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Travel Distribution Strategies

Where is the balance of distribution power drifting?

Ritesh Gupta  Apr 08, 2011

Travel companies, be it for suppliers or intermediaries, have had to take some hard decisions regarding their distribution strategies over the past few months.

Be it for the airline-OTA relationship, or the efforts being made to increase transparency in the room booking process, there is no dearth of such noteworthy developments in the marketplace.

Airlines have been focusing on removing non-essential costs, and overall maximizing profitability, by developing a portfolio of routes with consistently high passenger load factors and carefully managing capacity.

The airline product, as highlighted by American Airlines, has evolved to a collection fares and optional services that can be mixed and matched according to the needs of individual customer segments.

For their part, low-cost carriers continue to push for more low-cost distribution models to be able to offer even lower fares to their passengers. Having direct access to those who book their tickets aids greatly in this endeavor.

Till recently, American Airlines was seen directly taking on the likes of online travel companies Expedia and Orbitz via its online banner ads. The airline categorically conveyed that its fares won’t be able on such sites.

And finally after their three-month-long battle, American Airlines and Expedia resolved the issue in early April. The two entities announced a memorandum of understanding (MOU) that will allow the companies to resume doing business together. Access to fares and schedule information of American Airlines and its subsidiary American Eagle has been restored for search and ticketing on Expedia and Hotwire sites worldwide initially via global distribution system technology. Expedia said it plans to access American’s fares, schedules, and customized travel products and services via American’s direct connect link by using aggregation technology provided by a GDS.

Assessing the situation, Tom Bacon, Principal at Tom Bacon Consulting, and former Vice President, Revenue Planning at Frontier Airlines, said travel suppliers will drive more of their bookings through their own sites as:

1. they try to drive down distribution costs, and
2. they seek a direct relationship with customers.

The growth of XML messaging technology, more robust computing power, and lower connectivity costs have enabled carriers to have more direct distribution models. American Airlines says airlines need to compete on the basis of services offered in addition to price, and for its part, the airline has been working on technologies necessary to ensure that optional service pricing transparency is readily available to all who want to see it.

But do suppliers have adequate marketing strategies in place to drive bookings through sites?

“Frontier Airlines is an example of a US$2 billion carrier who certainly does not have the presence in major markets to abandon OTAs. American Airlines is a national carrier with heavy advertising that can better change their distribution mix. So, one result of the consolidation in the US airline industry (Southwest-AirTran, DL/NW, UA/CO) is to create more power in distribution which can be used against the OTAs,” said Bacon, who is scheduled to speak at the forthcoming Online Marketing Strategies for Travel 2011 Conference, to be held in Miami (June 7-8).

Madigan Pratt & Associates’ Madigan Pratt recently stressed on the significance of quantifying the Hotel-OTA hidden costs for hotels and developing marketing strategies to maximize occupancy and revenue in the years ahead. Pratt said OTAs are a valuable marketing and third-party distribution resource for hotels. Used in moderation they can provide a base level of occupancy, a steady stream of revenue, and help during seasonal troughs. However, when taken to excess, OTAs can be hazardous to the financial health of a hotel. He says many hoteliers are becoming addicted to OTAs – dumping inventory and waiting for large checks without stopping to calculate the hidden cost of commissions, which are deducted before payment to the hotels. Hidden commissions that hotels pay to OTAs (the leakage) are a marketing expense. This is money that could be used to market directly to potential guests to get them to book direct.

Both direct and indirect channels are consumer requisites and strategies for both should be aligned to maximize value. Hotels clearly point out that there need not be disparate systems running disparate channel content and pricing.

Bacon said, “Certainly, a travel supplier cares about providing one image to the public, including consistent fares and consistent information across channels. Today, already, most travel suppliers are able to provide more extensive information regarding ancillary fees and services on their own websites than they can in external channels.”

Commenting on the whole talk about suppliers enjoying a reversal of fortunes and the fickle balance of distribution power changing once again, Bacon said, “I do not really see a 'reversal of fortunes.' Both suppliers and distributors play important roles in travel distribution - but each also seeks through innovation to gain a bit more leverage. As suppliers have introduced more ancillary services, distributors now need to catch up or provide additional value in some other way. Another way to look at this is that at the time of de-regulation, airlines relied on external channels (especially travel agents) for over 80 percent of their bookings. Thirty-three years later, most airlines still rely on external channels for over half of their bookings.”

As far as the OTAs are concerned, they do a great job of packaging travel components and giving the customer the benefit of one-stop shopping on their sites. They are adept at selling the entire experience including airline tickets, destination services, and hotel rooms, which is a great value to the consumer. Competent hotels do work very closely with online travel agencies at all levels to ensure they understand their distribution objectives and, therefore, help to contribute positively to their overall distribution strategy.

OTAs provide a channel whereby consumers can easily and readily select an option that transcends the brand of a singular lodging business entity. No hotel chain can conceivably do that. This alone ensures the longevity of the OTA business model.

Many travelers today are overwhelmed by the research and decision process. At the same time, with so many choices for purchase and research channels, today’s customer has high expectations for quality, value, and other factors. Meanwhile, suppliers want to get their brand in front of the right customer and have them buy a great experience that could be repeatable and referable.

Bacon says the biggest challenge is the myriad of options itself - does anyone really want to establish a protocol only to have it leapfrogged the next day? What do customers really want?

“I see everyone in trial mode offering new personalization features while at the same time trying to preserve flexibility - sometimes a tough balance,” he said.

Some of the new ventures acknowledge this and are categorically trying to address the existing gaps.

The recently-announced online travel venture, Room 77, which is being described as the world’s first hotel room database and search engine, has stated that the uncertainty of a hotel room is one of the biggest imbalances in travel today, and it plans to change that by giving people the information they need to be able to request the room that is best for them.

“The face of Internet shopping, including online travel, is still evolving. There is still lots of opportunity as innovators offer new travel sites, new packaging, new pricing, and new personalization,” Bacon said.

Also, the concept of private online travel clubs and its members being offered exclusive hand-picked offers, featuring savings of up to 60-70 percent off hotel rack rates or brochure prices, and the same lasting for few days or as a flash sale is gaining traction in the marketplace. For consumers, flash sale sites are becoming increasingly popular because they’re an attractive way to access overstocked inventory, or to get introduced to new offerings. Consumers are looking for value and access to the best hotels. Hotels want to reach new customers that want to experience all the hotel has to offer. As such, private sales are a great match for both sides and continue to increase in popularity.

“Flash sales still represent a tiny fraction of the industry. Airline sales continue to be weekly for 3-7 days at a time - virtually continuous,” said Bacon. “Overstocked inventory is a revenue management mistake - and RM systems continue to have their own enhancements to respond faster to market changes. I see “flash sales” as a flash in the pan - more sizzle than steak - but “sizzle” can play a broader role than just sales - it establishes brand awareness that can be helpful,” said Bacon.

For their part, emerging players in this arena themselves believe that the industry is likely to see more innovations in the vertical as the model evolves, including new features and offerings, to meet the needs of both the supplier and the consumer.

Online Marketing Strategies for Travel 2011 Conference
Tom Bacon is scheduled to speak at the forthcoming Online Marketing Strategies for Travel 2011 Conference, to be held in Miami (June 7-8).

For more information, click here or contact: Gina Baillie, VP, Marketing, EyeforTravel, E: , T: UK +44 (0)207 375 7197

Where is the balance of distribution power drifting?
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