Airbnb May Alleviate The Rivalry Between Hotels, Online Travel Agencies
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Once upon a time these two segments within the hospitality industry maintained a cooperative relationship that benefited both: hotels provided online travel agencies with a booming, long-standing business to market to the masses, and OTAs provided the visibility hotels needed to increase bookings. That relationship has grown contentious as booking sites increase market share and raise commissions, undercutting hotel companies’ bottom lines.
“In a broad sense hotels had much to gain from OTAs, such as increased marketing power and increased reservations and visibility as far as getting more eyes on the hotel,” Colliers International Hotel Valuation Services Director Ryan Sikorski said.
Online travel agencies started gaining momentum in the 1980s and 1990s. Initially serving as a tool for travel agents, their entry into the global marketplace has grown tremendously. As of 2016, Sikorski said, visitors’ hotel bookings on online travel agencies surpassed that of direct hotel bookings for the first time in the U.S.
“Hotels are happy to take that increased visibility, but on the flip side it means less money," he said. "It's hard for a hotel to stomach the idea that a sizable chunk of their revenue stream is going to an OTA when they feel like they have the structure in place to do it themselves.”
Airbnb is also transitioning further into the online travel market, and launched its Airbnb Trips service in November to help connect travelers with unique experiences listed by local residents in communities across the globe. This expansion of its offerings could help assuage the rising tensions between hotel companies and booking sites by forcing OTAs to become more competitive with their pricing, according to Hilton Worldwide CEO Christopher Nassetta.
“Competition is a good thing,” Nassetta said on the company's second-quarter earnings call. “[Airbnb] morphing in whatever ways to feeling more like an OTA is good — whether they do that or not, I don’t know, not for me to say. But the more competition there is in any space, the better off we are, I think, because more competition in theory would help have the impact of driving pricing down and distribution costs down.”
Hotels Buck Against OTA Prices As Tech Advances Rise
As hotel companies grow their technology capabilities, major players are questioning the need to pay OTAs’ high fees when they now have the capacity to book directly.
“You probably could make a correlation between the technology game of the hotel industry with [this] rising contention,” Sikorski said. “As [hotels feel] more comfortable with their system and ability to book themselves … they are thinking to themselves, ‘why is this revenue leaving our pocket and going to someone else?’”
According to Sikorski, hotels pay between 10% and 30% in commission to OTAs for every reservation booked through their sites. This is a sizable expense considering hotel profit margins typically range from 25% to 40%.
To combat these high fees, hotels are getting creative in their attempts to encourage guests to book directly through their sites, cutting out the middleman. Hilton launched a marketing campaign called “Stop Clicking Around” to discourage searches through booking sites by offering promotional deals and discounts to guests that book direct. InterContinental Hotels Group is doing something similar by developing the industry’s first cloud-based reservation system to accommodate guests who book direct.
Hyatt Hotels Corp. has been a forerunner in the industry’s move away from third-party booking sites.
“Hyatt has been a spokesperson for the big hotel companies with respect to all sorts of issues ranging from labor down to OTAs,” Colliers International Hotel Valuation Services Managing Director Bryan Younge said.
Earlier this year the hotel company issued an intent to terminate its Corporate Lodging Agreement with Expedia in an attempt to muscle the OTA to lower its commissions. Sikorski said this was a risky move, considering an estimated 10% of Hyatt hotel bookings come from Expedia-owned sites, including Hotels.com, Travelocity, Orbitz and Hotwire. Hyatt had also signed secondary agreements with Expedia rivals Booking.com and Priceline.com, putting increased pressure behind its negotiations with the online travel services giant.
The two have since reached an agreement, signing a new deal to renew their distribution agreement in August.
“Either way, it’s a precedent and a signal that Expedia is [not] impervious to contract renegotiations,” Younge said. “[It’s] a win for Hyatt and hotel companies overall.”
Where Does Airbnb Stand?
If Airbnb continues to expand its platform to online travel, it would likely further encroach on OTAs' market share and pressure booking sites to lower their prices to compete. But AirDNA CEO Scott Shatford is not so sure that will happen.
“It’s been a big question — typically who’s asking the question is hedge funds that have bets on Priceline and Expedia,” Shatford said. “Is Airbnb going to get into the hotel booking game? Up to this point they don’t want to get into that space.”
When Airbnb launched Trips in November, the disruption rippled through the travel market as investors in major agencies like Expedia and Priceline feared the launch would soon eat into market share.
But Shatford said Airbnb’s goal with Trips is to provide a service major booking sites are not. The goal is twofold: One, the tech giant aims to diversify its offerings beyond mere short-term rentals — a business model that has experienced a great deal of regulatory setbacks. Two, Airbnb is looking to etch out a place for itself in the online travel market that differs from what major players are already offering.
“The real difference is that Airbnb doesn't want to list the Hiltons, Marriotts and the big hotels. They’re trying to differentiate themselves by maybe [listing] boutique hotels and bed-and-breakfasts,” Shatford said.
Airbnb Trips connects travelers with experiences beyond the typical tourist spots and excursions in communities around the globe. Local residents post trips and experiences on its platform — hidden gems, as Airbnb refers to them in its release, such as violin making in Paris or running marathons in Kenya.
What started as just 500 experiences in a few key cities has since expanded to 2,500 experiences in more than 35 cities around the globe. Airbnb launched 30 Madrid-based experiences this month. It is rumored the home-sharing giant is also working to build a flight-booking tool that it will layer into its existing offerings.
“Airbnb’s biggest problem going into an IPO is being lumped into a hotel or online travel agency," Shatford said. "They want to be regulated differently than a hotel and held to a different standard in terms of safety and taxes. The biggest problem is trying to scale their business without accepting all the traditional hotel properties on to their platform [since] that creates serious regulation struggles.”