4 Sept 2011

Research says OTAs cost hotels $2.5 billion last year

Love them or hate them Hotels can not survive today without Online Travel Agencies no matter how expensive they might seem to be! And according to research OTAs are turning out to be very expensive retail channels for the hotel industry.

STR recently estimated that OTA sales cost U.S. hotels $2.5 billion in potential revenue last year.

That estimate, reported earlier this month, emerged when STR attempted to quantify the financial stakes in the often uneasy relationship between hotel owners and OTAs such as Expedia, Orbitz, Priceline and Travelocity, each of which sells a sizeable chunk of room inventory each year.

STR estimated that the OTAs accounted for about 7.2% of the approximately $120 billion in revenue realized by U.S. hotels in 2010. While that $2.5 billion figure has been pretty consistent over the past couple of years, it dwarfs the $1 billion that OTAs “cost” hotels as recently as 2004, said Mark Lomanno, STR’s chief strategy officer.

The cost is calculated as the difference between revenue a hotel would realize if it sold the room itself and the negotiated discounted rate it gets from the OTAs. The online agencies add markups of between 22% and 25%.

It’s probably a fairly costly channel,” Lomanno said. “The only thing more costly is flash sites like Groupon.”

Still, the net impact of OTA sales on a hotel’s bottom line is anyone’s guess, Lomanno admitted, since it’s “hard to say” if hotels would be more profitable without the OTA channel.

For one thing, like all elements of the retail distribution chain, the online giants represent increased sales opportunities as well as increased cost per unit.

Still, the $2.5 billion figure serves to quantify the friction between hotels and OTAs. The relationship has become more strained as the number of people who book travel reservations online continues to rise.

The OTAs’ role in hotel sales first surged about a decade ago, at a time when many hotel operators didn’t have websites. It soared in the travel downturn that followed the 9/11 terrorist attacks.

Moreover, Douglas Quinby, senior director of research at PhoCusWright, said the OTAs gained additional negotiating power when the most recent recession hit the industry hard.

Generally, OTAs have a countercyclical role,” Quinby said, meaning they offer improved sales opportunities during slow booking periods. While Quinby said hotel and hotel-network websites have picked up market share as the economy has recovered, he added that the trend could reverse in another downturn, giving OTAs even more negotiating power.

Even so, the largest sources of hotel revenue remain direct channels. Hotel and hotel-network sites accounted for 19% of U.S. hotel revenues last year, while call centers made up 17%, according to STR. GDSs accounted for 10% of hotel sales.

Further complicating cost calculations, STR’s $2.5 billion figure fails to account for the “billboard effect,” said Chris Anderson, assistant professor at the Cornell School of Hotel Administration.

The billboard effect occurs when a traveler begins a hotel search at an OTA, then books a reservation on a hotel’s website.

By placing listings for four hotels in JHM Hotels' portfolio on Expedia then removing them, Anderson found that the OTA boosted hotel reservations by 8% to 26%.

What’s lost in this [$2.5 billion] estimate is the cost of content and reach,” Anderson said. “OTAs do create content and do serve a marketing role.”

He added that hotels benefited further because reservations sold through OTAs tend to be made at more upscale properties than reservations made direct.

OTAs are the creators of most of the new and sexy stuff we see out of the space, with Priceline’s Negotiator app being, in my opinion, the first really cool iPhone app in the space,” Anderson said.

Still, Joseph McInerney, president and CEO of the American Hotel & Lodging Association, said that such a marketing role was not worth the cut the OTAs take. That is especially true, he said, given that before the role of the Internet within travel exploded about a decade ago, agents typically were paid an average 10% commission.

I think they’re taking too big a slice of the pie,” McInerney said of the OTAs. “Yes, they have a service and they’re a partner with us, but they have no investment other than the people they have making reservations.

The Interactive Travel Services Association's executive director, Art Sackler, said, “You’ve got a pure marketplace here, and there’s clearly a win-win going on. Whatever the numbers are, they’re leading to a growing pie. To simply say somebody’s charging too much without looking at all of the factors involved is way too simplistic.

Despite the nature of this push-pull, love-hate relationship, only one major hotel group has pulled inventory from OTA sites. InterContinental Hotels Group, the world’s largest hotel company by room count, removed listings from Expedia and its Hotels.com affiliate in 2004 because the intermediaries refused to unbundle service fees and taxes. IHG’s inventory has since been reinstated.

In separate interviews, Lomanno, Quinby and Anderson all seemed to agree that such a scenario was unlikely to happen again because more travelers have become accustomed to booking rooms through OTAs.

It’s hard to put the toothpaste back in the tube, even though OTAs might have a different value than they did 10 to 12 years ago,” Lomanno said.

Article Source: TravelWeekly