The Ups and Downs of the Hotel Industry 2003

The hotel industry is facing challenging times, exacerbated by the looming possibility of war with Iraq and the severe economic downturn. Occupancy rates are at the lowest that they have been for years, prompting hoteliers to work with online retailers in an effort to move inventory.

Online hotel sales, in contrast, are soaring as discount sites attract millions of buyers with their special, “merchant” rates. In a report released last month by industry market research firm PhoCusWright

, it was estimated that by 2005 online bookings through all channels would jump to 20 percent, from 9 percent in 2001. “The increase is symptomatic of the dramatic change that hotel distribution has gone through,” said consultant William Carroll, president and CEO of Marketing Economics, who authored the report.

Online travel agencies now represent nearly half (49%) of the $6.3 billion in online hotel sales (2002), with the remainder coming from hotel Web sites.
PhoCusWright projects that roughly three-quarters of online agency hotel sales are via the merchant model that buys rooms in bulk from hotels at specially negotiated prices and sells them at a discounted price to consumers. This is a convenient place for hotels to leave unoccupied rooms in a soft economy.

This business model has boosted profits at Expedia


and, which represent roughly 60% of online agency hotel sales. Following in pursuit, Travelocity
has recently launched a new merchant rate program and it has been suggested that other players including Orbitz

could follow this year.

Online hotel discounter,

, recently reported an upward trend of online bookings for Q4 in 2002, far exceeding their own expectations, with the number of rooms booked rising 130% to 16,783, and visitor numbers for the quarter rising 144% to 1,699,060 million people worldwide.

Jill Chalmers

, managing director of All-Hotels said: “ has seen an upturn in people booking hotel stays online across Europe and the US during 2002, and our figures suggest these numbers will continue to rise in 2003”.

Global hotel chains are now competing aggressively with discount pricing strategies and loyalty programmes whilst attempting to improve their own branded Web sites to prevent online retailers from making money at their own expense. Meanwhile, many smaller hotels don’t seem to understand the importance of going online.

As a former hotelier, Jill is fully aware of the situation. She comments: “Hotels are sometimes confused as to what rates they should be offering online travel companies - they need to get over this and quickly recognise that immediate bookings online via the internet are here to stay, and that they need to act quickly to ensure they grow market share.”

Jill sees online distribution as ‘immediate, powerful and global’. She comments: “Online travel is set to grow and All-Hotels intends to develop our online offering to grow our market share, as we become an increasingly stronger player on the e-hotels global stage.”

Online Discounter

has not weathered the economic storm quite so well, recently surprising investors when it cut its quarterly outlook, which sent its shares crashing 25%. blamed a downturn in worldwide travel and an increase in customers booking directly with hotels for these events.

Bob Diener

, President of, told Internet Travel News that the change to the budget is primarily due to a massive decline in average daily rates for hotels during November and December 2002.

Bob states: “Despite not quite accomplishing expectations - In one of the worst economies in economic history, it’s still a spectacular performance”. He adds “There is always an overreaction from investors, which is what we have seen, but the long-term fundamentals are still strong”

Bob believes that have ‘hit rock bottom’, and is expecting a flat economy in 2003, but he firmly states that this is not a sign of tougher times ahead, merely a temporary glitch. He also stress that expect to meet all its full year ‘02 estimates. For the year 2004, he predicts a significant increase in revenue, transactions and profits for

Bob also revealed that he did not think it was economical for hotels to continue to lower their rates. He commented: “It’s at the point where if the rates are lowered any more, it will no longer increase demand. In the long term it only makes sense to raise them”. will release its quarterly earnings report for the fourth quarter before the market opens on Wednesday, Feb. 5, 2003. The company will also hold a conference call that day at 11:00 a.m. (Eastern Time) to discuss its quarterly results.

There is no doubt that changes in distribution will continue to impact hotel chains, global distribution systems (GDSs), call centres, online travel agencies and offline travel agencies. There are many challenges that hoteliers will have to face in 2003, including the travel and economic downturn. Now more than ever, it is essential for hotels to adopt an effective Online Distribution Strategy. In this tough economic environment, the Internet can be a hoteliers best ally or worst enemy.