Hotel room discounts available on the Internet have raised buyer concern about rate integrity while providing unexpected negotiating leverage.
Buyers continue to chafe at seeing hard-fought negotiated rates undercut by Internet discounts, but they are beginning to realize that the new distribution channel provides significant transparency on rates that reveals more room to negotiate than most previously thought.
In the negotiations that culminated in rates for 2003, one travel manager used merchant rates to his advantage, using the rates as a defensive tactic. "When we were doing our market research, one question we asked properties was how many rooms they set aside each day for the merchant sites," said Yasuo Sonoda, travel manager at Macromedia in San Francisco. "By checking the merchant sites for these rates, we were able to set a floor for our negotiations because we knew how low the property really was prepared to go."
Interest in the Internet as a distribution channel for booking hotel rooms grew significantly last year, with vendors upgrading their sites to tap what they saw as unmet demand among business travelers for discounted inventory.
With the economy depressed and travel volumes down, online travel agencies Orbitz and Expedia entered the business travel market and put new focus on hotel bookings as a major source of revenue. Orbitz, for example, last month introduced a new hotel matrix on its already-established consumer site and announced plans to feature the new functionality on its four-month-old Orbitz for Business site, through which customers are able to book at their company's negotiated rates. While Expedia Corporate Travel launched in November 2002, customers are not expected to be able to book at their negotiated rates until the second half of the year.
Travelweb LLC, a merchant-model online distributor of hotel rooms, last week announced that the number of hotels worldwide that contribute inventory to its system has exceeded the 4,000 mark. Five online sites, including Orbitz, draw from this inventory.
Self-booking vendors also have enhanced their hotel content and increased the real-time accuracy of the rates quoted. Worldspan's Trip Manager began providing to its corporate clients rates that include hotel taxes and applicable surcharges and fees, while Amadeus' E-Travel made it simpler to see the real-time availability of its hotel room inventory.
For buyers, increasing adoption of the self-booking tools remained an issue across the board, but particularly on the hotel side. Historically, the booking rate for hotels has lagged behind the rate of air bookings.
Meanwhile, aside from their other frustrations with discount Web rates, buyers continued to have serious reservations about such merchant sites as Hotels.com and Lodging.com, where the discounted rates often undercut the rates they were able to negotiate for the same hotel on the same night
(BTN, Oct. 7, 2002).In a report released last month, industry market research firm PhoCusWright estimated that by 2005 online bookings through all channels would jump to 20 percent, from 9 percent in 2001. "The increase is symptomatic of the dramatic change that hotel distribution has gone through," said consultant William Carroll, president and CEO of Marketing Economics, who authored the report.
In setting up their business travel sites, Orbitz and Expedia so far have taken opposing positions on loading clients' negotiated rates. From its inception, Orbitz for Business allowed travelers to book rooms at the corporate negotiated rate. "Customers provide us with their discount number or multilevel rate code," said general manager David Cerino. "Every time a search is done, we send off these rate codes to get back the account's negotiated rates." Pegasus Solutions is the technology provider that maintains the inventory.
In addition to negotiated rates, Orbitz for Business offers as many as three more sets of rates. "These include our OrbitzSaver rates, which are supplied to us by Travelweb and follow the merchant model," Cerino said. As is the case with Hotels.com and Lodging.com, OrbitzSaver reservations are prepaid, but tend to have deeper discounts than other rates on the site. Bookings on the rest of the Orbitz for Business site are for reservations that are claimed when travelers check in.
"We also have special Web rates that may be available for a limited time only. Consequently, they're attractively priced," Orbitz's Cerino added. "The branded hotel companies offer them exclusively on their sites as well as on Orbitz." The last set would be the published, or rack, rates.
Estimates vary as to how large a piece the merchant sites have of the total number of hotel rooms booked. Pegasus CEO John Davis said merchant sites account for roughly 2 percent of bookings. Bear Stearns lodging analyst Jason Ader does not break out numbers specifically for merchant sites, but estimated that all types of online bookings accounted for 5 percent to 10 percent of total bookings.
Whether or not buyers get credit toward their volume projections for merchant bookings "is really between the corporation and the hotel company," Davis said. "On the 15th of every month, we provide the previous month's data to the corporation. Travel buyers are then free to present this as evidence of their travelers' bookings." In other words, for reporting purposes, the buyer simply is not told that "X" number of rooms were booked through Orbitz for Business during the period. Rather, the buyer is told which hotel companies actually received those bookings.
For New Jersey-based Bradley Pharmaceuticals, an Orbitz client, volume commitments are not a factor in the travel program. "With 115 travelers, we're not large enough to be able to negotiate attractive rates, though we do have parameters as to the kind of hotels our travelers book and the rates we want to pay," said vice president Brad Glassman. "As a result, Orbitz's business travel tool tends to make sense, the merchant rates especially."
While Expedia Corporate Travel will not have negotiated rates available for booking until the second half of the year, it does have a merchant model version. Of its 45,000 hotel inventory, 8,000 are included in a category called Expedia Special Rate Hotels.
"We don't take the risk with these hotels. We don't own the rooms, but we work with the supplier to come up with something that makes sense as far as room block and a net rate they give us," said marketing manager Mitch Robinson. "Consequently, we get a rate that business travelers typically can't get. The hotel is happy because they get incremental demand, so everyone is happy."
Aside from merchant rates potentially undercutting negotiated rates, buyers have complained that these bookings traditionally were nonrefundable. On Orbitz for Business and Expedia Corporate Travel, however, travelers frequently are allowed to cancel. "Specific cancellation policies vary by hotel," Cerino said.
"There's even waiver insurance, which allows travelers to reduce any cancellation penalty," Robinson added. "The reason people have been willing to do prepaid bookings and figure out the cancellation policies is that the savings are so great."
Travelweb, which celebrates its first anniversary next month, was founded by five major hotel companies and Pegasus, which provides the technology platform. "The discount Web sites overall in 2002 showed travel managers that there was more elasticity in hotel rates than they assumed," said Bruce Wolff, Marriott senior vice president for distribution sales and strategy, who serves as Travelweb's chairman. "There's just so much more transparency. Travel managers who thought they were getting the best rate in negotiations learned there was still room for further discounting."
Transparency aside, buyers said they found the merchant sites often distort true availability. "One hotel in our program showed it was sold out, when rooms were still listed as available on the merchant site," said Victoria Millies, senior purchasing agent at Exelon Business Services Co. in Chicago. Millies was frustrated because she had even negotiated last room availability at the property. "I called the hotel directly and was told that the remaining inventory for the night in question had been sold to the merchant site. Therefore, the hotel considered itself sold out." Consequently, the traveler was not able to get a room through conventional channels.
In a reversal of the pattern established by Orbitz, which moved from air bookings to hotel and car, merchant site Lodging.com last week announced it was expanding into a broad-based travel Web site, adding air and car rental bookings to its existing hotel room base. The rationale in both cases was to be able to offer a one-stop shop to travelers who already were on the site to book one travel service. Lodging.com last August was acquired by Cendant Corp.
For self-booking tools, the goal has been to provide better quality information as a way of improving adoption rates. The recent focus on hotel bookings has been the result of growing sophistication on the part of corporate travelers. "A lot of business travelers already have used a leisure product like Orbitz or Expedia, so their expectations of what their experience would be were higher than they might have been from a pure self-booking tool perspective," said Matt Hausmann, E-Travel vice president of marketing and business development. "The bar simply has been raised in the whole e-commerce space."
Trip Manager's new tax functionality, for example, provides real-time rates complete with hotel taxes plus any surcharges and fees. "It takes the surprise out of booking a hotel room," said Joann Svejcar, Worldspan traveler supplier services vice president. "As more fees and surcharges are added to the rate, it's important for the customer—and travel buyer—to know that the $100 rate really is $100, not $135 once all the extra charges are added. Travel managers need as accurate a picture as possible of the true costs, so they can budget accordingly."
Starwood was the first hotel company to make this enhanced data available to Trip Manager. Starwood, with 700 hotels across six brands, chose to participate because it believed more accurate rate information ultimately was to everyone's advantage. "If customer satisfaction is a priority the way it is for us, then you want your guests to have complete rate information at their disposal when they're booking," said Linda Kent, Starwood director of global agency distribution.
At E-Travel, one set of hotel upgrades focused on ensuring the real-time availability of the rooms listed on the tool. "When travelers enter their search criteria, they now see displayed only the preferred hotels as defined by their company's travel policy and that have availability," said Catherine Lafer, senior director for product development. "This is on the first screen, so you don't have to drill down before you realize the property is not available on those dates." At the same time, travelers still have the ability to view other preferred properties, so they know they're still in the program.