The Battle Over Online Travel Booking

The holidays are over, and it's back to business as (more or less) usual at the Hilton Garden Inn Mayfaire! A lot has happened since the last entry, and we want to address all of it in due time. We had quite a few comments on our post about the beach communities' "rebranding" efforts, and we're going to sort through those and thoughtfully summarize and revisit on Friday. And we have a few really good questions coming up for next week. For now though....

Timeliness is everything. And over the holidays an official brouhaha broke out between the airlines and the Online Travel Agents (OTAs) as American Airlines pulled all of its flight listings from Orbitz.com, Expedia showed the solidarity of the OTAs (or was it a preemptive move on their part?) by obscuring American's listings on its site, and the three remained in "negotiations" while other online booking sites tried desperately not to get dragged into the fray.

While we have discussed Priceline and the "opaque" OTAs at some length in a past blog post, one of the most frequent questions we get is about the OTAs and how they work, and what a gorgeous segue American Airlines handed to us.

Online travel agents, including Expedia, Orbitz, Priceline, Hotels.com, CheapTickets.com, Booking.com, and a few notable others, are essentially brokers. These sites negotiate contracts with hotels, airlines, and rental car companies to take a "booking fee" for every reservation that is booked on the site. So if, for example, you pay Expedia $500 for a hotel room in New York City, it is likely that Expedia pays the hotel $400-$420 for your room, the remainder being their commission. These fees are determined largely by negotiating power (United likely pays a smaller percentage than, say, JetBlue, as it is a larger carrier with more flights). Typically, these fees are higher than those of "traditional" or "brick-and-mortar" travel agents because the OTAs provide a universal platform that will attract greater numbers of viewers/buyers than a traditional travel agent, even in a large network, can.

Therein lies the rub. Hotels, airlines, and rental car agencies are, by utilizing the OTAs, sacrificing higher rates for an increased volume of business, and the shell game begins: airlines will set a maximum percentage of flights allowed to be sold through an OTA, try to drive increased traffic to their own websites through advertised specials that offer a lesser discount than the OTAs but promise greater ease of use, and generally try any way possible to minimize the effect of the OTAs while relying upon the volume provided by them. It may seem paradoxical, but the advantage of using OTAs is they can generate large amounts of business, the drawback is that because of their commissions companies try hard to reduce their impact.

So, American makes their power play. The gist of the move from American's point of view is that they have developed a more accurate real-time booking system that keeps up with rate changes, extra fees, and value added features with no time lag, and they are convinced that their system is better for consumers, so they want OTAs to adapt to their system. Meanwhile, the OTAs, which use the Global Distribution System (GDS), argue that adapting their systems to fit each airline's reservations model will unduly tax the system and take away from the ability to list flights, suppressing the ability for travelers to shop competitively and driving rates upward (travel alert!).

Ultimately, it all comes down to this:

"Critics of proposed changes—such as Orbitz....—have said the Direct Connect system reduces consumer choice. Other industry players, though, said the travel agents were more concerned about losing some of the revenue from ticket fees shared with airlines."--WSJ

Both the airlines and the OTAs are fighting over their piece of the pie, and this fight is not likely to end peacefully or soon. The behemoth airlines (American, Delta, United, USAir) are not likely to lose passengers if they lose the OTAs. By virtue of their size, they control much of the runway and flight distributions, and it would be very difficult for a smaller airline, even Southwest or JetBlue, to make significant inroads if a full-scale pullout from the OTAs were to occur. And positive economic projections for 2011 and 2012 mean that airlines are anticipating more travellers, thus higher rates and less need for the OTAs. 

It wouldn't be out of the realm of possibility, then, to see all of the major carriers either remove their listings from the OTAs or negotiate much more favorable deals that prevent the OTAs from the same sort of deeply discounted pricing they have been able to offer for years.We wouldn't be at all surprised if the airlines negotiated more favorable contracts now for a fairly short term (2, maybe 3, years) to see if the economic recovery and increased travel will allow them to jump ship completely, and then abandon the OTAs at the end of that contract term.

Not to worry, though, if you like using the OTAs for hotel rooms. There doesn't appear to be any move for lodging to follow in the airlines' footsteps. Why? There are a lot of reasons, but at this moment in time, hotels need the volume, airlines need the rates. Ultimately, as always, supply and demand drives the market. Should hotels reach a point in this country where every hotel can sell out just fine every night without using OTAs (and fat chance that is), the solution becomes to simply build more hotels. So the hotel industry will most likely always continue their relationships with the OTAs, for better or worse. The airlines, though, have a bit more freedom. The major carriers control routes, runways, and terminal space; there are a finite number of flights that leave from a finite number of runways on any given day; and the choices of airlines is fairly limited. The airlines, particularly the major carriers, then, hold most of the power in this struggle, and they will wield it to increase profits.

Don't cry for the OTAs. With or without the airlines, they will adapt and come out on the other side of this just fine. There's only one loser in all of this: airline passengers. Doesn't that just figure?

Scott

Keep the comments and questions coming! hgimayfaire@gmail.com We'll be back Friday with a recap of the comments from the beach rebranding post!