Are hotels becoming more like the airlines when it comes to how they’re pricing their rooms, especially by imposing stricter cancellation policies and other fees?
It depends whom you ask but one thing is clear: Hotels are definitely becoming a lot more sophisticated about how they’re charging guests, and about pricing their product.
The Case for airlines inspiring Hotels
“I see them basically taking a page out of the airlines’ playbook,” said Craig Fichtelberg, president of AmTrav Corporate Travel, referring to hotel chains. Fichtelberg sees parallels between airlines’ “extremely restrictive basic economy fares,” and the stricter cancellation policies recently enacted by Marriott, Hilton, and InterContinental Hotels Group.
“That basic economy rate [on airlines] is going to attract the same people who are buying low-cost carrier rates, but the companies we work with at AmTrav are asking that we don’t even show those rates to the corporate travelers because they’re too restrictive,” Fichtelberg said. “From the hotel perspective, I see Airbnb as analogous to the low-cost carriers in the airline world, and the hoteliers are now looking for ways to compete without watering down their corporate business.”
He believes the move toward standardizing cancellation rates is a first step.
“Step one was implementing a standard basic cancellation policy across hotels, and step two is starting to create more defined bundles, similar to what the airlines have done,” Fichtelberg said. “The basic economy bundle for a hotel would be non-refundable and non-changeable, without Wi-Fi and without a free breakfast, for example. By creating these targeted bundles and different price points, they can compete more aggressively with Airbnb pricing.”
Fichtelberg said what hotels are ultimately trying to do is “price discriminate so they charge the right price to the right customer, so corporate travelers pay more than leisure customers for the same room at the same hotel.”
Eventually, he sees hotels serving up different prices for individual hotel rooms, similar to how airlines have already segmented varied prices for different seats, even within economy class.
“Before airlines starting doing this, every seat in the economy cabin was the same price,” Fichtelberg said. “I think hotels are seeing what the airlines are doing and seeing airlines are driving revenue from this that is significant and they see this as an opportunity. That’s why I think this is going to extend well beyond just the cancellation policies.”
Robert Mann, an airline industry analyst and former executive with American Airlines, Pan Am, and TWA, said what hotels are doing is simply a case of “Economics 101.”
“The way hotels are thinking about how to maximize revenue is now very akin to how airlines have been thinking about it for a couple of decades,” said Mann. “Hotels never did a very good job of price discovery, but I think they’re using restrictions and other ancillaries to try to do that.”
Price discovery, or the ability to determine the price at which you can maximize revenue, is crucial to any business’ profitability. By implementing more restrictive cancellation policies or adding ancillary fees such as resort fees and parking fees, hotels are simply being smarter, and trying to get more guests to book direct, too, Mann said.
On the other hand, hotel revenue managers have to determine whether higher fees might persuade some guests to book elsewhere at a property where fees might be more modest.
In 2015, the U.S. lodging industry collected a record $2.45 billion in fees, and in 2016, was estimated to be on track to have collected $2.55 billion, according to a report compiled by Bjorn Hanson, a clinical professor with NYU’s Jonathan M. Tisch Center for Hospitality and Tourism.
Getting customers to book direct doesn’t just add more to the bottom line, but also lets hotels be more “granular in their own distribution channels than they can be in a global distribution system channel,” Mann said. Which could, ostensibly, enable hotels to price individual rooms differently based on the types of amenities or special features they have.
Mann did point out, however, that the way hotels manage themselves is more likely closer to trains than airlines, because airlines are dealing with different logistical issues. This is something Skift noted last year in a discussion of why it’s possible to pick an exact seat on an airline and why it’s so hard to pick a specific room in a hotel.
As for the fees being implemented by hotels, Mann said, “It’s interesting because airlines have been told [by regulators] they can only impose fees before the sale, but hotels don’t have to do that.” That pertains to price transparency, but airlines do charge many fees, such as for meals and entertainment, while people are flying, as well.
Mann may have a point, though, about hotels not necessarily disclosing all of their fees up front or clearly enough for the majority of consumers to notice.
In January, Mary W. Sullivan, an economist in the consumer protection division of the Bureau of Economics of the U.S. Federal Trade Commission (FTC), published a report on hotel fees. It found that “separating mandatory resort fees from posted room rates without first disclosing the total price is likely to harm consumers by increasing the search costs and cognitive costs of finding and choosing hotel accommodations.”
The report itself is proof that the FTC is keeping an eye on hotel fees, and it may issue regulations for disclosure of those fees, similar to those stipulated for airlines.
Last year, Senator Claire McCaskell (D-Mo.) introduced a bill to the U.S. Senate that would require hotels and online booking sites to disclose during the booking process any fees that are typically charged at the end of a stay. The Truth in Hotel Advertising Act of 2016 would give the FTC the ability to enforce penalties on companies that advertise hotel rates without including additional mandatory fees.
Not So Fast
Some hospitality industry experts, however, aren’t so convinced that hotels are borrowing strategies from the airlines as they become smarter about inventory and revenue management.
“The hotel industry started charging fees and surcharges before airlines did back in the 1990s,” said Hanson. “Airlines have made more of a science out of it [charging fees] than the hotel industry has. Even baggage fees alone are 150 percent of what U.S. lodging charges in terms of the fees and charges that I keep track of, so I suppose, in that sense, there may be some knowledge to be gained from airlines there.”
Hotels do have different business models than the airlines, as well as differing views about how to maintain relationships with customers.
“Hotels are unlike the airlines,” Hanson said. “What the lodging industry is trying to do [with implementing fees] is, in some ways, following the airline model, but it’s not allowing itself to become as much of a commodity as economy seats in the airlines.”
Cindy Estis-Green, CEO and co-founder of Kalibri Labs, agreed, saying, “The ways airlines handle things these days have become downright onerous. The cancellation rates at hotels are incredibly high. There’s a huge gap between what airlines do with onerous cancellation rates and change fees. Hotels are switching from 24-hour to 48-hour cancellation policies — that’s a long way off for hotels to be anywhere close to airlines.”
Maintaining or enhancing guest relations is even more important for hotels than passenger affinities are for airlines.
“The hotel industry is much more fragmented [than the airline industry],” said veteran lodging analyst David Loeb, founder of Dirigo Consulting LLC. “Even with those giant brands, it’s still hugely fragmented. Because of all this competition, hotel companies want you to love them. They want your loyalty because you love them. They’re in the hospitality business. You sleep in hotels. They want you to be happy there. They don’t want you to stay with them because you have no other choice. Today, in the era of Airbnb, it’s an even bigger concern for them.”
Why Cancellation Policies Are Becoming More Restrictive
If that’s the case — that hotels want customers to love them — then why are hotels implementing more restrictive cancellation policies?
Hanson said they’re doing so because it’s costly: Last-minute cancellations lead to millions in lost revenue. He said that some name-brand hotels in New York City have seen cancellations/no show levels of up to 30 percent, and that industry-wide in the U.S. the cancellation or no-show rate is most likely 15 to 16 percent. This is especially critical for an industry that will see the highest occupancy rates since 1984, he added.
Estis-Green said cancellation rates are as high as 40 to 50 percent for some hotels and “that level of cancellation rate is not good for the consumers. It means hotels can’t plan very well, and they might be over-booking or under-booking their rooms. They can’t take care of customers the way they want to.”
Loeb said the emergence of technologies that allow people to cancel and rebook at a higher rate at the last minute has made it even tougher for hotels to manage their inventory.
“Hotels needed to find a way to take back control of their inventory from that process, from these well-organized and advanced, programmed systems that allow customers to exploit the revenue management system to cut the rate of a room close to arrival,” Loeb said.
Hanson estimates that a third of cancellations are taking place simply because guests have forgotten or neglected to formally cancel their bookings. “The lodging industry is implementing these policies to notify guests of cancellations they’ve already determined, but just haven’t gotten around to notifying the hotel,” he said. “They’re not trying to punish guests.”
The Future of Hotel Rates and Fees
Though cancellation policies may be getting tougher, hotels are incentivizing guests to book direct and to purchase rooms well in advance with non-refundable rates by offering discounts and other special perks and amenities.
Loeb said hotels “just want to be fair both ways. Hotels are saying, ‘We’re going to make this better for you if you book direct by giving you things like free Wi-Fi and free breakfast, and in some cases, a discount on the rate. We want to make sure you have a place to stay, and you just have to give us enough notice.'”
In the future, it’s likely we’ll see more flexible rates from the big brands, as Hilton CEO Christopher Nassetta recently noted.
Nassetta said, during a second quarter earnings call with investors, that Hilton is running tests along these lines. “I’m not going to get into it in detail because we’re deep in the middle of it. But hopefully sometime in the second half of the year we will layer some incremental opportunities on top of that, that would really start to bifurcate. Then really thinking about from the 48-hour, 72-hour mark out to seven days, creating fully flexible pricing structures and semi-flexible pricing structures that would require [guests to] potentially even cancel seven days, within seven days.”
Similar to how Hilton encouraged guests to “Stop Clicking Around” and book direct, it’s clear the company wants to educate consumers about the benefits of not waiting until the last minute to cancel a hotel room they don’t need.
“Again, with the effort being to be able to manage inventory more intelligently, what we find as we’re testing it is the large majority of our customers actually do know within those time frames whether they need to cancel or not,” Nassetta added. “It’s just they haven’t had to do anything about it. So, they haven’t. But if you can create the right incentive system where you give them an incentive to let you know earlier, it’s good for them because they ultimately probably can get a little bit better deal. It’s much better for us because we can manage that close-in inventory more intelligently to make sure that we both price it right, but more importantly, we fill as much as we can and don’t leave rooms unoccupied.”
Hanson thinks that as rates become more flexible and cancellation policies gradually become more restrictive, however, it’s doubtful that we’ll see hotel companies establish a single, universal cancellation policy across their brands and properties.
“A single, national cancellation policy is unwise,” he said. “In New York City, where occupancy is going to be, on average, 86 percent, cancellation policies are more important than they are in markets that run relatively low occupancy, for example. To implement a uniform cancellation policy with those two extremes is unwise and might cause guests to feel like they’re being treated unfairly.”
As for hotel fees, Hanson thinks it’s misleading to describe them as “hidden” or “surprise” fees and in his own research, he noted, “I couldn’t find a single case where the resort fee or amenity fee wasn’t fully disclosed, but that doesn’t mean people don’t miss it. The disclosure was good — it was the traveler or guest’s failure to pay reasonable attention.”
Still, it’s clear that there’s been more legislative pressure and regulatory attention being paid to hotel fees, hidden or not, so it’ll be worth paying attention to see if the FTC takes any action.
However, because those hotel fees have profitability levels of 80 to 90 percent, as Hanson noted, don’t expect them to disappear overnight.
“Hotel surcharges are a mature process,” Hanson said. “They are fairly stable and mature now, but that doesn’t mean there might be a change in a few years, or if new fees are created.”
As for a potentially new type of hotel fee, Hanson pondered whether hotels would ever implement a change fee similar to what many airlines do. “That’s not something the hotel industry has embraced yet, and I’ve heard no rumors,” he said. “Airlines will allow tickets to be transferred to another date with those change fees, but hotels are actually stricter in this case. If you don’t cancel within the deadline at a hotel, you can’t transfer that cancellation fee to another date.”
Hanson said it will be worth paying closer attention in the future to what the cancellation policies are for travel packages that combine air, hotel, and car rentals, for example. “The travel sites will often encourage consumers to book everything all at once, but the cancellation policies for each of those different items are often different.”