Thursday, August 6, 2009

Does Orbitz Mean Merchant Model To

Orbitz Worldwide CEO Barney Harford is bullish on subsidiary, the Sydney, Australia, hotel business primarily selling last-minute rooms in Europe and Asia.

Harford said during the OWW Q2 conference call yesterday that he "loves" the business model, which offers a twist on the traditional agency model.

Harford, who pledges to go gang-busters in building the Orbitz hotel business, said's "modified retail model" is much simpler than the merchant model, which requires tons of nurturing and work.

And, besides, immediately receives its pre-paid commissions, ranging from 10 percent to 15 percent, in the form of deposits as soon as consumers book the rooms.

Some 15,000 properties have signed up for the approach, Harford said.

Here's how the model works.

To book the Palms Hotel and Spa Miami, the consumer pays up-front a $47.40 "deposit," including a $3 nonrefundable booking fee.

So, collects its compensation immediately and doesn't have to wait weeks or months for finicky hotel chains and independent properties to send commissions.

And, from a consumer perspective -- and here's a HEADLINE -- the booking fee is transparent -- $3.

After the room is booked, e-mails the customer a voucher, which states that consumer must pay the $251.60 balance, plus applicable city, state and other taxes, to the hotel upon checkout.

In this way, the hotel gets its money immediately upon the completion of the stay.

In turn, with online travel companies being tracked by tax-deprived cities, counties and states across the country, bows out of the whole tax mess, and pays diminished credit card fees because it is merely processing the deposit and not the full retail rate for the room.

Tom Botts, a partner in Hudson Crossing, notes that collecting commissions from hotels can be "a horror show" so speedier payments are advantageous to the intermediaries.

However, a downside for the OTCs is that they wouldn't get to hang onto the hotels' money for as long as they do now under the current merchant model.

Harford said the business faced challenges in the second quarter, largely because it does a lot of business in Europe, where the downturn is acute.

He offered some tantalizing hints about the future utility of the model as he praised its advantages over the merchant model.

For example, Harford said it is easier to acquire hotel partners using the model relative to the merchant model, which requires a protracted effort.

So, could the modified agency model be rolled out on a broader basis internationally and in the U.S?

I don't believe that Orbitz is about to chuck the merchant model -- although it has less at stake than Priceline and Expedia. For example, Harford said Orbitz estimates it only has about a $1 million annual tax exposure for its merchant model hotel business in New York City.

And, whether the model would win broad consumer acceptance, given its complexity, is another issue, Botts pointed out. currently offers "last-minute" inventory for bookings up to 28 days' out.

In response to an analyst's question about whether OWW was considering expanding's 4-week window, Harford coyly replied: "Stay tuned."

If the OTCs are forced to abandon more U.S. cities because of adverse rulings on the merchant model tax question, perhaps the model could get some increasing attention.

We're "staying tuned."


David Whitley said...

It is an interesting model, and has been used in the budget sector for a while - I know takes 10% up front as a deposit, while the rest is paid direct to the accommodation provider.

Luke Ford said...

It is interesting. Our online travel company ( uses many different forms of payment depending on the destination. So in Albania we might ask for 100% upfront because frankly hotels are just not developed to use credit cards or allotment even. Whereas, a place like Belo Horizonte, in Brazil, we can use the ratestogo model. As each of our local travel sites are owned by local people we are flexible in our means.