Monday, June 8, 2009

Priceline's Hotel Pressures: Commission Model Problematic as Travelers Show Commitment Phobia

Priceline outperformed its online travel agency competitors in the first quarter, but the pressures it is feeling in its hotel business reflect how competitive and dicey the hotel sector is becoming in the current market environment.

Consider that in the first quarter of 2008, 56 percent of Priceline's gross profit came from its international operations, primarily its European-based hotel business, which uses a commission model.

As I wrote in a Travel Weekly article, Expedia, which bought last year, is targeting Priceline and its hotel business with a commission-based program of its own in Europe, the Middle East and Africa.

That commission model, which both Priceline and Expedia are pursuing at breakneck pace in Europe, has some problems that are absent from the merchant model, which is dominant in the U.S.

The problem?

Consumers easily can cancel the reservations.

In a 10-Q report filed with the SEC May 11, Priceline stated: "As ADRs [Average Daily Rates] decline, customers who have existing reservations may cancel those reservations and rebook at a lower rate, and in times of economic stress, travelers are more likely to cancel their vacation plans outright. While decreasing ADRs and a worldwide recession make it relatively more attractive for consumers to make a cancellable agency reservation than a pre-paid reservation, our agency business will likely have higher cancellation rates compared to companies who offer predominantly merchant model hotel rooms."

If those increased cancellations weren't enough to keep Priceline executives awake at night, then consider the pressures that the merchant model faces in the U.S. over the hotel tax issue.

In the same SEC filing, Priceline detailed the heat it feels from municipal and state auditors around the country.

Priceline stated: "Among others, the City of Philadelphia, Pennsylvania; Miami-Dade County, Florida; the City of Anaheim, California; the City of Phoenix, Arizona; the City of San Francisco, California; the City of Chicago, Illinois; Broward County, Florida and state tax officials from Wisconsin, Pennsylvania, and Texas, have begun formal or informal administrative procedures or stated that they may assert claims against the Company relating to allegedly unpaid state or local hotel occupancy or related taxes. In addition, during the three months ended March 31, 2009, the Company received audit notices from 28 other cities in the state of California. The Company is engaged in audit proceedings in each of those cities."

Priceline added that it expected to be assessed $3.3 million, including penalties and interest, from the City of San Francisco, and may have to pay the assessment in order to appeal it.

And, that sort of "pay to play" policy is not a very appealing prospect for the OTAs.

The expenses, including legal fees, that the OTAs must be shelling out as they battle lawsuits and audits related to merchant-model-hotel taxes must be off the charts.

As I wrote several weeks ago, the OTAs have adopted what I characterized as a Google Earth strategy: They are placing pins on a map, leaving town and opting-out of selling merchant-hotel rooms in cities where they experienced adverse tax rulings.

One industry insider speculated to me that perhaps Expedia's initiative to expand its hotel-commission model in EMEA may be an experiment about or precursor to an abandonment or downplaying of the merchant model, given the tremendous pressures.

At any rate, or model, that is, the hotel business, traditionally an OTA sweet spot, is getting very spicy.

5 comments: said...

Hi Dennis,

Great article.

Do you have any backup figures that prove that canx in a commissionable model is higher than in the merchant model? Merchant model OTAs have made changes in the canx policy to be more flexible of what it used to be hence why I have doubts about the "problem" you raise in your article. Cheers, Guillaume

Dennis Schaal said...

Guillaume: Well, Priceline says it expects more cancellations because of its commission model than OTAs that use the merchant model. Priceline, for example, still charges cancellation fees for Name Your Own Price bookings, although it waived cancel fees on published price hotel bookings.

Dennis Schaal said...

Guillaume: You are right that some of the OTAs have eased their hotel cancellation policies and I should have pointed that out. Duh. But, it still appears that the reservations are easier to cancel in the agent model, where the guest pays the hotel upon arrival, or at check-out. For example, read what states about cancellations, including its merchant-model Expedia Special Rate hotels. The Expedia UK website states: "Hotels can be changed or cancelled according to each property's rules and restrictions. Some properties impose penalties, such as one night's stay, if you cancel your reservation within a certain number of days before your scheduled check-in date. Other properties, such as Expedia Special Rate hotels, charge a small penalty for changes made any time after a room is booked." said...

So in essence, Hotels have regained control about how they want their customers to be penalized if they fail to canx within the "acceptable canx policy". To me, this is going to the right direction. Before it was up to the merchant OTAs to dictate that rule...

Anonymous said...

What is an "OTA"?