NEW YORK -- In the mid-1990s, the Internet held much promise for
travel suppliers, who had visions of lower distribution costs and a
healthier bottom line.
It hasn't quite turned out that way. Putting the power of travel
shopping in the hands of consumers has made the Internet a
battleground for discounting. Suppliers -- particularly hotels and
airlines -- have seen the promise of lower distribution costs
swallowed by revenue erosion.
No, the Internet hasn't lived up to its hype from the suppliers'
point of view.
The challenge for suppliers is to make it work because there's
no turning back now.
The bad guy
For the airlines, Internet distribution may have saved millions
of dollars in GDS and other costs. However, the revenue loss
airlines suffered from moving business to the Internet has exceeded
their distribution cost savings, according to Jamie Baker, airline
analyst for J.P. Morgan Securities.
Baker, speaking at the Federal Aviation Administration's
forecast conference, said, "The Internet has moved from good-guy
status to bad-guy status."
Baker maintained most airline executives now would concede that
"the old days actually were better." However, he said it is too
late to turn back the clock, remarking that it could be done "only
if the Internet gets turned off."
Speaking at the same conference, US Airways CEO David Siegel did
not concede any strategic mistakes, but said the Internet has
"permanently changed the buying process for both business and
leisure travelers."
He said the airline must lower its cost structure to adjust to
"a new revenue environment."
The Internet's effect on corporate travel purchasing has
particularly crushed the airlines' bottom lines, according to
Lorraine Sileo, an analyst at research firm PhoCusWright.
Many companies, under pressure to cut costs during a bad
economy, are booking more restricted fares and shying away from
business fares, she said.
However, they are turning to the Internet instead of traditional
travel agencies, lured by lower service fees and Web-only
discounts.
Although there may be no turning back, there is some cutting
back.
America West, for example, cut back on Web and off-tariff fares
when it adopted a new fare structure a year ago.
Such pricing was a "cash-flow addiction, but sooner or later
it's going to kill you because the revenue is too low," said Ron
Cole, America West's vice president of sales.
American, United and US Airways now are trying to use Web-only
fares as leverage to squeeze more costs out of the GDS/agency
channel.
The carriers are making their Web fares available in the GDSs --
if agencies shoulder a portion of GDS fees (AA's EveryFare program)
or accept reduced GDS incentives (Galileo's Momentum).
Despite these moves, airlines are expected to continue to
promote their own Web sites, which are widely seen as their
lowest-cost distribution channel.
Fifty-seven percent of airline tickets bought on the Internet
are purchased at airline Web sites, according to PhoCusWright.
Meanwhile, on the hotel side, Internet bookings are growing
rapidly -- and the disillusionment factor is lurking on the
horizon.
Merchant model
According to PhoCusWright, online hotel bookings, as a
percentage of the pie, will grow from 9% to 20% by 2005, but the
major Internet travel sellers may be in a better position to cash
in on the trend than the hotels them-selves because of the growth
of wholesaling -- or what the Internet retailers have dubbed "the
merchant model."
In this scenario, the online retailer buys rooms at wholesale
and marks them up as much as 30%.
This practice, which is far more lucrative for the retailer than
collecting commissions, is credited with propelling Expedia and
Hotels.com to profitability.
That, in turn, has prompted other Internet travel agencies,
including Travelocity and Orbitz, to launch merchant-model hotel
programs of their own.
In prosperous times, hotels don't need to be aggressive in
offering discounted inventory on the Internet.
Too dependent
But Sileo said low occupancy rates have hoteliers desperate to
sell rooms -- a trend that "isn't going away soon."
Sileo said 73% of all online hotel sales are generated by
Expedia, Hotels.com and Travelocity, which alarms hotel chains.
"Hotels feel like they've become too dependent on three partners
to sell their product on line," she said.
Hotel chains have responded by instituting lowest-price
guarantees on their own
Web sites and by launching Travelweb, the Internet distributor
owned by five major hotel chains, Pegasus and Priceline.com. Some
chains also are taking steps to ensure cooperation from franchisees
and affiliates.
Henry Harteveldt, senior analyst for Forrester Research, said,
"Hotels have to figure out how to protect their yields while using
the discounters in a strategic manner."
At Starwood, for example, Tom Botts, director of distribution
strategy, said, "Our best-rate guarantee is a brand standard. If
hotels do not participate, they are fined substantially. We've
found compliance to be good."
However, at the same time, Botts said, "We do not endorse
participation with Hotels.com because of exceptionally high markups
and onerous requirements on our hotels, including guaranteed room
allotments."
Six Continents also is encouraging its properties to "work
within an overall Internet strategy and framework," said Andrew
Rubinacci, director of distribution planning.
Although the big brands have global reach, Rubinacci said the
hotel industry is still a "street-corner business to a degree, with
decisions being made at the property level."
As a result, Rubinacci said, pricing is "out of our
control."
One of Six Continents' solutions is to make deals with
Travelocity and Expedia to make wholesale inventory available to
those Web sites via a direct feed from the hotel's central
reservations system.
Six Continents also wants the opportunity to apply
yield-management technology to its wholesale inventory, Rubinacci
said.
"The hotel industry did it to itself," he said. "It approached
the Internet as a discount channel, and [the Web] has become a
mainstream vehicle.
"Without a good distribution strategy, hotels let it get away
from them. That needs to change."