Online Travel Sites Put Pressure on Hotel Rates

The growing use of online travel sites to book lodging in the US could drive down hotel rates and may help keep them lower even after the economy recovers, a research report by Bear Stearns suggests.

The report, by Bear Stearns
lodging industry analyst Jason Ader, said sites like Expedia
, Travelocity
, Orbitz
are doing for hotel rates now what they did with air fares a few years ago - giving consumers more options and making the market more transparent.

Ader said online travel sites, once used mainly to book air travel, are increasingly being used to reserve hotels. He predicted that online lodging revenue in 2005 will have more than tripled from the $3.8 billion generated in 2000.

“This trend will cause continued pressure on hotel rates, even as the economy rebounds and demand for lodging increases.” He said profits and stock prices of hotel companies could suffer in upcoming quarters.

Several hotel operators have already indicated that their revenues are soft. After a steep downturn following the 11 September terror attacks last year, the industry initially rebounded but has more recently found business travellers slow to go back on the road.


Ader predicted that there would be no meaningful recovery in hotel room rates before the end of 2003 or the beginning of 2004. He cautioned that even then, rates might remain below 2002 levels.

Ader`s report devoted considerable space to discussing the ways a new sales medium like the Internet may upset the usual supply and demand-based pricing and bring about a permanent change in rates.

When rate discounting continues for an extended time he said, “the effect can be the lowering of the public`s perception of what is a fair price to pay for a hotel room. As a result, it becomes harder to raise prices even when the economy is getting stronger and demand for rooms is growing.”

Ader said that phenomenon has already occurred in some markets, such as New York City where travellers who once accepted $300 room rates now expect to pay no more than $250.

The report also addressed the growing use of reverse online auctions, in which competing hotels bid on corporate business, as another trend that could hurt pricing.

“Despite the traditional supply and demand curves that historically have caused prices to rise and fall, the rate transparency caused by quick access to competing hotels` rates and availability has introduced a third variable that will limit hotel operators` ability to rapidly increase prices as demand rebounds.”