When online travel agencies (OTAs) roared into the marketplace a decade ago, hoteliers soon felt like early adopters of personal computers—“Can’t live with ’em, can’t live without ’em.” On the one hand, travel had shriveled under the weight of recession and 9/11. Here were these upstart dotcoms with more money than the treasuries of some countries, charging booking commissions in excess of 30 percent on bargain-basement room rates. The salt in the wound came when complaints arose—guests turned to the hotel and came away angry when told to take it up with the owner of the transaction, the OTA.
Then came the name-your-price, opaque services—priceline.com and hotwire.com, for examples. Still, in the midst of recession the OTAs got Americans traveling again, a huge matter considering business and meetings travel had dropped so much. As Cindy Estis Green, managing partner of the Estis Group and author of Demystifying Distribution explains, “For that we are all grateful.”
Such a lopsided relationship couldn’t remain one-sided for long. By 2006, balance between hoteliers and OTAs was achieved, due in large part to the creation of branded Web sites owned and operated by hotel companies. So fierce was the pushback by hotel companies, one brand (InterContinental Hotels Group) even refused for a while to work with the largest OTA, Expedia. Into the mix came the meta-search firms, kayak.com and sidestep.com, among others, that searched the best deals across all channels and then sent the value-oriented traveler to the home Web site of the airline, hotel, and rental car firm.
OTAs quickly learned the art of dynamic packaging, which kept them in the game. By combining the pricing for air, hotel, and car into one package, the OTAs kept the favor of deal-hungry travelers and hoteliers who liked the anonymity of the price structure because nobody could know just how deeply discounted a room might be. “Dynamic packaging has definitely been [OTA’s] anchor and their strength,” Green says.
Then, in April came news of the big three companies—Expedia, Travelocity, and Orbitz—lifting the fees paid by
airline passengers for trans- actions. Besides pleasing travelers, eliminating the fees shone a harsh light on the hyper-competitive nature of the online travel agency business. Orbitz next upped the stakes by removing the fees bundled with taxes paid by consumers booking hotel rooms.
Unbundling the Fees
“Orbitz fired off the latest salvo in the continuing war between the OTAs by removing the somewhat hidden booking fees that have pervaded the industry’s merchant model,” travel analyst Tom Botts of Hudson Crossing wrote on his blog in April. “These booking fees have typically been included in the ‘second step’ of the booking process after the consumer clicks on the rate at the hotel they wish to purchase. The fees have been bundled together with taxes in a single ‘taxes and fees’ line without delineation to the consumer on which portion was/is taxes going to the government and which portion is fees going to the OTA.
“This is a page right out of Priceline’s playbook but with a twist,” Botts continues. “PCLN eliminated the fees on non-opaque (meaning not name-your-own price reservations) several months ago under their ‘Fee Chop’ moniker but only shows the ‘all-in’ price when the consumer clicks to book. Orbitz, to their credit, is showing the full price, including taxes on the first page—something even Hilton.com does not do.”
Botts next sampled a room for a Wednesday night at the Hilton New York to see how the big OTAs and Hilton.com compared. “As expected, every site we tested came back with the same initial price: $219,” he wrote in his blog. “However, from there, prices diverged widely when the “all-in” price was compared.”
Such actions bear out Bill Carroll’s view of the battle for market share. Carroll, a senior lecturer at Cornell University School of Hotel Administration, sees OTAs working through a twin set of issues.
“One is that clearly they are competing with one another, seeing opportunities to capture market share,” Carroll says. “They are jockeying for improving their market share in the ‘downturn.’ Number two is that a falling tide drops all boats. So, they, too, are seeing declines in their revenues. In the case of one, just plain volume. In the area of hotels, this is probably more associated with their rate levels than with transactions. I would suspect, even though there’s not specific information on it, bookings are probably growing year over year, even in the downturn. But the impact on ADR [average daily rate] is so dramatic that it is not showing as growth in terms of revenue.”
Evolution or Revolution?
Would OTAs be struggling for market share were it not for recession, or is their current status more a matter of the evolving nature of online travel marketing? No one interviewed for this article ruled out the role of recession, while a few cited the emergence of new online marketing concepts. Ashwin Kamlani recently left his marketing position at Sol Melia Hotels & Resorts to establish a hotel booking company, AboutAnywhere.com, predicated on advertising revenue and not fees and commissions. Kamlani sees a mixture of factors influencing the OTAs.
“They are suffering from margin erosion and a heavy increase in competition,” Kamlani says. “While the recession is definitely a significant factor in the recent turmoil, other factors are also important to consider. The last time the industry suffered from such a strong decrease in demand was following the events of Sept. 11, 2001. At this time, however, there were fewer options for hotels to capture business online, and in their desperation to increase booking volume, hotels signed agreements with the OTAs giving away
25 to 35 percent of their revenues.
“I would argue that hotels are the cause of the current weakness of the OTAs,” Kamlani continues. “The margins that the OTAs make off of hotels is so high, that when demand falls for hotels, the OTAs suffer greatly. Combine that with hotels having a stronger online presence with their own hotel Web sites and a multitude of new OTAs, it becomes quite clear why the OTAs are struggling. Of particular interest is what has played out in Europe. Once Booking.com gained the number-one position and Priceline bought the company, other players, like Expedia, which had for so many years stood firm in their aggressive negotiation tactics for higher margins, suddenly had to resort to eroding these margins in order to compete.”
Is this, then, mostly a matter of online marketing titans wrestling each other from afar? Or are hotels directly affected? As one online travel-marketing executive says, the competition among the OTAs doesn’t particularly affect hotel operators directly—though hoteliers have their own demand and occupancy issues. Instead, he sees this as a time to innovate and launch new channels that more precisely match specific customers with targeted product. “For hotel operators, it’s really a question of ‘What can I do to segment consumers and gain market share and put heads in beds in a very difficult climate?’” he says.
Negative Past, Positive Future
Heading into the second half of 2009, hotel marketers would like to put thoughts of recession in the past, a task easier said than done. Expect a solid year of current conditions, possibly 18 months, Green says. “I am hearing more positive news lately,” she says. “I’ve been doing audits with some hotels and the volume is picking up.
“People still want deals and are expecting them,” Green continues. “As the economy improves, they’ll still expect deals. But as demand increases, rates will gradually go back up and then the deals will recede. But I think we’ve got 18 more months ahead of us where deals are still prevalent.”
Looking to the future, Del Ross, head of global distribution for Intercontinental Hotels Group, sees good things for OTAs and their suppliers.
“We really value the relationships with intermediaries,” Ross says. “They represent a very valuable source of incremental business for us with the way the deals are structured now and the changes in the dynamics of our relationship over the past few years are really favorable.
“We also think this kind of environment is making everyone stronger, because you have to work harder to attract the customers and to convince them to book,” Ross continues. “So for the long term, we think suppliers and intermediaries will come out ahead. In the long run, we think this is going to be a good environment for the distribution side. In the near term, we don’t have a position on which of the intermediaries will do best. From our standpoint, we try to make sure our products are optimized on all the shelves.”
As head of global distribution for Loews Hotels, Anthony Del Gaudio works closely with the major OTAs and opaque services. Also looking forward, Del Gaudio emphasizes the basics when working with OTAs.
“With OTAs, we have to keep on top of what they are doing and how to market with them,” Del Gaudio says. “If they are doing big summer promotions, does it make sense for the brands to latch on to their efforts? For whatever the costs may be from us to them, they are spending a hundred times as much money to promote to the mass media. There are a lot of analytics that go into whenever you partner with the OTAs—you’ve got to determine what’s the true bottom line.”
For an online distribution manager, that’s what it’s all about, Del Gaudio says.
“It’s an interesting game out there today.” n
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How They Plan
OTA thriving in the travel review game
In April, online travel aggregator, Kayak.com, announced the launch of TravelPost in direct competition with powerhouse TripAdvisor in the field of traveler reviews. Several years ago, such news might have stirred the emotions of travel aficionados more, says online travel research company PhoCusWright. But in recent years, online travel agencies (OTAs), have developed expertise of their own in the field of traveler reviews.
Seventy-one percent of online travel shoppers employ OTAs in their travel product selection process, according to PhoCusWright. “They are reading the reviews where it is most convenient for them,” PhoCusWright said in the announcement
detailing the trend.
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