Online hotel rates explained

Confusion has reigned among hoteliers following the end of a three-and-a-half-year investigation by the Office of Fair Trading on the discounting of online room rates by hotels and online travel agents. Gaucho Rasmussen, director of the Office of Fair Trading, explains the practical impact, and Martin Couchman, deputy chief executive of the British Hospitality Association, responds on behalf of operators

ARE WE LOOKING AT THE END OF RATE PARITY?

By Martin Couchman, deputy chief executive, British Hospitality Association

The OFT states, quite rightly, that the market needs to work in consumers' interests, but it is also important that the market does not damage the hotel industry and the jobs it supports. The internet-fuelled power of the online travel agents (OTAs) has been increasingly putting the hotel industry at risk by taking a growing share of its income.

The OFT's comments introduce some new meanings to old phrases, such as ‘room only', which it defined in August 2013 as hotel accommodation "offered on a standalone and/or individually priced basis, that is, not as part of a package. ‘Room only' can include ancillary non-travel offers, such as breakfast."

Another new concept is ‘closed user group'. The original proposals referred only to OTAs being able to set these up for their customers. The OFT accepted the British Hospitality Association's (BHA's) argument that a corresponding right for hotels to set up their own closed user groups of regular customers had not been clearly included in the initial wording. Therefore, both OTAs and hotels can now set up these customer groups.

Will OTAs do so? Booking.com has written to hotels with which it has arrangements to say, surprisingly, it "does not plan to act upon the second commitment [the right to discount]." If other OTAs follow this, the prospect of large numbers of customers being able to secure discounts will not happen.

On the other hand, the OTAs will not have had to offer up part of their commission to their closed user group members. Booking.com's decision may be a surprise to the OFT whose statement "thinks it likely" that OTAs will want to introduce discounting.

Will hotels do so? One concern has been whether any hotel is likely to attract enough regular customers to a closed user group to have an impact in competing with an OTA charging the headline rate. The protection offered to hotels is that, according to the OFT: "OTAs shall not enter into or enforce any MFN [Most Favoured Nation, or rate parity] or equivalent provisions in respect of reductions off headline room rates offered by hotels to their closed group members."

This is clear enough, but its effect is weakened by the OFT's "what it means for UK hotels" guidance, which says: "if we become aware that rate parity obligations are being enforced against hotels in a way that makes it very difficult for hotels or their OTA partners to give discounts to members of closed user groups… we will consider our options carefully."

This phrase doesn't suggest there will be very effective policing by the OFT of the powerful OTAs. The OFT also puts the onus on hotels, saying they should take advice to ensure rate parity provisions do not apply to discounts to closed user groups. Fortunately, we have already told our members in the BHA that they can raise queries with us, in particular about contract terms requested by an OTA.

The "consider our options" phrase generally reflects the OFT's reluctance to take more general action over MFN clauses. When they first consulted on this issue in August 2013, we said that the right way to proceed would be for the OFT to work with its opposite numbers across the EU and with the European Commission. Already, the German competition authorities have prohibited the OTA, HRS, from continuing to apply its MFN clause from 1 March and similar actions have been launched against Booking.com and Expedia. The day of the MFN may be drawing to a close. It is a pity the OFT is still reluctant to get involved in this task.

ENSURING MEANINGFUL PRICE COMPETITION IN HOTEL BOOKINGS

By Gaucho Rasmussen, director, Office of Fair Trading

The online world offers a wealth of opportunities for businesses and consumers alike, and the online travel sector in particular is characterised by the frequent introduction of new technology or platforms. In such a rapidly evolving industry, it is critical that the market continues to work in consumers' interests and that the benefits of the most innovative and efficient business models are passed on to consumers.

However, in 2010, the OFT received a complaint from an online travel agent (OTA) suggesting that this may not be the case, and we subsequently opened an investigation into three of the largest businesses in the market: Intercontinental Hotels Group (IHG), Expedia and Booking.com. We limited the scope of the investigation to a small number of major companies with a view to achieving a swift and effective outcome, but we understood that the alleged practices were potentially widespread. Our provisional competition concerns were that Booking.com and Expedia both entered into separate agreements with IHG, which restricted their ability to discount the rates at which they could offer room-only hotel accommodation bookings to consumers. We were concerned that these arrangements were by their nature anti-competitive as they could limit price competition, both between OTAs themselves and between OTAs and hotels. Furthermore, they might increase barriers to entry and prevent expansion for new OTAs who may wish to gain market share by offering discounts to consumers.

Following receipt of our formal allegations in July 2012, all three parties offered behavioural commitments to address our concerns and bring the investigation to a close. We conducted two extensive public consultations on the commitments and have decided that they address our competition concerns. In summary, the commitments will ensure that all OTAs and hotels that deal with the three parties will be able to offer discounts off headline room-only rates, so long as customers:

• sign up to a closed group scheme (for example, a membership scheme) of an OTA or hotel to be able to view discounts; and
• make one undiscounted booking with the OTA or hotel in question to be eligible for future discounts.

The discounts offered by OTAs should be funded through their commission or margins. The parties have one month in which to make the necessary changes to their commercial arrangements with each other and three months in which to ask others with whom they deal to agree to similar arrangements. It will then be for each OTA and each hotel to decide if, when and how they wish to take advantage of the discounting freedom.

Our expectation is that these commitments will help to promote competition across the sector by allowing OTAs and hotels to offer discounts and incentivising consumers to shop around for the best deals.

WHAT THIS MEANS FOR HOTELS IN THE UK

OTA DISCOUNTING:

HOTEL DISCOUNTING: Hotels will be able to offer discounts in an equivalent manner to OTAs. Expedia and Booking.com should at least give hotels the freedom to discount freely to consumers who meet the criteria outlined above. There should be no limit to the amount of discount a hotel can offer. Hotels should take advice to ensure that any rate parity provisions in place between them and their OTA(s) do not apply to discounts offered to other hotels' or OTAs' closed groups.

WHAT THIS MEANS FOR CONSUMERS

Once consumers become members of an OTA or hotel discounting scheme, they should be able to see any discounts available and compare these with those available under different schemes. Consumers can be members of as many schemes as they want to compare discounts. Therefore, we would encourage consumers to join multiple schemes, and to shop around between hotels and OTAs to find the best deal for their particular requirements.

Consumers will be able to take advantage of the deals once they have made one full-price booking with that OTA or hotel.

The discounts available following the commitments are likely to be provided in addition to any existing loyalty or other discounting schemes. This means that consumers can continue to take advantage of existing schemes and join new ones in the future.

We believe that the outcome to this investigation will help ensure that travellers will now secure the very best deals possible, and ensure meaningful price competition in the sector.