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Flying the nest

07 December 2004
Flying the nest

Perhaps the area where aviation practice looms largest over the hotel industry is distribution. The global distribution systems (GDS), which for decades have been the primary hotel booking mechanisms for travel agents, were invented by airlines as a means of selling seats; hotel booking capability was only added later to allow agents to offer combined flight and accommodation packages.

The simple coding system used by the GDS is a direct legacy of its original function and early computer capacity - with obvious limitations as a result. Selling an airline seat is, after all, quite a straightforward affair. It requires few classifications - first class, business or economy; window or aisle - and is therefore well suited to an abstract code.

By contrast, selling hotel rooms requires a greater range of descriptors to clearly establish the facilities and quality standards on offer, not to mention the various room types available - sea view, ground floor, twin, double, cabana, smoking, executive floor, to name but a few.

While the GDS have evolved to suit the needs of hotel chains, they remain poorly suited to the task of selling the virtues of individual properties - and the cost involved is one of the reasons why many independent hotels join brands which can offer them GDS representation and a wealth of other benefits under a single membership.

The GDS remain entrenched in travel trade industry practice - they continue to power the major online travel agencies, such as Travelocity, Opodo and Expedia. But, for the independent hotelier, there is no doubt that the Internet is a better fit as a distribution channel, offering visual immediacy, descriptive freedom and powerful promotional capabilities. It may be an area where our industry needs to look away from the infrastructure inherited from the airlines.

Yielding the benefits
US airlines pioneered yield management in the 1980s, and its importance to profitability cannot be underestimated. Their industry notably takes a bottom-line view on yield, focusing on how they can maximise operating profits on a given flight, and overbooking to guarantee full capacity.

The hotel industry, however, remains fixated on maximising revenue - regardless of source. Its reliance on the revpar measurement (revenue per available room) fails to adequately factor in the cost of different distribution channels. Some heavily discounted direct bookings and best-rate guarantees, for instance, may prove more profitable than bookings made via a third party, as commission charges bite into yield - though care needs to be taken to ensure rate parity and integrity.

For this reason, there is a strong argument for hoteliers to follow the airlines' lead and embrace Younes and Kett's GOPPAR measurement (gross operating profit per available room)* as their model for assessing financial performance. It provides a means of analysing revenue management from an entire property perspective - and by looking at profit, not just revenue, hotels should be able to operate more effectively, and distribute more wisely.

Advance payment

Hoteliers should also take stock of the way airlines deal with customers. We must remember that the Air Miles programmes initiated by airlines were a pioneering force in driving customer loyalty, and the concept has been adopted in recent years by the major hotel chains.

But more critical is the carriers' hard-line approach of ensuring that customers pay for airline services upfront and are duly penalised for failing to observe terms and conditions.

The hotel and restaurant sector is almost unique in allowing its customers to pay for products and services after they have enjoyed them. It leaves them vulnerable to no-shows, late cancellations and general abuse by bookers.

At best, in the event of no-show or late cancellation, the hotel can try to collect a cancellation fee, normally to the value of one night's stay. However, this fails to make up for the possible loss of several nights' worth of accommodation from its inventory, and may upset the booker to such a degree that repeat business may be at risk - a conundrum seemingly unique to the hotelier. Hoteliers are also exposed to guests cancelling at the last minute, only to book a cheaper rate at the same hotel on a distressed inventory or alternative website.

In short, without an advance payment model similar to that of the airlines, hotels' efforts to manage yield are at risk of being rendered virtually redundant in today's transparent Internet market. Some online travel agencies already take bookers' cash in advance and then pay the hotel later - sometimes after the guest has checked out. Is it time for the hotelier to fight back?

Industry consolidation Of course, the reason airlines are able to take such a firm stance on payments in advance is because, as an industry, they comprise a strong, consolidated entity. By contrast, the hotel sector is enormously fragmented, and its fiercely competitive culture - intensified by the online revolution - means that the customer is firmly in control.

For independent hotels, this fragmentation has brought advantages, too. Growth in the online channel, for instance, means their marketing efforts can reach potential guests and bookers more effectively, giving them an even playing field against the big chains.

In the case of pre-payment, however, industry consolidation is key. We need to look to the example set by airlines and take a unified, industry-wide stance to establish a better deal for the hotelier - independent hotels simply cannot afford to go it alone.

The commission question Airlines also show the way in their approach to commission payments. By pursuing e-ticketing models that pare down the extent to which agents are required to act as middlemen, larger providers are reducing to a minimum the amount of commission they pay. Now, traditional and online travel agencies are turning to the hotels once again to act as "cash cows".

Hoteliers therefore need to take a similarly aggressive stance - if they dare. As the Internet grants customers increasing choice and access, hotels' reliance on travel agents as brokers should decline. Their new role in this altered world order is more about offering expert travel consultancy for customers, rather than providing hoteliers access to the market.

Surely, therefore, the onus should be on the guest to pay agents a fee for this service, rather than hotels footing the bill in high commission rates. Once again, the airlines are pointing the hotel industry in the right direction.

Making it personal But airlines are not faultless in their practices, as demonstrated by the succession of fallen (or falling) giants such as Pan-Am, Laker and United Airlines, coupled with the steady erosion of British Airways' business by budget operators such as Ryanair and Easyjet.

In each case, a failure to respond to a developing market and shifting customer needs was the underlying cause of business declines.

Maintaining a strong grip on customer relationships is an area where the hotel sector should be way ahead of the game - particularly so in the independent sector, where the ability to offer truly personalised service is the hotel's extra-value proposition. Getting closer to your guests, the end users, is the key to strong marketing data capture.

So we must learn from the airline industry's positives and negatives. Hoteliers need to continue to be vigilant and innovative, and evolve their guest offering to avoid being caught cold by shifts in the market.

We're getting closer to the airlines' lead; now, let's get ahead!

\* For a full discussion of GOPPAR see Younes and Kett's article at: www.hvsinternational.com/content/913.pdf

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