Online travel agents pose ‘serious’ financial threat to hotel operators

The rapid growth of online travel agencies (OTAs) such as booking.com, expedia.com and Airbnb.com forms a ‘serious’ financial threat to hotel operators, delegates at the annual ULI conference in Paris heard last week.

In the past few years, Airbnb has evolved so fast that it is now close to the largest hotel company in the world in terms of room inventory, according to Mark Wynne-Smith, global chief executive of the hotels & hospitality group at Jones Lang LaSalle. ‘I think everybody in this room should be incredibly concerned about Airbnb.com, not only from an investment perspective, but also as global tax-paying citizens,’ noted Josh Wyatt, director of hospitality at Patron Capital. ‘I think it’s outrageous that Airbnb is not charged taxes.’

While office landlords may pay a lease broker between 5-10% to find a new tenant, hotel operators are paying 12-25% nightly rent to a third party aggregator or online travel agency, Wyatt pointed out. ‘How brutal is that? A lot of real estate owners don’t understand how important this issue is with respect to how much extra EBIDTA (earnings before interest, depreciation, tax and amortization, ed) and NOI (net operating income ed.) is being driven out of their property. You need to think about this question: it’s very, very important.’

If hoteliers could find a way of carving out the OTAs and getting the data back to the company, commission fees for obtaining guests would drop from 25% to 3-4%, he noted. ‘That would generate a real material change in the cap rate and the property’s valuation.’

OTAs have done a ‘massively brilliant job’ in the past few years while the hotel industry was sleeping, Wynne-Smith observed. ‘The sad thing was, when people in the technology business were developing all the systems to own the inventory, the industry was running around just trying to make sure that it held itself together. These guys have now stolen a march and are a long way ahead. The investment required from the industry to get back in there and ahead whilst the OTAs are still investing may be a battle that may not be won. You could map out a scenario where the brands lose completely.’

According to Patron’s Wyatt, OTAs like Airbnb should in any case be forced to pay taxes. ‘I have no qualms about going on the record and saying that if I could figure a way to shut it down or regulate it, I would. If they were regulated and taxed, it would be a fair game and I would be somewhat more supportive because at least the benefit comes back to society. But at the moment they are not submitted to any taxable charge, or any type of insurance or safety & health regulation. It’s like hoteliers are going into a gun fight with a knife. I don’t think that’s fair and I think something should change.’

The reality is, however, that the OTA phenomenon is here to stay, JLL’s Wynne-Smith noted. ‘This is the way the market is going to go in the future. Once Airbnb is taxed and regulated something else is going to pop up. I think it’s important to understand that the model has changed now and the only bit on the front which is definite is the aggregator on the internet and the property owner. All the bit in the middle is up for grabs, the brand, inventory, everything. We have to expect that the model will evolve.'

While customers may be placing a 'macabre trust' in Trip Advisor, from a user perspective the phenomenon is great, Wynne-Smith said. 'We think we get the best from them and that the operator is trying to rip us off. And it’s very rapid how this has developed. That’s the thing that brands have to get over, they actually do give the best price.'

In a reaction, Scott Woroch, executive vice president of worldwide development at the Four Seasons Hotels, conceded that the way in which hoteliers are reaching their customers had changed 'dramatically' in the past five years. 'It will continue to change. It's a work in progress.'

It's not just young travellers who are booking online, he added. 'It cuts across the entire spectrum and the entire demographic, so it's an important issue. Our ability to customise the experience is really all about knowing the consumer, and being able to better anticipate their needs and recognise them. For us the distribution question really is at the forefront in terms of customisation. If we’ve got a third party in between us, our ability to mine that data to deliver a more customised experience is compromised. That’s a selfish reason, putting aside the not insignificant financial motivation that we can interact directly with our consumer.'