If the industry thinks airline distribution is complex, hotels are a different and complicated beast. Chief writer Tricia holly Davis reports
Whenever the term ‘distribution’ arises, the word ‘airline’ inevitably follows. But lately, a good chunk of the current distribution debate is turning the spotlight on the enormously complicated, and often neglected, hotel industry.
Compared to the world of hotels, navigating the airline industry with its convoluted, eye-crossing fare structures, continuous labour problems and low-cost competitive threats, seems like a walk in the park.
For one thing, where there are only a few dozen airlines in the world, there are thousands of hotels.
Secondly, each property has its own room categories, amenities and other unique attributes, which make it a far more complex product to sell than an aircraft, which today has only two or three classes of service (save for British Airways). And where the airline industry mainly consists of larger players, the hotel industry is full of small, independent properties, some of which don’t even have e-mail, let alone a bookable website.
But these obvious complexities tell only part of the story. The barriers to unifying this highly fragmented industry, and distributing this inventory to consumers and travel agents in an intelligent, easy-to-use way, are many.
For a start, the travel industry’s main distributors, the global distribution systems, were designed by the airlines for the airlines. One cannot simply take this legacy design and adapt it to a different sector, which has its own rules, inventory and pricing schemes.
In fact, despite so many advances in technology, reconciling a hotel booking through the GDSs today does not look markedly different than it did several years ago. The process still requires a series of complex ‘switches’ and middlemen, all of which add costs above and beyond the straight GDS booking fee.
For many hotels, especially smaller independents, it is an unaffordable cost of doing business. The result is that a staggeringly small percentage of the world’s hotels are listed on the GDSs.
Even though the GDS fee for hotels is about half of that for the airlines (on average 1.3% of the total room revenue compared with 2.5% of revenue for an airline booking), when taking the middlemen fees and agent commissions into account, the hotels’ distribution costs can actually outstrip those of the airlines.
What’s more is that the hotels have been subjected to double-digit growth in GDS fees over the past few years, according to Marriott vice-president for e-commerce Larraine Voll Morris. Consequently, larger chains such as Marriott are following the airlines’ lead and are building direct connections to their preferred distribution partners and aiming to drive more bookings direct to their own websites.
This may make economic sense for the hotels but also helps to fragment the industry even further.
Although the online consumer channels represent a lower base distribution cost to the hotels, Von Essen Hotels executive director sales and marketing, Greg Ward, says these channels present a whole host of other challenges that have cost the hotel industry in different ways.
Even though online channels have a less complex back-end design than the GDSs, they too were initially established to sell airline seats and, until a few years ago, did not have an automated hotel booking process in place. In fact, when the consumer portals first started to sell hotels, the back-end fulfilment was done via fax or phone.
This caused all sorts of logistical problems for the hotels and ultimately impacted customer service, and thus the hotels’ reputation. This certainly did not help to endear the online channels to the hotels.
Their relationship with the online agencies became further strained “by the almost cruel transparency that the Internet brought,” says Stuart Walters, chief information officer, WorldHotels.
This phenomenon found its peak when the online agencies started to ask for merchant rates, a pricing model Walters believes has a limited lifespan.
“Especially after September 11, the hotels relied on online players to get business and were willing to pay those merchant rates, but consumers started to find different rates on the Internet on any given hotel and started to make the hotels responsible for honouring the lowest rate they found.
“At the same time the online agencies became the hotels’ worst competitors and the hotels could not do much about it, because they had signed annual agreements with the online agencies that tied their hands,” says Walters.
“The online agencies’ timing was superb,” observes Roland Tanner, former president of Hotel Electronic Distribution Network Association.
Like the airlines, the hotels provided heavily discounted rates to these new distribution channels believing that they would bring in new business in a depressed market.
But, in reality, Tanner says the same customers were simply booking cheaper priced rooms. A few years on, the hotels, like the airlines, began to see their margins decline and realised that they had to regain control over their inventory and yields.
This meant a total overhaul of online partner contracts and the concept of price parity was born, says Ward. “It was critical for hotels to create a level playing field because otherwise, from a consumer point of view, it makes the booking process a farce.”
But this has been a huge bone of contention because it turns the original online business model on its head.
The hotels also retaliated by tearing a page from the airlines’ book and employing revenue and distribution managers. Ward says: “Five years ago these positions were non-existent in the hotel industry, but today they are key roles. Take search engine optimisation as an example – that is a hugely important part of our business.”
So far, the strategy is working. Revenues generated via online distribution channels now represent 5% of Von Essen’s turnover, compared with 0.05% two years ago. The highest proportion of bookings, about 65%, now come direct through Von Essen’s own website.
This is consistent with the broader hotel industry. Whereas about 30% of airline bookings are made online, hotel bookings made via the web and the GDSs are about half of that, but the bulk of those bookings are made through the hotels’ own branded websites, says Fabrice Marchand, head of hotel IT solutions at Amadeus.
However, this picture is somewhat misleading since it is mainly the big chains that have bookable websites, and are therefore known to consumers. The reality is that a huge chunk of
the hotel industry’s inventory is still not bookable online or through the GDSs.
What’s more is that the hotels that were previously burned by the new business models, particularly the low-cost/net rate model, are in no rush to push more inventory on to consumer portals.
In the same way that some airlines have pulled inventory off the GDSs and online portals (eg American Airlines and Expedia.com), hotel brands are also withdrawing content and/or not contracting on desirable terms with some of the online players, says Jane Lewis, director of hospitality distribution for Galileo.
Some past examples have included the InterContinental Hotel Group withdrawing from Expedia.com and the Marriott chain withdrawing from Travelocity.com.
Today, online portals are trying to win back hotel customers with more competitive pricing plans, higher customer service standards and slicker technologies that help properties up-sell. For example, Travelocity has developed a product to meet the hotels’ price-parity rules and has committed to certain service standards to protect the hotels’ brand integrity.
TravelRes.com, the new UK portal of Hotel.de, offers a booking range of 8% to 15% of the room price, depending on how high up the screen the hotel wants to be listed.
The company has also built direct links to some of the major hotel chains, including Best Western and Marriott, which further cuts the distribution costs.
Despite such efforts, WorldHotels’ Walters believes the online agencies will continue to lose inventory in favour of hotels’ own websites as long as the economy is going strong (though he concedes online agencies will remain a partner in weak markets and for disposing of distressed inventory).
In addition, he predicts the rising popularity of dynamic packaging will drive more online business to the hotels’ own sites. But Galileo’s Lewis counters: “Until some of the challenges with dynamic packaging are resolved, including access to a larger variety of packaging content and the ability to book air fares across countries and borders, it will not become a standard on hotel websites and therefore will not affect established online brands”.
The challenges were and are different for smaller, independent hotels. Prior to the advent of consumer sites, smaller independent outfits did not have a wide consumer outlet, so while they may have lowered their price point to compete online, consumer portals such as Lowcostbeds.com actually do drive new business.
But this also means these smaller hoteliers have become somewhat dependent upon these sites and, therefore, have been less successful in reclaiming their margins than the larger chains. Therefore, industry pundits say reports that hotel prices are on the rise are not entirely accurate, since they do not portray the hundreds of smaller hotels that have never actually recovered their price point.
Price erosion aside, Tanner says third-party distribution channels present other, potentially more damaging, consequences, namely the shift from brand loyalty to channel loyalty.
With the exception of the corporate market, where there exist negotiated rates with certain brands that business travellers are instructed to book (though do not always), the online channels, arguably, have actually cost the hotels clients and thus revenues.
“Turning over your inventory to a third party can be detrimental [to your brand], which is why you need to be smart about who your partners are and the terms of your agreements,” says Von Essen’s Ward.
If a lot of this rhetoric sounds familiar (like the airlines), it is. But so, too, is the response by the GDSs, which are diversifying their products to meet the hotels’ demands and to secure their own futures.
The GDSs are investing heavily in the hotel sector, as evidenced by the purchase of hotel technology companies by Travelport (Trust International) and Sabre (SynXis).
“We are now helping hotels market themselves and reach the agent community in a way that matters,” says Steve Fitzgerald, vice-president of hotel distribution for Sabre, which this year will roll out a number of new hotel solutions.
For Walters, such tools can’t come to the market soon enough. He observes that, if the hotels really are to be masters of their own destiny, then they have quite a bit of catching up to do on the technology front, taking Web 2.0 into consideration and offering a wider variety of travel-related products through their own booking engines.
Lewis predicts the savvy hotel chains will focus on developing complex, multi-channel strategies and will introduce new pricing through inclusive packaging, using online and offline channels to their advantage.
Ally Dombey, a hotel distribution consultant, believes hotels would do better to look closer to home, focus on selling more of their own product and developing websites that package the products and services available on-property, such as spa and golf services. “The reality is I don’t think the hotel industry, operating on a brand by brand basis, will ever hold a candle to the online agencies that operate well in this sector.”
So who’s right?
Well, if the history of airline distribution is anything to go by, then this is just the beginning of a very long saga. Then again, as Dombey puts it: “What have we got to learn from the airlines?”
New hotel technology tools coming to the market
Sabre’s up-sell solution (being rolled out in the UK and Europe), alerts agents before they complete the sale about available room upgrades. Sabre has also created a ‘Spotlight’ hotel display tool, which lets hotels increase their visibility on the GDSs, in the same way they would pay for top placement on a Google search. If more than one hotel wants top placement, then the top slot rotates. The listings are based on airport code, so if an agent searches for Heathrow there will be a different set of results than if they search by Gatwick. Hotels can currently choose to rotate on a top spot for six or 12 months, but Sabre is exploring a two-week and daily spotlight option, which would help hotels to move distressed inventory.
Amadeus will introduce several new functions over the next year. Among these is a ‘floating inventory management’ system, which allows hotels to sell rooms based on attributes, such as a seaview and double bed, rather than the actual, physical rooms, the idea being that hotels can sell more with the same number of rooms.
New players Conferma, Hotel Reservation Service and Lanyon are just a few companies offering new content and yield management services. Other companies such as Rate Tiger and TravelCLICK offer web-rate shopping comparison tools. These allow a hotel to compare rates of rivals and across a self-selected set of websites.
Paul Riches sales and marketing director Youtravel.com:
There are lots of factors people consider when they’re choosing a holiday hotel. Does it have seaview rooms? Are food and drinks included in the price? Is there a well-run kids’ clubs? How easy is it to get to the beach? How big is the swimming pool? And then, of course, there’s the all-important price factor.
We are constantly reviewing where we appear on search engine listings and will strive to be in the top results.
But customers want to see pictures of the hotel, read customer reviews and look at maps. The search results always return initially in price order.
At that point customers may start to look at facilities and what’s included. All our research shows that unless you’re on that first results page then it’s very unlikely people will look any further and use their hotel booking site also as a holiday research tool.
The effect of this is that pricing on some properties fluctuates by Ј1 or less per night as suppliers try to get that top spot.
Our research shows that if you ask people what made their holiday a success, the hotel scores 64% and the flight only 7%. With travel agents’ commission being squeezed by the big operators, the rise of the ‘mix and match’ holiday will continue.
The solution is to ensure that prices are competitive for certain properties, but offer different or exclusive hotels which allow you as a business to set your own price.