If it costs the airlines billions to conduct business through OTAs and the GDS then what will it take for the hotel industry to re-think its current conventional distribution strategy?
The recent actions by American Airlines to move forward with their “direct connect” model has ushered in a new era of how products and services are marketed to travelers.
According to an article released by Fairlogix, “A Picture is Worth $7 Billion, The real story behind airline distribution, travel supply chain, and consumer value”, it costs the airlines roughly $7 billion annually to conduct business through their current indirect distribution channels such as Orbitz and Sabre.
To set the record straight “direct connect” is not a new phenomenon in fact Orbitz introduced its own version of direct connect in 2002 with none other than the same airline that they are now battling.
The technology known as “Supplier Link” was designed to lower costs and avoid Global Distribution Systems (GDS) fees but Orbitz eventually went on to become AA’s highest-cost OTA (Online Travel Agency) per booking.
The OTAs and the GDSs have made their sentiments against direct connect very clear: They want to control the airline’s product, pricing, distribution, and at the end of the day remain status quo.
Likewise the intentions stated by American Airlines, Air Canada, AirTran, and Southwest Airlines are equally as clear: They want to control their product and inventory and establish closer ties to their customers.
The hotel industry and the OTAs
While the OTAs and the GDSs continue to dig in their heels in this uphill battle with AA, let’s take a look at another market segment that is under their thumb, the hospitality industry, where especially the OTAs are blamed for commoditizing hotels, decimating rates, and training travelers to demand deep discounts.
According to a much discussed article released by Hospitality eBusiness Strategies titled “The Billion Dollar Leak – The Impact of the Merchant Model on US Hotel Profits” revenue leaked from hotels to the OTAs in the form of abnormally high commissions was estimated to reach $5.4 billion in 2010.
In addition to this leakage, which primarily represents leisure travel, hotels are paying millions in commissions to “other” third-parties for business that represents meetings and events that are held at their hotel.
In total, we estimate the hotel industry is currently in the same predicament as the airline industry and don’t appear to be moving toward a “direct connect” distribution model.
Why hasn’t the hotel industry developed a strategy to wean themselves off OTAs?
Due to the lack of demand from 2008 through 2010 most industry pundits would suggest that hotels were too busy playing catch up and desperate to capture revenue from any source that was available.
We certainly can’t blame the OTAs for the adoption of that strategy but because of this hotels lost any momentum and market share that they could generate on their own.
Over that same time period OTAs demanded and got new agreements that were against everything the hospitality industry stood for: last room availability, guaranteed best rates (only found on the OTAs websites), penalties for hotels that don’t use the OTA, thus tightening the noose.
What are some options for hotels moving forward?
In order for the hotel industry to take back some of the control that they relinquished over the past three years, they must adopt some if not all of the following initiatives:
- Move beyond traditional search methods and engage prospective customers the very moment they start thinking about travel.
- Reverse the trend and reward customers who book in advance and not necessarily at the last minute.
- Maintain strict rate parity, a best rate guarantee, and in the future don’t give any distribution channel the ability to undersell your hotel.
- Expand social media presence and promote special offerings that are only available to individuals who are following your hotel.
- Make it a point to elevate current and prospective customer’s online experience before and after their stay at your hotel.
- Look for and adopt emerging direct connect distribution channels like Hotelmine™ that allow customers to book direct with you and not through an indirect channel.
Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets. Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.