Wednesday, April 22, 2009

Orbitz Hotel-Fee Cut: Bid to Increase Nonair Revenue

Orbitz's move today to cut consumer booking fees on hotels, and to show the total price of hotels up-front in the search-results display, instead of at the end of the booking process, is a bold bid to build its hotel business and to reduce its historic reliance on low-margin flight sales.

In 2008, Orbitz garnered roughly 47.5 percent of total net revenue from non-air sales (largely hotels and vacation packages) and 39 percent from airline inventory. (The remaining 13.5 percent came from global distribution system, or GDS, incentives on air, car and hotel sales).

The consumer press, including Budget Travel's Blog, correctly are hailing Orbitz for "tellin' it straight" by showing the fees up-front.

This disadvantages Orbitz at the moment on metasearch websites like Kayak because the total price of hotels through Orbitz and sister company CheapTickets may appear to be higher than competitors' rates on other websites because of apples to oranges comparisons.

Orbitz's decision could be a game-changer on the consumer level because it may change the way travelers shop for hotels -- especially if Expedia and Travelocity match the move. And, I expect they will in some form.

But, the initiative will not move mountains in terms of Orbitz's competitive position. And, I'm betting that Orbitz doesn't expect that it will. In the Orbitz executive suite, the decision-makers clearly believe the competition will match Orbitz's thrust, and parallel booking-fee cuts already may be in the works.

Expedia is the king-maker in the online hotel business and has more resources at its disposal, in the form of more inventory and higher margins, than does Orbitz so I don't expect a major share shift.

Orbitz doesn't have the breadth of hotel inventory that Expedia does, and I doubt that this move will help them make progress on this front.

And, Priceline cut its hotel booking fees in July, and already has been making inroads in hotel sales.

Still, Orbitz's fee-cut and new hotel display should help it improve its consumer image and build up that nonair revenue -- and that is a strategic imperative. Expect a big marketing campaign in tandem with the "Hotel Fee Cut" and "Total Price" promotion.

However, from a business perspective, the booking-fee wars, initiated by Expedia when it removed its booking fee on flights in March, may end up hurting all of the online travel agencies.

"Total Price" is great, but let's hope that the OTAs don't get "totalled" in the price wars.

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