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4/11/2004
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The Right Balance

Hotels are looking to take back some of the market share that online travel sites grabbed in the lean years

Later this year, if Hilton Hotels Corp.'s plan goes as expected, travelers won't see room rates posted on travel sites such as Hotels.com or Expedia lower than what Hilton advertises on its own Web site. "You don't let the customer see a rate less than a rate you sell yourself," Hilton CIO Tim Harvey says. "At that point, you lose trust of the brand, and whoever is selling the room gains that trust."

But customer loyalty isn't the only thing hotel chains and operators stand to lose to the growth in third-party online bookings. In an era when consumers are more likely to make travel plans based on the best rates on the Internet rather than what a particular hotel brand has to offer, hotels have found their relationships with third-party sites have resulted in inflexible pricing practices and lost profits. While third-party sites helped the hotel industry through a tough economy—and continue to provide a valuable service by booking rooms that otherwise would go unoccupied—many say now is the time to establish more-favorable dynamics. "Everyone in the hotel industry is ready to get control of their inventories again," says Andrew Jordan, executive VP of sales and marketing and chief marketing officer at hotel chain Wyndham International.



When an online site beats you on price, "you lose trust of the brand," Hilton CIO Harvey says.

Photo by Sacha Lecca
Online travel sites present a complicated dilemma, one hotels are addressing in two ways: by creating incentive programs and improving brand Web sites to get customers to buy direct, and by changing how they do business with the third parties. It appears the third-party sites are more than willing to cooperate. By year's end, Expedia and Hotels.com, both owned by IAC/InterActiveCorp, and Travelocity, owned by Sabre Holdings Corp., plan to implement XML-based connections to Hilton, Outrigger Hotels & Resorts, and several more hotel chains that will completely reverse how business is conducted between the parties. Those efforts stand to have a huge impact on the industry: Expedia, Hotels.com, and Travelocity make up 74% of hotel sales by third-party Web sites, according to travel-research firm PhoCusWright.

These efforts can't come soon enough for hotel companies. While the industry remained profitable even during the economic downturn—earning room profits of more than $16 billion in 2001, $14 billion in 2002, and back to $16 billion last year, according to Smith Travel Research—it has been steadily losing money to online travel sites. The hotel industry missed out on $962 million in bottom-line profits last year, about 6% of the industry's estimated profits, Smith Travel says. Those profits would have gone to the brands if they had sold the rooms directly to travelers. The biggest losers are chain-owned hotels, because franchises and smaller operators benefit from the marketing muscle of online travel sites, Smith Travel analyst Jan Freitag says.

The new XML-based connections will help make it possible to have parity in prices between what customers see at hotel brand sites and what they find at third-party sites. And while third-party sites may not be able to underprice hotel chains, they'll benefit from more-immediate access to a hotel's inventory and availability. Both parties will benefit from lower costs and improved communications regarding room bookings. "This is a huge strategic focus for us," says Spencer Rascoff, VP of lodging for Expedia and Hotels.com. "Our hotel partners are lining up at the door to get in on it." In 2002, Expedia acquired Newtrade Technologies Inc., which is building the connectivity platform based on technology standards in the travel industry.

Most hotels currently agree to provide a certain number of hotel rooms to third-party sites over a specific time frame for a set rate, such as $100 for every room sold. The deal is structured so that the rate the hotel offers at its site at the time—say, $120 per night—is the same rate the third-party site offers to its customers, allowing the online partner to retain $20 of the total room revenue. When the third-party site gets a booking, it notifies a hotel by E-mail or fax or, in some instances, via an extranet that automatically updates the hotel's inventory.

The problem is that none of these approaches allows back-and-forth communication between a third-party site and a chain's central reservation system, its revenue- or yield-management system (which uses analytics to determine the most a hotel can charge for a room), or an individual property's management system. So if rooms are filling quickly and a hotel's yield-management system indicates the rate should be increased to $140 a night for the given time period, the result is that the third-party site starts beating the branded site on price. That disparity exists until one of the parties notices the difference and acts on it.

The systems that Expedia, Hotels.com, and Travelocity are developing for later this year will let hotels use XML connections to push out pricing and inventory updates directly to third-party sites as soon as they happen. "So when changes are made to published rates, it's very easy to adjust so there's no lag between retail rates and the changing of online rates," says Josh Feuerstein, VP of hotels at Travelocity. "It does make price parity easier to chase."

Improved business-to-business connections aren't the only way hotels are fighting to take back control of bookings. Most of the major chains offer lowest-rate guarantees: If a customer finds a lower rate at a third-party site, the hotel will match that rate and, in some instances, throw in perks such as a late checkout or an additional discount of, say, 20% on top of the third-party rate.

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