Going for Broke: The OTA Showdown Heats Up
By Carroll Rheem
Some questioned Expedia's strategy when it threw down the gauntlet on March 11 by announcing a promotional fee cut for flights. Competitors were bound to respond, sparking a downward spiral cutting into their revenue margins. There is no doubt that each of the big three (Expedia, Orbitz, Travelocity—or Exbitzity) will suffer a hit in air driven revenues as a result (Priceline had already eliminated airline fees in 2007). However, not all transactions are created equal. Air has always been a low margin product for online travel agencies (OTAs); hotel is what brings in profits. Expedia saw an opportunity to grab share from competitors—taking the hit on air could potentially pay off in (or at least be softened by) increased hotel revenuesand hit a major competitor where it really hurts.
The Leader Makes a Move
As the chip leader in this game, Expedia chose to make a hefty wager. Not only did it set the ante by waiving ticket fees, it also raised the stakes with a perpetually popular attraction—free nights. Will it lose some chips? Possibly, but you've got to bet some to win some. Did it go too far? Perhaps, but consumers have been hearing about no fees for a while now from Priceline and Hotwire. It had to go aggressive to catch their attention in a sea of specials. With this bet, Expedia just might have set off a chain of events that eventually forces Orbitz to lose too many chips. So out to market it went—on the hunt for market share, and on the heels of TripAdvisor's flight metasearch launch. Coincidence? We think not.
Ante Up
Travelocity anted up to Expedia's no fees and substituted the free nights with "PriceGuardian" for packages. PriceGuardian refunds consumers the difference if someone books the same package on Travelocity for less. The exact same package—same city pair, same dates, same flights, same hotel—which is a creative offer (though Orbitz introduced the underlying concept), but with a rare occurrence.
Priceline didn't give up anything new for the ante (it was the first to start it and had already made the change permanent). So it matched Travelocity's PriceGuardian on packages and raised the stakes to take on Orbitz's "Price Assurance" (no doubt the inspiration for PriceGuardian) with "Pricedrop Protection." Price Assurance refunds consumers the difference if someone books the same flight on Orbitz for less, and was introduced last year as a permanent program. Priceline's "Pricedrop Protection" takes it one step further by offering it on opaque airfares, but the catch is that the refund only kicks in if someone purchases a lower published price for the ticket.
Keeping up? But wait, there's more.
The Pressure Is On
Orbitz is the last player to make a move in this game. Given its heavy reliance on air driven revenues, the ante is a scary proposition. To give up ticket fees would sting tremendously, but to lose air travelers to its competitors is also something it can ill afford. Price Assurance had given its air product a bit of an edge last year, but without ticket fees to fund the machine, the sustainability of the program would likely be in jeopardy. Faced with a major dilemma, it appears to be making decisions cautiously. Today, Orbitz rather quietly upped its existing major hotel promotion from 20% to 30%—a move that suggests there may be more to come, given the PR hoopla its competitors have been raising. It is a prudent move for it to measure the effects of its competitor propositions on consumers before making a move it can't take back. If we see Orbitz announce a ticket fee cut, it is a fair assumption that consumers are swayed significantly by the fee issue. It would also mean that the company is in critical condition. If it holds strong, it will be a sign that the existing air product proposition is strong enough to take the licks, or at least that Orbitz believes so.
Creativity is clearly alive and thriving in OTA marketing departments. Expedia is the only player not giving consumers money out of its pocket based on supplier price cuts. Are free nights enough to counter hypothetical refund promos? Given the heavy hotel mix that Expedia has and the tangibility of a free night (vs. the chance that you might get a refund), it certainly seems possible.
Did Expedia ruin it for everybody (well, at least for Exbitzity)? Or did it merely make an early move into what is an inevitable state—where ticket fees are gone forever? The latter seems more likely given the permanent abolition of ticket fees by the opaque brands, and opaque's consistent gain of market share since the cycle turned sour. Expedia opted against treading water and watching supplier sites and opaque eat away at its bookings. Instead it got aggressive and took some risks to stem the hemorrhage and try to widen its lead.
Then again, perhaps Expedia will reinstitute ticket fees after the promotion and return the OTA game to a nice, peaceful pace for peak summer travel.
Somehow, we don’t see that happening.
