Airlines and Hotels: Two Sides of the Same Coin?

When it comes to buying airlines and hotels, there are some big differences.

That may not be the case in the near future.  I think we’re beginning to see a shift – the beginning of a shift – away from the hotel model of pricing and contracting.

Let’s look first at some key differences:

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  • Airlines want market share; hotels want room nights
  • Airlines give discounts off rapidly changing prices; hotels generally offer fixed rates
  • Airlines vary the discount by booking class; hotels vary the rate by the size of the room
  • Airlines check their contracts rigorously; hotels prefer relationships
  • Airline contracts run about two or three years with no seasonality; hotels run one year with strong seasonality

But the economic models of the two industries are fundamentally similar:

  • Very high fixed costs to produce perishable products
  • Similar labor and distribution cost structures
  • Heavily dependent on the business traveler, using sophisticated revenue management tools to govern pricing and availability
  • Very susceptible to economic cycles
  • Ancillary revenue is critical

So it makes sense that airlines and hotels would go to market with more similarity than differences. Here are some signs of the shift:

1) Susan Lichtenstein, Cisco Systems’ director of travel, meetings and events, was named 2009 Travel Manager of the Year by Business Travel News in large part for her pioneering work with hotel suppliers.  From the BTN article (emphasis added):

Among those innovations was striking multiyear hotel agreements that include a hybrid dynamic pricing component with six multibrand chains to vastly simplify the hotel negotiating process. Both hotels and travel buyers now are seeking to emulate that strategy.

2) TRX Travel Analytics has successfully applied their patent-pending hotel clustering concept to corporate hotel data.  Hotel chains could easily adapt this technique to create easily-measured markets. Doing so gives hotels the basis for measuring share of room nights and monitoring corporate compliance with share-based goals.

3) Hotel chains are increasing their dependence on, and sophisticated use of revenue management systems.

4) Hotels are more visibly offering highly-discounted non-refundable room rates, making hotel inventory look more like airline inventory.

5) The long-standing resistance to dynamic pricing by veteran travel managers is slowly fading. Dynamic pricing is code by the hotels for “we need to change our room rates like airlines change their fares”.  The semi-hysterical reaction of travel managers has been “You can’t do that! We need fixed rates throughout the year!  Our travelers need fixed rates so they can budget!”

Look, if airfares account for the majority of a travel budget, and airfares change three times a day, why is having fixed hotel rates so important to travelers?  Travelers will get over it, just as the new travel procurement folks are doing.

6) More importantly, dynamic pricing means that hotels will offer discounts off the going rate – just like airlines do.  I expect that hotels will  create separate discounts for various types of room inventory – think refundable versus non-refundable, not just standard versus suite.

7) This story from the Wall Street Journal describes Starwood’s $5 credit to guests who opt out of maid service. That is pitch-perfect in these cost- and green-sensitive times…and eerily similar to Air Canada’s longstanding offer to reduce your ticket price if you don’t check any bags. (Thanks to Robert Cole for tweeting about this).

Perhaps the biggest reason we’ll see a shift from traditional hotel sourcing and contracting is the most obvious –  people hate it. But that’s a story for another day.

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