HOTELS

Scott van Hartesvelt

Orbitz Rocks The Boat
May 7, 2008

Orbitz has recently launched its Summer Sale promotion and the implications are far reaching. The Orbitz summer sale is similar to those run by their top tier competitors at this time of year, with one exception. Users can enter the promo code SUMMERSALE10 and receive an additional 10% off their room rate. Here’s the kicker:  Orbitz is paying the 10% out of their margin.

Before we discuss what this could mean for the industry, I want to make a couple quick points. Online Travel Agents (OTA) gained significant strength during the previous economic downturn. Hoteliers were desperate for revenue, and these channels offered a new and powerful way to reach consumers. Hotels signed up in droves, and global travel brands like Orbitz came of age. As the economy recovered, some hoteliers expressed frustration with the margins they paid to OTA sites for their listings. Independent and branded hotels began offering discounts on their own Web sites, or shutting down their inventory allotments when they didn’t need the rooms. At risk of losing their position in the marketplace, OTA sites responded with the following:

• Guaranteed allotments or last room availability were included in contracts, ensuring their customers could find rooms, even during high-demand periods.
• Price parity was included in OTA contracts, stating that they would have the lowest publicly available rates.  Parity can be complicated, as different OTA sites charge different net rate percentages. To accommodate this, most contract language requires that your net rates be in parity, based on your set markup percentage. 
• “Low Price Guarantees” were advertised to the traveling public, giving them confidence that the price they saw on a travel site would be the lowest they could find anywhere. Result: The price for a hotel room is generally consistent across all channels. Until now.

By reducing the price by 10%, funded by its own margin, Orbitz has thrown thousands of hotels out of parity with other travel sites. This week, our clients have been receiving calls from OTA sites asking that their pricing be brought back into parity. A senior operations executive for one of our clients says “Contractually, we are in parity. Expedia and other OTAs have a real issue here. Market forces are finally driving margins down, and this can only benefit hotels across the country.”

Personally, I am fascinated to see how these travel sites respond. The Orbitz promotion is set to run through July 6 for travel through September. More than two months of exposure is probably enough for consumers to begin flocking to Orbitz for the best price. How will their competitors respond? Will they drop their margins to match? Will they strong-arm hotels, telling them they will drop them from the site if they don’t pull away from Orbitz? How will hotels respond?

The last time the economy slowed, major travel sites solidified their business model and grew exponentially. This time, will they act in a different manner? Can hotels and resorts re-introduce free market forces to the margins they pay OTA sites? When it is time to negotiate your 2009 contracts, it may serve you well to remember this story. Remind your representative that Orbitz, and possibly others, were willing to sacrifice a healthy portion of their margin to gain market share and remain relevant.

Posted by Scott van Hartesvelt on May 7, 2008 | Comments (6)