Online leisure/unmanaged business hotel bookings are estimated to have reached $23.5 billion in the United States in 2006, representing 25 percent of all hotel sales (see page 38). By 2008, PhoCusWright projects $3 out of every $10 spent on hotel reservations will be funneled through online leisure/unmanaged business travel sites. Online hotel and lodging sales, which last year grew 25 percent over 2005, are projected to continue to grow in double digits through 2008, though at a slower pace as the market matures.

The current dynamics in the U.S. hotel market are driving online hotel sales. These include fragmented inventory, greater price parity across channels, better margins than air and car, strong growth in packages and new supplier strategies such as improved Web site features. Meanwhile, consumers are turning to the Internet more often to buy hotel rooms due to increased broadband access, improved functionality and increased confidence in finding the best deals online.

Price Parity, Flexibility Impact
Channel Shift
One of the biggest trends on the Internet has been the shift in the balance of power toward hotel chains (versus online travel agencies). And one of the biggest reasons for that shift is greater price consistency. The online travel agencies have been all but stripped of their ability to offer significantly lower hotel prices to deal-starved customers compared to the hotels themselves. The large chains have been first to deliver consistent pricing across channels, although taxes and fees are still resulting in different net rates delivered to customers.

Chains have not gained ground because of consumer loyalty, however. Consumers continue to shop around. More and more consumers visit online agencies to search for content and prices but then purchase direct with the hotel, either on the hotel branded Web site, reservations center or the property itself. In 2006, 42 percent of usual online travel shoppers looked on an online travel agency site but ultimately purchased direct with the hotel – up from 31 percent in 2005, according to The PhoCusWright Consumer Travel Trends Survey Ninth Edition. At the same time, 40 percent of shoppers searched a supplier site but ultimately purchased from an online travel agency, signaling that lack of loyalty goes in both directions.

The metasearch and opaque players add to the mix of distractions for online hotel shoppers. Although only accounting for a minor level of activity, metasearch companies such as Yahoo! FareChase, Kayak, Mobissimo, SideStep and Search Party do appeal to price-focused mercenary consumers with little or no brand loyalty. Search Party offers the ability to simultaneously compare hotel rates, taxes, fees and cancellation policies from a single screen, while FareChase is integrated with Yahoo!’s main search engine, giving consumers fast access to pricing information, as well as more shopping tools and alternatives. Measuring the impact of these metasearch sites on consumers’ hotel purchasing behavior has only just begun.

Despite these distractions, hotel branded Web sites are growing at about three times the rate of the market as a whole, providing ample reason for hotels to continue to invest in their Web sites and take a powerful position at the negotiating table with online travel agencies. In 2006, 55 percent of all online hotel sales were booked through hotel branded Web sites versus 45 percent through online travel agencies. Hotels have asserted themselves at the bargaining table, improved their Web sites, maximized search marketing strategies and offered extra value to the consumer through loyalty points and flexible cancellation policies. Branded Web site development over the years has allowed users to search more easily for properties, compare prices and facilities, check loyalty points, and find promotions and packages that suit their needs. This improvement in functionality is extending to group bookings and to emerging Travel 2.0 applications. By 2008, PhoCusWright projects that hotel branded Web sites will represent 57 percent of all online leisure/unmanaged business travel sales.

Chain executives interviewed by PhoCusWright see a strong economy coupled with favorable room demand, rather than supply, as the reason for the shift. Hoteliers report that rising occupancy levels allow them to shift inventory availability to higher ADR and direct channels, where customer relationships can be enhanced. As these executives see it, brand direct bookings are an investment in the future. They cost less and represent an opportunity to create more loyal customer relationships or at least lessen the opportunity for intermediaries to create deeper relationships with their guests.

Technology is also adding to the opportunity to drive more hotel brand direct bookings. Major chains have aggressively pursued and mostly achieved single-image inventory solutions in yield and channel management, including system interfaces with online travel agencies. Chain IT organizations have linked yield and channel management systems to allow inventory and price decisions to be made and executed simultaneously across all channels, including brand online and offline, online travel agency, travel management company (TMC) and travel agency. Distribution service providers such as Hotel Bookings Solutions and TravelCLICK/iHotelier, in concert with revenue management system providers like IDeaS and integrated system providers such as MICROS, offer comparable solutions for independents and small chains.

Agencies Focus On Packages,
Global Growth
It is not all bad news for online travel agencies, however, as they focus on two important strategies to combat lost share of domestic online hotel bookings: packaging and international expansion.

Unlike hotels, online travel agencies are clearly focused on packaging and as a lodging-driven growth opportunity. Despite tight inventory control by travel suppliers, online travel agencies are well aware of the opacity value of packaging to hotels in a strong hospitality market. High occupancy rates create the opportunity for upward price action. Public discounting and head-to-head competition in online travel agency displays risk unwanted price wars and a drag on upward leisure price increases. Packaging creates opacity and more willingness by hotels to release inventory. Packaging is also a unique opportunity to serve travel experience demand since it simultaneously and efficiently assembles all components of travel inventory at a single price for comparison and purchase across brand suppliers of air, hotel, car (or ground transportation) and destination services. Ultimately, this is a function that is not as well done by component suppliers like hotels. However, agencies face difficulties putting together heavily discounted packages to appeal to mercenary customers, because highly discounted air and hotel inventory continues to be more difficult to source, thanks to a strong economy.

As further avenues for growth, the major online travel agencies are focused on the European and Asian markets. The fragmented hotels market in Europe, where an estimated 75 percent of properties are independent and not part of a chain, has improved online travel agencies’ value proposition in markets such as England, Germany, Italy and Spain. China and India also have enormous growth potential simply because of their populations and the degree to which their respective economies are growing. As U.S. online travel agencies continue to expand throughout Europe and Asia, their non-U.S. hotel sales could represent an even larger proportion of their total bookings. When bookings from European sites are added to the mix, U.S.-based online travel agencies booked more hotel rooms overall than U.S.-based hotel Web sites in 2005.

The bottom line: hotel chains have been successful in their plan to shift bookings to their own Web sites, and online travel agencies are accelerating strategies to combat slower growth. While hotels are encouraged with the results of their efforts, they won’t be completely satisfied until virtually all of their online bookings are direct. But there is a limit to how far hotels can push the online envelope as online travel agencies continue to grow their packaging strategies and expand their booking volume and customer base globally. In many ways, it’s a win-win for hotel chains which continue to build their direct relationship with the customer while relying on third parties to help keep occupancy levels where they want them to be.

For more information about PhoCusWright’s U.S. Online Travel Overview, Sixth Edition, go to www.phocuswright.com.