Consider the relationship between online travel agencies (OTAs) and hotels. On the one hand, hotels are the ones who employ hundreds of thousands to build, maintain, and staff properties only to have search engine firms with relatively small overhead come in and demand high commissions to sell the rooms. But, OTAs like Expedia and Booking Holdings Inc. are popular one-stop destinations for hotel searches. They are virtual billboards on a very busy boulevard that no hotel can afford to ignore. So how can both parties get what they want?
Mizuho US Internet analyst James Lee recently hosted an investor call on the future of OTA commissions with HeBS Digital, a leading ad agency in the hospitality space. I spoke with him about his takeaways from the call.
Why are OTA contract renewals such a hot topic?
We are entering a period when major hotel chains will begin renewing their contracts with OTAs. Of note, Marriott, the largest hotel chain globally, is about to negotiate its OTA agreements in a way that could serve as a blueprint for other such agreements in the industry.
What leverage does Marriott have?
OTA commission rates have been declining over the last 10 years due to a shift toward the agency model and pressure from hotel industry consolidation. US hotel chains on average pay 12-16% commissions to large OTAs. But that is down substantially from 18-22% back in 2008. The ultimate goal for hoteliers is to bring those commissions down to about 10%, which is the level they pay to traditional travel agencies.
What are forces that will drive this round of negotiations?
Hotel economics are in good shape in North America. The growth in demand is expected to modestly exceed supply in 2018 and 2019, according to HeBS Digital and STR. We also expect the occupancy rate to grow at a stable pace. So, the goal for hotels is lower distribution costs.
Why so much focus on that one cost?
Hotels have limited leverage on other cost factors like labor and debt service. And right now, the industry is under pressure to improve profitability amidst positive fundamental trends. OTA contract periods are typically three-year terms. So using the last contract renewal in 2015 as a proxy, we estimate that Marriott’s OTA commission rate was reduced by one to two percentage points globally. This year their goal appears similar.
What are hotels like Marriott willing to bring to the table to get concessions?
Knowing what the hotels are after, it seems like OTAs would like to optimize their supply to offset further commission declines. The group will likely ask for LRA (last room availability) to gain unlimited inventory and qualify for loyalty points. With LRA agreements, OTAs can purchase any available accommodations such as suites, family rooms, king rooms, etc., even if it’s the only unoccupied room at the hotel.
So LRAs are a huge bargaining chip?
Guaranteeing this inventory availability is critical for OTAs, especially in top markets like NYC that have occupancy rates above 80%, limiting their ability to meet demand. We believe requesting LRA and the ability to let OTA users qualify for loyalty points is reasonable since the same conditions are provided to traditional travel agencies.
What is the likely outcome?
In our view, hotels will shave another 1-2% off commission rates this renewal season and OTAs will successfully get LRA and qualify for loyalty points. Hotels realize cost reductions in the one of the few areas they can and OTAs meaningfully increase their inventory, increase market share for hotel booking and increase volume growth that will more than offset the lower commission take rate. It’s a win-win situation for both.