Saturday, April 25, 2009

Mr. Sandman: Orbitz and Expedia Play Gotcha on Fees

In March, Expedia eliminated air-booking fees, causing a lot of pain for Orbitz. And, last week, Orbitz made some travel news of its own when it reduced booking fees for hotels and began displaying the total cost of the booking in initial search results, presumably generating considerable angst at Expedia.

Here's how one travel industry insider views the booking-fee skirmish:

"Orbitz led with hotels to kick sand in Expedia's face. Same reason they dropped hotel fees. Since Expedia sells a lot more hotels than Orbitz, the reduction in fees will hurt them more than Orbitz (the inverse of the drop in air fees). Since most suppliers only show base fees, Orbitz (and other online travel agencies if they match) will look more expensive than hotel websites, at first blush. So some volume will be lost. That will hurt Expedia more than Orbitz."

As I reported in Travel Weekly and the Hudson Crossing Travel Industry Insight blog confirmed, Expedia apparently has matched Orbitz's hotel-booking fee reductions.

Among other OTAs, Travelocity still is in assessment mode, and Priceline reduced its hotel-booking fees a year ago.

As I noted in the Dennis Schaal Blog a few days, ago, Orbitz's initiative is designed to build its nonair business, a strategic imperative that Orbitz Worldwide CEO Barney Harford was brought in to execute.

Yes, Orbitz's in-your-face move seemingly would hurt Expedia more than Orbitz because Orbitz's hotel business is way smaller than Expedia's.

And, by one estimate, Expedia garnered about 19 percent of its EBITDA last year from hotel-booking fees. The hotel business, in addition to advertising and media, is Expedia's growth-generator.

But, Expedia's hotel business already had been under substantial pressure before Orbitz's reduction in hotel-booking fees.

In Expedia's 2008 10-K, the company stated: "Industry sources forecast lower occupancies and year-on-year declines in ADRs [average daily rates] in 2009. These trends, combined with softer demand in a weakening economy and lower air capacity into our core leisure travel destinations, create a challenging backdrop for our hotel business, which has been a key source of revenue and profitability growth for Expedia."

So, the OTA play-for-keeps games continue. You can expect that Orbitz will mount an intense marketing campaign to tout its "total cost" hotel displays.

Harford gave us a taste of the likely talking points on the Orbitz Travel Blog. "We’re daring you to compare the Orbitz Total Price before booking your hotel anywhere else," Harford wrote.

Incidentally, the Orbitz Total Price initiative had to be in the works for several weeks. That would be the time needed to do the development work required to move total price displays for hotels from the details page to the initial search-results page.

And, the development work required may be one reason that Expedia and Travelocity haven't immediately parroted Orbitz on the hotel-display issue. It would take 30-45 days of code-writing, one industry strategy-decoder told me.

There is pressure on Expedia, Travelocity and Priceline to match Orbitz on total price in hotel displays. And, it's about time the OTAs got more consumer-friendly.

For example, Travelocity markets itself as a "customer champion" and it would be hard to see how it can remain couching the total price of hotels on its details page when the pressure is on and the Travelocity Customer Bill of Rights states that customers "have the right to unbiased information up front."

The OTAs, because of Dept. of Transportation (DOT) requirements, already display total price on flights. And, Travelocity led the way on total price for car rentals several years ago, with the other OTAs following in lock-step.

In addition to hotels, the OTAs' service fees on cruises, too, remain couched in "taxes and fees."

And, although Orbitz's decision to display total price on hotels up-front is a huge step in the right direction for consumers, all of the OTAs fall short on the transparency front because they still lump together "taxes and fees" in hotel bookings, leaving consumers in the dark regarding how much of a service fee they are paying.

With hotel-tax lawsuits against the OTAs raging across the country and the OTAs' disguising of their net rates on hotels still their unanimous mantra, don't expect any movement on the "taxes and fees" issue in the near future.

You might have to wait for a court order or a settlement for that issue to get resolved.

Meanwhile, it will be interesting to see next week, when Expedia releases its first quarter earnings results, what the business impact was of its eliminating flight-booking fees in the last couple of weeks of the quarter.

Did it pick up some share in the air business? Was there a steep revenue hit or did increased volumes fill the gap?

So, what is the next step in this OTA gotcha game?

An acquisition? A merger? Another frenzy of discounting?

Or, as Forrester analyst Henry Harteveldt cautioned to me: Will all of these fee cuts lead to a "revenue death spiral?"

No comments: