Web Discounts Undermining Negotiated Room Rates

Travel buyers last month said their room rate negotiating leverage is being hurt because they cannot verify easily the number of room nights booked by their travelers on the various hotel Internet sites. In turn, such hotel companies as Hyatt Hotels Corp. for the first time acknowledged that "leakage to the Web" was a growing problem for buyers that they need to fix.

Adding fuel to the flare-up over Web rates, two leading Wall Street lodging analysts last month questioned the long-term viability of the negotiated rate approach to managed travel, compared with the Web rate alternative.

Corporate travel buyers take the opposite view. "It's very difficult for travel managers when travelers report that they have found rates on the hotel Web sites that significantly undercut negotiated rates at the same hotels," said Hanna Murphy, vice president for travel at Siemens in Santa Clara, Calif., noting that the difference can be as drastic as $139 compared to a negotiated rate of $180. "The traveler might assume the stay automatically is going to count toward a volume projection made by the buyer, but that isn't the case." Murphy said that, in most instances, this volume is not visible to the supplier until the travel manager presents credit card data. "At that point, we can show the hotels that we have given them more of our business than they have actually tracked," she said.

There are three kinds of Web sites: hotel companies' branded Web sites, such as marriott.com or hilton.com; the industry's answer to the airlines' Orbitz, called travelweb.com (formerly Hotel Distribution Systems); and such third-party consolidator discount sites as hotels.com or lodging.com. None credits buyers for traveler bookings.

Murphy's concern, however, goes beyond cost savings to the underlying core of the buyer-supplier partnership. "Suppliers always talk about the value of the long-term relationship, but the proliferation of Web rates has dented that relationship because they undercut the buyer," she said. Murphy acknowledged that many hotel companies are suffering in the present economy, but noted that corporations are as well, with many buyers dealing with cuts in their travel budgets. "What will the value of the relationship be in the future?" she asked.

Officials at such hotel companies as Hyatt said it is difficult to get their arms around the actual degree of leakage that is occurring to the Internet. "It's still early in the bid season, but when we talk to buyers about the value-adds they'd like to see discussed as this year's negotiations progress, getting credit for leakage is one of the points they raise," said Ty Helms, vice president of sales. "Certainly, we want to be responsive to buyers, but I don't have a ready solution today," he said. "It's a two-way street, however. As much as we need to work with customers to help them track this leakage and understand where it's going, they also need to put policies and educational programs in place so their travelers understand how the system works from their end." Helms said not all accounts that Hyatt works with consider leakage a problem. "These companies tend to have a strict mandated policy regarding Internet bookings and their travelers follow it," he said. "Other companies, by contrast, have looser policies and they experience tremendous leakage."

Helms agreed with Murphy that buyers often are put in an awkward position when travelers find better-than-the-negotiated rates on the Internet sites. "This is where the education comes into play, because there are a number of fences and restrictions that we, as hoteliers, put on these rates," he said. For example, prepayments and minimum stays often are required, but last room availability will not be included. "The end-user tends to forget these components and just goes back to the travel manager and says, 'I found a lower price.' The other components need to be factored in."

Hilton Hotels Corp. is among other companies that have acknowledged buyers' concerns, though Hilton has not set out to find a solution. "From our standpoint, we're hardly trying to work against our corporate travel partners," said Steve Armitage, senior vice president of sales. "Actually, we want to work with them on this. After all, we make less money when the booking goes through the third-party discount Web sites." Armitage pointed out, however, that this channel may prove to be relatively short term. "It's a product of today's business environment," he said.

In describing the proliferation of Internet rates as "Web storm rising," Bear Stearns lodging industry analyst Jason Ader estimated that the number of rooms booked online at the various Web sites will expand rapidly. "The trend will continue to grow exponentially," he said. "In fact, we believe that by the end of 2005, online lodging revenue will more than triple the $3.8 billion generated in 2000." Ader said online booking began as a way to entice price-conscious leisure travelers. "More recently, however, the recession resulted in further tightening of corporate travel policies, causing large corporations as well as small businesses to explore the Internet as a means to reduce costs."

Now that travel managers see they are paying more for their negotiated rates than they would have paid online, they are concerned. "Hotels will have to deal with travel managers who want to reduce their negotiated rates to rates similar to what they're selling the rooms for on the discount sites," said Keith Mills, Ader's counterpart at UBS Warburg. Mills expected travel managers to start approaching hotel companies seeking such parity.

Travelers in the long term will continue to book on the Web sites, according to Ader. This, in turn, has the potential to undermine the traditional negotiated rate business model. "With business travel lagging, hotel operators have been expanding their use of non-proprietary channels and sometimes find themselves discounting room rates to levels below those of their better corporate clients," he said.

Ader expected negotiated rates to be flat to down slightly in 2003 and increase only slightly in 2004. Mills expected the drop in 2003 to be between zero and 5 percent in most U.S. markets. "Boston, Chicago, Houston, New Orleans, Philadelphia and San Francisco, however, should see declines closer to 10 percent, primarily due to a continuation of weak business travel volumes and year-over-year declines in convention bookings," he said.