Hoteliers worry about OTA mega-agency
18 SEPTEMBER 2015 9:03 AM
Following the news of the DOJ’s decision to allow Expedia’s purchase of Orbitz Worldwide, members of the hotel industry are wary of what’s next, particularly when it comes to commissions.
REPORT FROM THE U.S.–Higher commissions. Unbalanced negotiations. Less competition.
Those are some of the concerns hoteliers have a day after the U.S. Department of Justice announced it wouldn’t challenge Expedia’s acquisition of Orbitz Worldwide on anti-trust grounds. From brands to independent properties and CEOs to GMs, the question behind their worries is no longer if but when.
Chris Harvey, GM for the Crowne Plaza Charleston Airport & Convention Center, said online travel agencies are an important part of the hotel reservation landscape.
“We need them, sometimes more than others, to generate revenue for our properties,” he said. “But our biggest concern is the merging of those two companies creates far too much leverage for Expedia. They take a much larger cut for room rates than their competitors. This has any owner or manager naturally concerned.”
Expecting commissions to rise
First Hospitality Group already was trying to gain better control of its inventory because of the proliferation of third-party sites when this merger happened, said Bob Habeeb, president and CEO of FHG.
“It seems like we had reached some acceptable level,” he said. “And now, the fear is these mega-agencies control such a large part of the market, they’ll start dictating terms to the hotels, and there goes the bottom line.”
Habeeb said he worries that “the bargaining power of the new combined agencies is going to drive commissions back up.”
Habeeb said that is disheartening for hoteliers after years of negotiating more favorable commission structures. Though commissions are still high compared to other delivery channels, they’re more acceptable now, he said.
As an independent hotel, the Shores Resort & Spa in Daytona Beach, Florida, relies on OTAs more for reservations than a branded property would, said GM Jason Kern. He’s concerned about the commission structures that may develop for independent hotels. Expedia is a giant already, he said, and it could control the margins and commission structures.
When the two OTAs were separate, he said, he would have one commission rate with one and another with the second. Now that they are combining he’s not sure what Expedia will do.
“If I have a better commission structure in one or the other, will they give you the better structure for both or not?” he asked. “Will they get 20% for all the bookings, or will they move it to the higher bracket?”
A surprise decision
The Department of Justice’s decision was disappointing, Habeeb said. The American Hotel & Lodging Association was wise to launch a fairly aggressive campaign against the acquisition, he said, and his company supported the AHLA’s opposition by writing letters.
The department’s decision came as a surprise to Harvey, who believes it will harm consumers by dramatically decreasing the competition among OTAs. With Orbitz joining Expedia, he said, will now control three-quarters of all OTAs. Adding in The Priceline Group for another 20% of the market, those two agencies will make up 95% of OTA business.
“The consumer who is not clued in or aware of this thinks all of the sites are operating under independent ownership,” he said. “They’re actually operating in concert. They can leverage that to take larger cuts.”
Preparing for what’s next
Hoteliers haven’t seen the impact from this decision yet, Habeeb said, and they likely won’t for a while longer. As with most mergers, he predicts OTAs will be on their best behavior for a little bit. The motivation behind this acquisition, he said, is the larger the OTA company, the more bargaining power it will have.
“We’re just waiting for once the merger is approved and completed, we’ll have a little bit of a quiet period, and then we’ll see significant pressure on the commissions again,” he said.
The larger brands will take this time to go back to the drawing board to see how they can continue to streamline reservations through their own central reservation systems, Harvey said. That’s going to be important to the properties, especially the branded properties, he said, because that will move some of the OTA business to direct bookings.
At his own property, Harvey and his staff try not to rely on OTAs. Since Charleston, South Carolina, is a seasonal environment, he is comfortable putting more inventory on OTAs in slower months. During the stronger months of the year, his staff makes a concerted effort to fill the hotel with groups, leisure travelers and business travelers paying best available rate.
“If we start to see these commissions climb for these other sites, that effort will be even more focused,” he said.
Everyone has been working on their distribution strategy since the acquisition was first announced, Habeeb said, and this decision gives even more incentive to do that. He believes the problem will come when there’s a hiccup in the economy and everyone starts to get more aggressive in trying to promote every delivery channel.
“When we’ll see the impact, it will be like a double whammy,” he said.
Kern said his property is running business as usual at this point. He’s still running channel management on the independent channels. Being an independent property means he’s still going to need Expedia’s and Orbitz’s websites as partners, he said, and he doesn’t think his property will change distribution strategies. He will push to channels with less commission.
“In theory, everyone wants hotel guests to book direct,” he said. “That’s the ideal situation, not reality.”
While many hoteliers are concerned about what has yet to come, Paresh Gajiwala, owner of the Americas Best Value Inn in Hayward, California, and other properties, said he doesn’t believe hotels in high-demand markets need to worry as much. OTAs haven’t made much of a difference for his properties, he said, because he’s located on the West Coast in areas like San Francisco and Silicon Valley.
He believes rate parity means guests see the same price when comparing OTA sites even in markets without that high of demand.
“The customer coming in will see the same price,” he said. “There’s no real benefit over Orbitz or Expedia. The customer is starting to get aware of what’s happening in the industry. A lot of customers may not know who owns them, but they know the rates are the same across the board.”
As a result, he said, guests go to book directly through the hotels, and Expedia knows that. Hotels are becoming competitive through guarantees and becoming more flexible. Many customers now research the lowest prices on OTA websites, he said, but they then take that price and book directly with the hotels.