporate and leisure will become pawns in this battle. One can only imagine what Amadeus board meetings must be like with the 2 VCs very unhappy that LH is doing this. if LH is successful there will be no shortage of airlines queuing up to do the same. Even if they are not - there will be other like attempts.

To give you some perspective - I provide verbatim the email from BTC's Kevin Mitchell. I think it behooves all of us - no matter where we sit in the debate - to understand and then to consider what the impact will be. T2 Clients are indeed wrestling with this and we have clearly pointed out where we think it will end up. Lets just say I am somewhat bearish on the GDS model.

Cheers

TEXT follows: From Kevin Mitchell BTC.

Dear Travel Industry Colleague,

I write to you with a sense of urgency regarding a program Lufthansa (LH) introduced called Preferred Fares Program (PFP) that will increase corporate customers’ costs and undermine the highly efficient processes that have become the signature and goal of modern travel management. LH is imposing an indirect fare increase of tens of millions of Euros through its PFP, which will also include increased VAT and credit card costs as well as travel management company (TMC) handling fees.
If LH is successful in shifting virtually all of its distribution costs to its customers, undermining the best-practices of corporate travel managers, and tilting the competitive playing field to its advantage, other global airlines will have little choice but to implement similar programs. I ask that you to consider joining colleagues from around the world and lending your name to the Signatory Letter to LH below. (You can provide your approval to add your name to this letter at http://tinyurl.com/6xhgwg )
Background
In January 2008 LH announced PFP for gradual phasing in beginning 1 July 2008 in Germany, Switzerland, Austria and Lichtenstein. To make the PFP program deceptively “attractive,” LH raised its standard fares by €30 for a round-trip while offering the lower, original fare structure via PFP wherein a €4.90 per-segment surcharge would be applied. As such, a 4-segment roundtrip would cost €19.6 under PFP, compared with a €30 fare increase.
Once it determined that the LH surcharge was part of a larger TMC channel discrimination initiative, Amadeus announced that it would absorb the surcharge on behalf of its TMC subscribers until at least the end of 2008, while it pursued a resolution via negotiations with LH. Amadeus recently communicated its decision that on 1 February it will cease absorbing the LH surcharge.
The goal of the Signatory Letter below is to encourage LH to forge distribution agreements that are equitable for all distribution system participants, including the corporate buyer, and that preserve the efficiency of the present TMC channel.
Thank you for your consideration in this matter.
Best regards,
Kevin Mitchell
Chairman, Business Travel Coalition
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DRAFT SIGNATORY LETTER
Tue Dec 9 09:06:28 2008
Mr Wolfgang Mayrhuber
Chairman and Chief Executive Officer
Deutsche Lufthansa AG
Airportring
60546 Frankfurt

Dear Mr Mayrhuber,
As major Lufthansa customers headquartered in Germany and around the world, we are writing to express our anger over your airline's imposition of an indirect fare increase of tens of millions of Euros through your Preferred Fares Program (PFP), which will include increased VAT and credit card costs as well as travel management company (TMC) handling fees.
Worse, your PFP surcharge will undermine our existing highly efficient corporate travel procurement processes by requiring customers to create new infrastructure and workaround procedures. We will be forced into an expensive and inefficient case-by-case analysis of which fare is more economical to purchase -- either a PFP fare with a surcharge and a TMC handling fee, or a standard fare offering.

Lufthansa is attempting to substitute its judgment for our clearly articulated preferences. Without collaboration, you are forcing a choice between a highly inefficient process for us and our TMCs, or paying significantly higher fares. This is a false choice and we do not welcome your unilateral approach. Corporate travel managers, in close collaboration with their TMCs and technology partners, have developed a professional and productive travel procurement environment that must not be poisoned.
The marketplace for commercial air transportation services is now highly transparent as a result of this longstanding and mutually beneficial collaboration. Complete fare information and point of sale functionality are now on one screen for both TMC agents and travelers utilizing automated booking tools. Now, travel managers can use this advanced purchasing process to drive business to preferred airline partners down to the city-pair level.
Your initiative to damage the existing TMC channel and its supporting technology partners; undo our progress in developing efficient, best-practice processes; and once again endeavor to dominate the point of sale is a flawed strategy strongly rejected by your very best customers. We need to find ways to strengthen our preferred channel, not weaken it.

Such negative actions on your part will make it more difficult and expensive for our companies to continue purchasing your product. Our companies, with air travel needs in markets where you are strong, and in markets where you seek to grow, will direct future business to airlines that build their distribution programs around our preferences. As you are no doubt aware, we do have a choice in air travel.
We urge you to promptly forge distribution agreements that are equitable for all distribution system participants, including the corporate buyer, and that preserve the efficiency of the present TMC channel. We hope you will eliminate the PFP program and rededicate Lufthansa to achieving our mutual success.

Sincerely,


You can provide your approval to add your name to this letter at http://tinyurl.com/6xhgwg