How Expedia and Priceline Impact Hotel Owners and Hotel Investors

9 min read

Special thanks to Christina Velasquez for contributions to this article.

When was the last time you used Expedia to book flights or a hotel room? Travelers often turn to Online Travel Agencies (OTAs) like Expedia to quickly find available accommodations, but that doesn’t mean that everyone is benefiting. Nowhere is this truer than in the hospitality industry.

This year alone, we’ve seen both AccorHotels (products include Ibis, Novotel, and Pullman) and Hyatt go head to head with Expedia.1 Hyatt, in particular, made headlines when it threatened to stop working with Expedia altogether, although just last month Hyatt admitted it would continue to work with the OTA for the foreseeable future.2 This isn’t anything new. In 2004, IHG actually left Expedia and did not have any listings on Expedia sites until it re-entered its partnership with Expedia 3 years later. Choice hotels in 2008-2009 had a dispute with Expedia as well, and shortly after the dispute, the hotel brand told all its franchisees that all Choice products would not be on Expedia.3 Despite hotel brands and hoteliers relying on OTAs for a large part of their annual room bookings, these disputes reflect a discontent among hotel owners that is neither new nor insignificant. So…what’s the big fuss about?

It’s a tricky game. In order to understand the Hotel-OTA conflict and analyze potential solutions, let’s first take a look at how OTAs work and they impact hotel owners.

Giants of the Industry

Every industry has its giants. The NBA has the Warriors and the Cavs. The tech world has Google and Facebook. In the hotel industry, we have the big three – Hilton, Marriott, and IHG – all established hotel brands that EquityRoots strives to work with in our own projects.  

But who owns the OTA world? There are two companies you’ve undoubtedly heard of:

  1. Expedia, Inc. has quite the roster, with an army of websites including Expedia.com, Hotels.com, Hotwire.com, Travelocity, HomeAway and Trivago.4 In 2015, Expedia acquired Orbitz Worldwide, which also includes Orbitz, CheapTickets, and Ebookers, among several other brands. Add to that thousands of other affiliate sites, and you’ve got one major player controlling much of how OTA’s operate.
  2. The Priceline Group is the other worldwide giant with a hefty lineup of its own, including Priceline.com, Booking.com, Agoda.com, Kayak.com, OpenTable, and Rentalcars.com.

These powerhouses alone hold incredible influence in the hospitality industry in no small part due to their all-inclusive appeal to travelers. Travelers using Priceline or Expedia can book not only hotels, but also auto rentals and flights. Planning a vacation to Los Angeles? It’s pretty easy to log onto Expedia.com, and search for a flight and hotel for your trip. Online filters generally allow you to specify dates, times, and travel budgets to best fit your needs. Hotel owners can actually utilize this powerful tool in a way that benefits them more appropriately – but more on that later.

If travelers search for hotel bookings in L.A. right now, they can compare pricing and offerings from the Hilton Pasadena, the Best Western Plus Garden Inn and Suites, and La Quinta. Once a traveler has made their hotel selection, an OTA actually handles the payment of the hotel for you. From the traveler’s perspective, it’s not difficult to appreciate the convenience.  Especially for travelers not loyal to specific hotel brands, they can use OTA’s to pick the right lodging for their needs efficiently.

How does this hurt hotel owners?

Hotel owners pay hefty commissions when working with OTAs, and increasing dependency on Expedia and Priceline can compromise sustainability in hotel operations. For example – let’s say you own a hotel in L.A. For simplicity, your rooms are priced at $100 per night. Chuck from Chicago decides to fly into L.A. for a trip. Chuck walks into your hotel, and requests a room, paying that $100 rate. Chuck gets to stay at your hotel, and you get to keep $100 in revenue. Straightforward.

Let’s compare Chuck to another guest at your Hotel, Erica. Erica decides to book her hotel through Expedia. She books the hotel online with the same listed room price of $100. Expedia handles the payment and gets that $100. Then, Expedia takes a commission and only pays you $75 as the hotel owner.

Whoa. What happened? Since Expedia helped you, (the hotel owner) gain a customer, the OTA charges you a commission. After all, without Expedia, Erica may never have booked at your property. The hotel owner has to pay a fee of 25% of the room rate – $25. This rate is pretty typical of many OTAs.

A distinction worth highlighting is the fact that Erica does not pay that commission fee. You do as the hotel owner. That’s primarily how OTA’s make their revenue – by charging a fee for hotel rooms booked online. Among all its services offered, Expedia makes 70% of its revenue through hotel bookings.5 That’s not to say that OTA services are not valued. Oftentimes, getting customers through OTAs is a great tool for a hotel owner to have. The issue is that the commission for these bookings are high enough to make it difficult for hotel owners to continue operating.

This booking fee isn’t a one-sized-fits-all setting. Hotel brands like Marriott and Hilton independently negotiate their own commission rates with OTA’s, and those commissions can vary depending on whether or not the booking date is a weekday or a weekend. Typically these rates range from 15-28%, depending on the brand. Independent hotel owners unaffiliated with a brand can face commission rates as high as 30% of the room rate. If your rate is $100 a night, you only earn $70 if your customer decides to book through Expedia.

Hotel Owners Suffer from OTA Dependency

Back to the example with you being the hotel owner. Although it’s true that you still get to keep the larger part of this revenue from Erica’s booking, you’ve been facing increasing costs in the past few years. Labor costs are on the rise.6 You’ve got to pay utility bills, mortgage, internet systems and other new tech costs to keep up with competition in the industry. With Priceline and Expedia charging the high rates in commission, hotel owners have a decreasing budget to cover more front end costs. In contrast, OTAs don’t have to pay the same overhead, brick-and-mortar, and maintenance costs that hotel owners have.

Additionally, a growing concern is that OTAs are becoming the norm rather than an alternative for hotel bookings. Younger travelers especially are conducting many of their travel bookings through online platforms like Kayak and Expedia. In the past, hotel owners were looking at a smaller percentage of their rooms to be booked by OTAs. As OTAs have grown, many hotel owners are now seeing the vast majority of their rooms being booked through OTA’s – this makes it difficult for hotel owners to sustain their operations without raising the prices of their rooms.

It’s important to emphasize that most of the damage is felt by hotel owners, not hotel companies. With or without OTAs, hotel companies still retain much of their revenue through royalty fees (also paid by hotel owners) and are more insulated from the effects of online middlemen.

That doesn’t mean that these hotel companies are completely safe from the effects of OTAs. When OTAs create a large impact on thousands of individual franchise owners, increased discontent among those owners push waves of communication to hotel brands with a clear message: something has to change. That’s what we are seeing now with several hotel brands now questioning their current working relationship with OTAs.

 

EquityRoots - Hotel Real Estate Investments Platform

Flights, too?

For better or for worse, OTAs are not going to go away in the future. If anything, they will continue to grow. Yet, hotels aren’t the only ones who have scuffled with OTAs. Airline companies such as Delta, American and US Airways have all at one point removed their flights from Expedia to protest high fees. To this day, Southwest Airlines still keeps listings off of OTAs because of those fees.7 Other airlines charge a fee if travelers book through OTAs: most recently, British Airways announced it would start charging a fee for many third party bookings on OTAs.8

Airline brands have even rallied together to leverage their fight against OTAs. Around 2006-2007, major OTAs got sued by several airlines for charging booking fees. The result fell more in favor of airlines. When travelers book airlines through one of the OTA websites, the airline still gets charged with some margin, but there are no longer any booking fees. Similarly, an Illinois Court gave American Airlines a win in their battle against OTA Orbitz (again, now owned by Expedia).9

Hotel brands could attempt to utilize some of the strategies utilized by the airline companies. Hotel owners can upcharge fees if guests book through Expedia or Priceline. Hotel owners can push for hotel companies to band together in a similar fashion as major airlines. It’ll take a high degree of coordination among hotel companies and hotel owners alike, but a concerted effort across the hotel industry could really benefit hotel companies and hotel owners in the long run.

Of course, it won’t be easy. Airlines are in a better position to challenge OTAs – because airlines own all the actual aircraft that travelers fly on; they have a unique position in that airlines own all of their assets. In contrast, the hotel companies do not own the hotels themselves – individual hotel owners do. The hotel brands give owners brand support in return for royalty fees, but they do not own the brick and mortar outright. This key difference gives airlines a greater reason to push back against OTAs, whereas hotel owners must coordinate with hotel companies on a large scale.

Hotel Owners can Utilize OTAs as an Asset

There’s an absolute need for hotel owners to put pressure on hotel brands, and hotel brands uniting against high commission OTA fees is incredibly important for sustainability. In the meantime, how do hotel owners utilize OTAs as more of an asset? There’s a definite stigma among hotel owners against OTAs, but there are ways to look at Expedia and Priceline as potential tools in the hospitality business. Hotel owners do have an opportunity to utilize OTAs like Expedia more appropriately in their favor. 

  • Utilize OTAs like Expedia as your research tool. Hotel owners can use OTA to shop other hotels in the area. OTAs are a powerful localized resource to see what your competition is doing in any given area.
  • Free advertising. The inherent benefit of OTAs is that you can advertise your hotel for almost zero upfront cost. Hotel owners don’t get charged if customers simply see their hotels on OTAs. Hotel owners pay the hefty commission if travelers book through the OTA.
  • Book Direct… Hotel owners should push to have guests book directly with them. Guests should use Expedia to search for the best value in hotels, but if they are booking through OTAs, hotel owners pay for royalties and OTA fees. If guests book directly with the hotel owner and brand, hotel owners benefit because they dodge paying the OTA commissions.
  • …and Invest in Loyalty. Of course, hotel owners need to recognize that it’s so easy for guests to use Expedia and Priceline. Utilize loyalty-building resources. Booking direct provides the opportunity to give guests loyalty points, and loyalty strengthens relationships between guests and hotel brands. Guests benefit from additional loyalty points and increasingly improved service from a long-term relationship with a brand, and hotel owners enjoy that loyalty in the form of increased bookings from repeat business (without paying commissions). If those points cost hotel owners 10% through direct booking by giving out those points, it is still cheaper than guests booking through Expedia and collecting a commission of 15-30%.

Marriott, IHG, and Hilton are some of the brands that have strong loyalty programs where guests earn free points for staying at affiliated properties, but if hotel owners are going to overcome high commission fees, action needs to be taken earlier rather than later. Appeal to hotel companies for higher degrees of support. This is something we are seeing more often now, and many hotel brands are actually asking their franchisees to leverage them further.10 Larger organizations like AAHOA can and already have taken steps to protect hotel owners.11 We’re confident in the ability of hotels to unite and overcome arbitrarily high commissions, and with strong efforts, hotels will be an even better real estate investment than they already are.

Sources

1. “AccorHotels Finds Competing with Expedia is Harder than Expected.” Skift.  Jul 31, 2017.
2. “Hyatt Isn’t Abandoning Expedia Just Yet as the Two Sides Reach Agreement in Principle.” Skift. Jul 31, 2017.
3. Schaal, Dennis. A Timeline of Online Travel Agencies Battles with Hotels and Airlines. Skift. Jun 21, 2017.
4. “About Us.” Expedia.
5. Page, Vanessa. “How Expedia Makes Money.” Investopedia. Aug 5, 2015.
6.Mandelbaum, Robert. “An examination of hotel labor costs.” Hotel Management. Nov 21, 2016.
7.Hobica, George. Battle Heats up Between Airlines and Online Travel Agencies. Airfarewatchdog. Oct 25, 2016.
8.chlappig, Ben. “British Airways will Start Charging a Fee for Many Third Party Bookings.” May 26, 2017. One Mile At A Time.
9.“Court Orders American Airlines Flights Back on Orbitz.” Consumer Reports News. Jun 2, 2011.
10.Mest, Elliott. “Hotel brands urge franchisees to leverage them further.” Hotel Management. Aug 21, 2017.
11.HNN Newswire. “AAHOA takes a strong stance on OTA issues.” Hotel News Now. Nov 9, 2009.

Share this Blog:

Leave a Reply

Your email address will not be published. Required fields are marked *