OTAs Get Spanked In San Antonio Court Ruling

As reported on HotelNewsNow.com, Online Travel Agencies lost a major case in San Antonio, Texas that one hotel distribution consultant says the ruling will set a precedent in how municipalities collect tax on hotel rooms sold through online merchant models.

HotelNewsNow.com – The heavy-hitting OTAs lost a class-action lawsuit by 173 cities in Texas as defendants in The City of San Antonio v. Hotels.com, which was initially filed in May 2006 and is one of the longest-running cases against OTAs. The ruling on 1 July declared OTAs must collect taxes on the full retail rate they charge consumers as opposed to the wholesale rate they get from hotels, including margins and service fees.

“Because the (OTAs) are not occupants, they never have the right to occupancy, and the wholesale rate they pay for the right to sell a hotel room is not consideration paid for the right to occupancy, there is absolutely no reason for hotel occupancy taxes to be imposed on wholesale rates paid by the (OTA) to the hotel,” the judge’s ruling states.

“With New York changing its law, and that change being held up by the New York state Supreme Court, and now 173 cities in Texas, those are two really, really strong cases of precedence,” said Robert Cole, founder of RockCheetah and former director of hotel distribution with The Sabre Group. “It’s going to be a downhill run, and it’s going to get a lot easier to prevail in these things.”
Along with his ruling, United States District Judge Orlando Garcia in Texas issued 300 factual findings, many of which describe testimony and depositions and bring to light how popular OTAs created and evolved their negotiation processes and tax calculations.(Read the Findings of Fact and Conclusions of Law.) Four days later, the OTAs responded by filing an advisory motion asking the testimony remain confidential.

Cole said he thinks that request is somewhat “disingenuous.”

“The OTAs are in the middle of hundreds of these litigations. They just want to make it more difficult to get a hold of this stuff,” he said. “It’s just fundamental math. It does have some embarrassing stuff—it does say they used to calculate tax this way and now they do it another way—but that’s just math. I just don’t think they want it out there.”

The issue
In the case of collecting taxes on merchant-model sales, the issue at hand really is between OTAs and municipalities. Hotel owners and brands initially stayed out of it, but then two things happened:

1) Hotels and OTAs began agreeing upon rate parity in their negotiated contracts because neither wanted the other undercutting their lowest price. Hotels want that price to be on a tax-inclusive basis. But there really is no way for OTAs to calculate the total amount of a hotel room without using the local municipality’s tax rate and collecting tax on the retail rate, Cole said.

2) Hoteliers began realizing that as municipalities face shrinking revenues, they will look for ways to substitute for lost tax revenue. Travel and tourism are easy targets—even considered “low-hanging fruit,” Cole said. So hoteliers began collectively lobbying against the OTAs to show cities that when they do the math “it looks like they are getting cheated out of something they are owed,” Cole said.

Going forward
In the Texas case alone, OTAs will be forced to pay back taxes to the municipalities as well as tax on the retail rates moving forward. The ruling estimates a total of more than US$20 million will be paid to Texas cities by the collection of agencies named in the suit. Together with New York, and depending on how the remaining lawsuits play out, OTAs will have significantly larger overheads.

Cole estimates OTAs in the near future will begin evolving their business plans to tweak the merchant model or move away from it all together.

“If you look at airline bookings, the OTAs do a lot of air transactions that they don’t get paid on. They have to do a lot of work—ticketing and scheduling changes. That’s ugly stuff, and they don’t get paid for that. What they do get paid is segment fees from the (global distribution systems), so they want to keep that GDS partnership in place,” he said.

Looking at the margins OTAs make on selling hotel rooms, there is a high degree of profit for a relatively lower level of effort, Cole said. But, even though margins are high, no company wants their existing profits squeezed.

“Hotels fund a huge part of their profit, so they’re not going to stop selling hotels,” Cole said. “Some may go to a more commissionable model where it’s a little bit cleaner, but generally they don’t get major discounts on those. They’ll tweak their business models.

“The way this all got painted out doesn’t bode particularly well for OTAs as a profitability perspective,” he continued. “Almost any way you paint it, it’s a squeeze on the OTA profit model.”

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.

Why hotels shouldn’t sell a $200 hotel room for $50

This is a reprint of an article written by Tom Walker with Teradata.

Tnooz’s June 22 article “Expedia: What Groupon Getaways with Expedia means for hotels,” (why a hotel should sell a $200 hotel room for $50) posits an interesting case. But does it withstand a closer look?

To make the argument, Jennifer Mellet, Expedia’s senior director of new channel sales, presents the following hypotheticals.

$100: What the customer pays
$ 50: What the hotel receives
$ 40: Cost per occupied room (CPOR)
$ 10: Net to the hotel

Assuming 1,000 people buy the offer, the hotel nets $10,000.

Ms. Mellet further claims that “those are 1,000 largely incremental room nights that would have otherwise gone unsold.” No doubt some of the business would be incremental, but how much is really an unknown. It is also true that some cannibalization would occur, which again is an unknown.

At a gross level of analysis, $200 is four times the $50 that might otherwise be sold. On the margin, however (using the article’s $40 CPOR), the Expedia/Groupon deal is sixteen times less than what the $200 sale is worth:

$200 – $40 = $160. 160/10 = 16.

Is it realistic to believe that the Expedia/Groupon offer will deliver sixteen times more sales than the hotel would realize without running the special? Anything is possible, but as a hotelier I would be more than a little skeptical.

To further strengthen her case, Ms. Mellet points out that:

– In fact, Groupon customers have been shown to spend as much as 60 to 80 percent on top of the value of the Groupon.

Illustration continued:

– Cross-sell revenue per room (70% on top of $100 voucher at 70% margin to hotel): $49

– Total margin generated if 1,000 vouchers are sold: $59,000.

But is there any reason to believe that Groupon customers are more likely than other customers to spend additionally once staying in the hotel? Perhaps, but the proposition is far from self evident. If the hotel sells one sixteenth of the rooms at $200 that Expedia/Groupon would sell, it would achieve equivalent profitability. And the customer would be the hotel’s, not Expedia’s.

There is a pitched battle today between OTAs and hotels over which of them “owns” the customer. Expedia is aggressively positioning itself to be the owner of what might otherwise be hotels’ customers. Unquestionably, Expedia and other OTAs provide hotels a valuable service, but that value is delivered at a comparatively high price.

Rather than abet Expedia in its drive to become a traveler’s supplier of choice, it might be wiser to gamble that hotels’ own channels can achieve more than one sixteenth of what Expedia/Groupon could produce. In the bargain, hotels retain their loyalty position with the customer, which represent a value far greater than the $10 Expedia/Groupon might deliver.

Groupon & Expedia’s “Sort of a Discount on Your Next Getaway” Partnership

Tnooz has announced that Groupon and Expedia are teaming up to offer “deeply discounted travel deals” to its customer base.  This sounds like a novel concept so how will it work?

Travel deals need to include a couple of components in order to make this thing really hum and be compelling. This is a getaway isn’t it? You know getting away from point A to point B.  Well if you need to get somewhere it has to be by car or plane right?  You can walk but that wouldn’t be much of a deal would it?  I mean walking from say New York City to Florida doesn’t make much sense now does it?

OK.  You could drive your own car and still take advantage of a deeply discounted compelling travel deal couldn’t you?  Yes you could but would you really feel like you got a really deeply discounted travel deal if you were driving your own car?  I prefer to rent a car on my travel deals because it makes me feel like I am on a getaway.  Driving my own car isn’t my idea of fun and I want my getaway to be fun so on my getaway I will rent a car.

I am sure Groupon and Expedia can sell me a deeply discounted rate like the one that I found at Advantage Car Rental at the San Diego Airport for $7.44 a day, according to today’s availability from carrental.com.  So what would be a deeply discounted rate from Groupon and Expedia?  Could I get it for half price and then I could save about $3.72 a day.  Now that’s what I call a deep discount.  Well I am renting the car for four days and I am saving $14 bucks.  That’s a heck of a deal isn’t it?  Imagine renting a car for a day for about what you pay for a gallon of gas.  What a country!

I got ahead of myself here didn’t I?  I like to fly when I go on trips.  I do go on trips and drive, like to my parents house, but that’s not really a trip.  A trip is like going to San Francisco or Paris, France.  I haven’t been to Paris in a long time and hope that it hasn’t changed that much but I still would like to go back there and use some of the French that I learned in high school 20 years ago.  Parlay vous Francie is about all I can remember right now.  Of course they speak Francie.

OK.  If I fly say American Airlines, what kind of deep discount is Groupon and Expedia going to get from them? They hate each others guts don’t they?  Well American maybe doesn’t hate Groupon but they do hate Expedia for trying to push them around a couple of months ago so let’s not kid each other American is not going to be invited to this deeply discounted party.  For that matter I don’t think that JetBlue or Southwest will be bringing presents either.  It really doesn’t look like this deeply discounted thing is working out before it’s debut now does it?

Oh my gosh.  I forgot one other part of the equation and that’s where I’m going to put my head in a bed on my deeply discounted compelling travel deal.  Remember I am not going to my folks house on this trip so I prefer to get a hotel room.  I slept in a twin bed or on the couch when I went to my parents house so I prefer to sleep in a king size bed when I am on the road.  You know how it feels when you stretch from one end of the bed to the other and your toes can’t reach the other corner of the bed?  In a twin bed my feet always hung over the edge of the foot board which was made out of wood.  That hurts!  The couch wasn’t much better. It kind of slumped in the middle so my back was always hurting me the next morning.

A hotel.  Isn’t that the only place left to squeeze the blood out of this turnip? My Mom use to say this when what she really meant is that someone was getting the short end of the stick.

Well if I searched for my hotel room directly on the hotel’s website I could get a really deeply discounted deal now couldn’t I?  They do guarantee the lowest rate don’t they?  So how could Groupon and Expedia beat that deal unless they have some sort of “understanding” with the hotel that won’t allow the hotel to sell me a better rate than they could.

These sort of things are very confusing to me.  A hotel can’t sell something they own (a guest room) cheaper than what Expedia can sell it for.  I thought it would be the other way around.  Isn’t this like the cat wagging the dog’s tail? My Mom use to say this when what she really meant was someone was getting the short end of the stick.

So since the hotel will most likely throw in the room as part of the equation for a price that’s lower than what I can book it for then maybe this new alliance between Groupon Getaways and Expedia should be called “Sort of a Discount on Your Next Getaway”.

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.

Orbitz’s Commission Rate “Unacceptably High”

Alamo and National, owned by Enterprise Holdings, lost their place on Orbitz’s site “after months of difficult discussions,” according to Enterprise, the world’s largest auto-rental company that also includes its namesake brand.

The two giants reached an impasse when the car-rental company wanted its flagship brand, Enterprise Rent-A-Car, on the site but found Orbitz’s commission rates “unacceptably high,” Pam Nicholson, Enterprise’s president, said in a statement.

She called the break-up “punitive” and said that it “greatly limits consumer choice and makes renting a car less affordable.”

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.

Cosmo Las Vegas Says No No No To Expedia

Cosmopolitan Las Vegas

In the price war still plaguing hotels on the Strip, the Cosmopolitan seems a bit like the new kid who’s too cool to play with the others.

Since the property opened in December, room rates have been slightly higher than other luxury resorts in town, running nightly rates of about $200 to $300 during the week and closer to $400 on weekends.

Based on online reviews, that seems fine by customers who rave about the property’s “chic” interiors and indie vibe.

Cosmopolitan is bucking the trend in other ways, too. It’s the only luxury hotel on the Strip not to sell rooms through Expedia, the dominant Internet hotel discounter serving Las Vegas. Expedia commonly sells five-star rooms for less than $200 a night through its Expedia.com, Hotels.com and Hotwire.com brands. It also takes about 20 percent in return, diminishing the hotel’s profit on each room but a decent trade-off for many Las Vegas hotels that make money on other amenities such as gambling and dining.

The price differential might be a short-term reaction to the buzz that typically surrounds a new resort rather than a long-term strategy. Competitors have opened their doors with cheaper rates since the downturn, though.

It’s hard to tell whether the strategy is working for the privately held Cosmopolitan, which doesn’t publish earnings.

One analyst thinks it’s risky given that Las Vegas visitors are sensitive to small differences in price. However, it’s a positive for other casinos that appear less concerned about competition from the Cosmopolitan than before, said Patrick Bosworth of Duetto Consulting in Las Vegas.

“It’s a branding play,” he said.

From Cosmo, “we are committed to building a unique luxury brand. We will continue to compete with other luxury properties in the Las Vegas market by providing guests with a meaningful and distinctive experience that they value and want to share with others,” said Lisa Marchese, senior vice president of brand marketing.

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.