Online Travel Agencies (OTAs) have traditionally charged airline ticket booking fees ($5-$7 per ticket), recently the top 3 US OTAs followed Priceline's example and removed these booking fees permanently. (Top 3: Expedia-43% market share, Orbitz-26%, Travelocity-22%)

When Priceline removed these fees back in 2008, they quickly gained market share: from 7% in 2007 to 9% in 2008 (PhoCusWright).

Over 54% of the OTAs' U.S. domestic reservation volume (44% of the OTA total gross booking volume) comes from selling airline tickets. The airlines, by default, do not pay any commissions to the OTAs or the traditional travel agencies for that matter.

Expedia acknowledges in its latest 10-Q SEC filings that its revenue per air ticket decreased more than 10% in each of 2005, 2006 and 2007, and in 2008 air revenue constituted less than 15% of the company's global revenue.

In the first quarter of 2009, due to the "no booking fee" promotion, Expedia's revenue per ticket declined 14%. Now that this no booking fee promotion has been made permanent, it would further reduce Expedia's annual air revenue.

So how are the OTAs Making Money?

Here is a summary of the contributions of the main travel segments to the OTAs' booking volume and revenues, listed in order of importance:

Hospitality:

The OTAs rely heavily on the hotel industry for the bulk of their revenues. Hotels contribute to 37% of all U.S. domestic bookings via the OTAs, which is a little over 30% of the OTA total gross booking volume. In the same time hospitality contributes to more than 60% of OTAs commissions/booking fees!

In its latest 10-Q SEC filing, Expedia acknowledges that in 2008, over 60% of its revenue came from transactions involving the booking of hotel reservations, with less than 15% of its worldwide revenue derived from the sale of airline tickets.

In other words, hotel reservations are financing the OTAs' operations and allowing the OTAs to remove airline ticket booking fees.

Case Study:

Expedia's Revenue from a New York City Luxury Boutique Hotel under net rate contract:

• ADR: $275/night
• Average Length of Stay: 2 nights
• Total Booking Volume: $550
• Net room revenue to hotel: $412.50
• Expedia mark-up/commission: 25% = $137.50
• This distribution cost is 2650% higher compared to the $3-$5 cost per booking on the hotel own website.

Online Packaging (Dynamic Packaging):

The OTAs love packaging as it helps them generate fees from airline tickets-as mentioned, if sold alone, an airline ticket provides zero commissions/fees for the OTAs.

No wonder all OTAs are heavily promoting their packaging services. Yet, this segment contributed to less than 16% of the OTAs total gross booking volume in 2008. This year, its share is expected to increase to 18% and remain flat at that level in 2010.

Car Rental:

Traditionally, the OTAs have charged similar booking fees for car rental reservations, since many car rental companies do not pay any commissions to the OTAs. So this segment still generates revenues for the OTAs, but unfortunately car rentals account for only 7% of U.S. domestic OTAs booking volume.

Cruise Segment:

The OTAs are generating hefty commissions from the cruise lines. Unfortunately this segment accounts to only 2% of the OTAs gross U.S. domestic bookings.

The question is: will the OTAs survive now that they have removed the airline booking fees?

HeBS is a full-service hotel internet marketing strategic services and award-winning website design firm. We help hoteliers take full advantage of the direct online channel and turn their websites into the hotel's main and most-effective distribution channel. 

www.hospitalityebusiness.com