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BTC responds to IAG regarding proposed surcharge

BTC responds to IAG regarding proposed surcharge

Kevin Mitchell, Chairman of Business Travel Coalition, today published the following letter to International Airlines Group (IAG) – the parent company of British Airways and Iberia, regarding surcharge of £8 per segment proposed by IAG:

7 June 2017

Mr Jerry Dunn
Group Manager Distribution
International Airlines Group
Waterside, PO Box 365
Speed bird Way, Harmondsworth
UB7 OGB, United Kingdom

Dear Jerry,

I acknowledge your letter of 6 June 2017 regarding the Business Travel Coalition communication to government authorities in London and Brussels regarding a recently announced International Airlines Group (IAG) – the parent company of British Airways and Iberia – surcharge of £8 per segment (£16 per typical return ticket). The surcharge, effective 1 November 2017, would apply when a customer purchases a ticket anywhere other than from IAG-controlled distribution channels, e.g., websites, service centers and airport ticket counters.

In addition to those channels, you point to newer channel options that will be free to use for travel agents and travel management companies (TAs). They would include New Distribution Capability (NDC)-based direct connections with the carriers, NDC-based aggregators, NDC-based self-booking tools and an IAG TA portal.

I note that you characterize these new alternatives as options but since IAG is imposing a £16 return-trip penalty for the use of existing neutral distribution channels, if it’s any sort of choice, it’s a Hobson’s choice. It is very interesting that three of the four alternatives that you described in your letter to me are NDC-based.

And the reason that is interesting is that those who witnessed the launch of NDC in 2013 by the International Air Transport Association (IATA) will recall vividly that the multiple airlines that are the controlling members of IATA designed NDC as a tool to defeat fare transparency.

This is established beyond debate by the contemporary remarks of the then IATA CEO who pushed for the adoption of NDC and left no doubt as to the airlines’ motivation.

There is perhaps no better proof that the prime objective of NDC is to destroy the current transparent pricing model, and that NDC has been engineered to attain that goal, than the comments made by Tony Tyler, CEO of IATA, in an interview on or about July 24, 2012 with Flight Global, where he explained his objections to the current distribution model:

“We’ve [the airlines] done a great job of improving efficiency and bringing down costs, but we’ve handed that benefit straight to our customers,” Tyler says. “As soon as someone’s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers – and you’ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves.”

This was not the only occasion when Mr. Tyler described NDC as an antidote to the current distribution model’s vexing role in keeping prices low. Indeed, at the IATA Conference where NDC was brought forward for approval, he introduced the topic by saying the following:

“[W]e will never reach our full potential as an industry if the core of the value chain cannot generate sustainable returns. So, we have a common problem….

[The current GDS-based model] is focused only on finding the lowest price. This has resulted in the commoditization of air travel…[t]he solution is the New Distribution Capability (NDC)” (Tony Tyler, IATA CEO, opening address at World Passenger Symposium, Oct. 16, 2012) _____

1 The fact that NDC is meant to stop what IATA views as excess competition on price is further proven by the questions and answers describing NDC posted on the IATA web site. The first such question and answer states the following:

Q1 How will NDC be different from the service Global Distribution Systems (GDSs) offer today?

A: NDC will enable airline products to be displayed in a differentiated and personalized way on the travel agent screens, as opposed to a commoditized low fare search display today.
_____

When confronted with stiff industry opposition at the US Department of Transportation, airlines ostensibly scaled back NDC to be only a communications protocol. IAG’s actions strongly support the suspicion that some carriers continue to view NDC as a weapon to destroy fare transparency.

In your letter to me, you declared how valued TAs are by IAG. If you truly valued your TA partners, though, you would not have sprung this surcharge scheme on them, but rather, entered into consultations with them. Your reference to new distribution options that are lower cost than traditional systems, aka global distribution systems (GDS), is made without any facts whatsoever to support that claim – facts recently requested by the Guild of Travel Management Companies. Can you provide the industry with financial analysis, for example, of the total cost of your modern distribution options as well as your call centers and airport ticket offices, including your required sales, technology and advertising costs, compared with the GDS-enabled TA channel costs?

You assert that these “free” channels are available for TAs to use. However, in an effort to avoid the surcharge, those options would fragment today’s highly efficient reservations process where air, hotel, rail, car and other services are in a single booking. TA information-technology costs would increase including for back office systems and the laborious use of passive bookings in the GDS to complete a record. If you truly valued your TA partners, you would not foist new inefficiencies and costs on them. In order to prevent the loss of customers to your websites, TAs would have to use less efficient processes or pay the surcharge – a false choice and made possible only because of your dominant market position.

You take credit for transparency and providing TAs with a 5-month advance notice the implementation of the surcharge. Giving notice is no substitute for sincere collaboration. If IAG is interested in transparency, how does it justify a £8 per segment surcharge when the cost via a GDS averages £2 and the cost via Google is approximately £16? Please inform the industry and its regulators.

IAG wants the industry and regulators to believe that the surcharge is designed to recover the cost difference between the “higher cost” GDS channel and your proposed lower cost channels. Can you provide the proof for this very important contention? Have you ever commissioned a study by outside, independent researchers to determine the total costs and value generation of each distribution channel? If so, can you share the results with the industry?

What’s more, the differential between free access to airfare content and £16 cannot actually be the cost difference, because selling direct isn’t free. Rather, this looks like an attempt to pawn off on consumers the entire amount of distribution costs via the independent channels, and maybe more by turning a cost center into a profit center and then securing higher yields on unsuspecting infrequent travelers visiting your websites where comparison shopping is non existent.

Nevertheless, you argue that IAG’s strategy is not revenue generation, but rather cost reduction. Unless you can prove otherwise, anyone in the industry knows that call centers and airport ticket offices are the most expensive channels generating the least economic value whereas the GDS-powered TA channel is less costly and creates more economic value. Indeed, GDS fees have dropped significantly over the past 10 years. So, if this were about recouping distribution channel costs, then you would be applying the surcharge to your own most expensive channels.

You have offered all manner of aspirational claims that new back-office solutions will be developed to address the many problems your surcharge would create, but offer zero guarantees. You say, “…there is no reason why the new solutions will not be compatible with existing back-office systems operated by TAs and corporate customers, assuming the providers of these back-office systems engage with the new options.” Such a statement is revealing and demonstrates a lack of understanding of the managed-travel model and processes and a total disregard for the collaboration necessary to understand your partners’ needs and risks. Taken together, this is why the European Association of Travel Agents and Tour Operators (ECTAA) today in a statement condemned IAG’s announcement.

Finally, in conclusion you state that IAG is not forcing a choice, but rather, making sure the cost differences of alternatives are clear to TAs. Put another way, it will be clear to TAs what the options will cost them in terms of surcharges, new investments and inefficiencies foisted upon them. What will not be clear is what the true costs are, and value created, in total, for each distribution channel option for IAG. Unless IAG provides the proof for all its assertions, this is entire scheme is unacceptable.

Sincerely,

Kevin Mitchell
Chairman
Business Travel Coalition