Published on Tuesday, December 20, 2011
Another Perspective on the OTA Argument
By Chris Patridge, EVP Marketing and Co-Founder of BackBid.com
There has been a great deal of controversy in recent months about the OTAs. Are they good or bad for hotels and airlines? Are they money-grubbing businesses -- only looking to steal customers and revenues, or do they offer beneficial marketing opportunities that make the high commission rates worthwhile? Thus far, no consensus has been reached so I would like to present my thoughts on the issue.
In my opinion, the OTAs are a necessary evil, although not for all hotels. For flagged properties that already benefit from the brand association and increased marketing reach of the chain, the OTAs aren’t completely necessary. Yes, they may miss out on some bookings but in reality, the brand name to which they are associated will bring in a lot more business than a simple OTA profile ever will.
On the other hand, independent and boutique properties do need to take advantage of the OTAs. Because these properties are not associated with a strong brand name (in most cases) and because they are not able to spend the huge amounts of money on marketing that the chains do, OTAs should be an important part of their revenue and distribution strategies. OTAs give boutiques increased online presence and visibility to potential customers – referred to as “the billboard effect” – increasing their bookings drastically.
There is, however, one type of OTA that is completely necessary for both flagged and independent hotels – opaque OTA channels.
When hoteliers hear the words ‘opaque channel’, most think of sites like Priceline and Hotwire, where consumers find out which property they are actually booking only after paying for their reservation. While these sites are traditionally defined as opaque channels, I would suggest that these are not the only opaque channels. In my opinion, opaque channels are also those that offer consumers the ability to book travel packages (air + hotel and air + hotel + rental car) like Expedia’s Vacation Packages, and those like BackBid that offer hotels the ability to offer private pricing tailored to specific consumers’ travel preferences.
Opaque channels (according to my definition) offer many benefits for all hotels. Sites like BackBid don’t undermine a property’s brand like traditional OTAs often do. Opaque channels remove the necessity to adhere to rate parity agreements. Because many opaque channels do not publish rates online (instead they send them directly to a traveler’s inbox), it avoids the issue altogether. And the big benefit – unlike traditional OTAs, opaque channels do not necessitate rash discounting (or any discounting at all!); instead, these channels offer hotels the ability to increase their market share based on offering value, not simply a lower rate.
The airline industry has also been experiencing a great deal of controversy about OTAs in recent months. Last December, American Airlines pulled all of its flights from Orbitz.com in a stand against the fees charged by the online booking site. Airlines, including American, are pushing for lower OTA fees to counteract the still-high cost of fuel. As well, American claims that the GDS companies and the OTAs are unfairly blocking customers from buying direct, which is a much more profitable channel for the carriers as there are no additional fees to be paid to the OTAs.
The case for airlines and the OTAs is very similar to that of hotels and the OTAs. All of these businesses are unhappy with the high commission rates that are being paid, but most airlines comply with the OTAs restrictions and fees in order to generate the bookings that they need to stay profitable (or in some cases, just to break even).
For legacy carriers, who have much higher expenses and therefore, smaller profit margins, the additional fees paid to the OTAs have a significant impact on profits. But because the OTAs and the GDS make it more difficult for carriers to sell direct, it is a necessity for most airlines to list their flights on these sites.
Of course, there is always an exception to the rule. American took a stand against the OTAs and raised public awareness of an important issue in the travel industry. Unfortunately though, a judge ruled against American on June 1, 2011, forcing American to once again list its flights on the site.
There is one type of airline that has proven successful, and highly profitable, even without listing their flights on the OTAs. Many low-cost carriers (LCCs) have the ability to eschew the OTAs completely, instead offering bookings only through their own direct channels. Because these carriers aren’t paying the OTA commissions, they are able to offer travelers a lower fare. With the LCC business model already offering higher profit margins, this is another way that innovators like Southwest are increasing their revenues and their market share drastically.
In short, the OTAs have created a significant business for themselves, making it difficult for both hotels and airlines to succeed financially without them. They became popular with both hotels and airlines in times of slow travel and lower profits; the argument was that some revenue was better than no revenue.
Today though, airlines and hotels no longer need to discount, yet they are still using the OTAs to sell large percentages of their inventory. In my opinion, this will change. As hotels and airlines fight back, and as new opaque online booking sites are developed, I think that we will see that the power of the traditional OTAs will decrease, opening up the market for innovators in the travel booking space.
The future of travel booking is bright: booking sites that empower the consumer and a crowd-sourcing travel-scape that offers a better value proposition for travelers and a better business model for hotels and airlines.
BackBid is an online booking site that enables travelers to post their existing hotel reservation and accept bids from alternative properties to find the best price and value for their upcoming stay. With BackBid, hotels have visibility to consumers’ travel preferences. BackBid empowers hoteliers to proactively create online bookings with confirmed travelers.
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