At the onset of the new decade (1990) it became apparent that travel agents were caught in a price battle between the remaining four global distribution systems and the airlines.
These four GDS vendors controlled the marketing and distribution channel for the entire industry. They had market power and could impose higher fees at a whim on both the agent and airline. At the same time airlines sought ways to lower their distribution costs.
The outcome was that travel agents were getting squeezed on both sides; GDS terminal lease fees and production volumes both increased as did the penalties for not meeting production goals. Any fee increases by the GDS on the airlines faced serious push back and when able shifted costs to the agent by reducing their airline reservation commissions.
The standard commission from a percentage of total booking value was replaced by a flat, much leaner fixed sale per reservation. Like the demise of the family farm in the 1980s, neighborhood travel agencies began shuttering its doors only a decade later.
For the most part the hotel industry did not have the coordination or the moxie to fight like the airlines and simply paid the higher distribution fees and travel agent commissions.
But the larger effect was that the travel agency industry was shrinking; in a short period of time hotels saw their traditional distribution channels dry up. No longer were agents sending customers to the hotels. What could a hotel do?
The arrival of the internet as a commercial device only accelerated the demise of the travel agency business. Of the nearly 40,000 independent travel agencies in existence, less than a third still exist today.
Once again, the ever-innovating airline industry pioneered the direct sales model. Even the GDS got in the game and powered online websites.
Offline hotel consolidators, popular 1-800-hotel services, and savvy traditional travel agents adopted the online model. Major disruption was unfolding due to the web. Aggressive behavior by certain market players would quickly cause history to repeat itself.
Hoteliers had relied primarily on others to put heads in beds and applied the same thinking with the web. Hotels gave net rates to their favorite agencies, tour operators and hotel consolidators so the same practice was applied online to the third-party vendors.
Anything that sold online was treated as incremental business. Therefore, steep room discounts could be found anywhere but on the hotel’s own website, if they even had one.
In 2001, the early years of our hospitality consultancy, general managers walked through our doors describing their online marketing strategy as “having a static online hotel brochure, email, and Expedia“.
The catchphrase “direct online distribution strategy” described the new world order in hospitality. Yet hotel managers were slow to embrace the idea that they would soon be entirely responsible for the marketing, sales, and distribution of their hotel inventory.
Professionally, they were not trained for this.
Top hospitality schools were not teaching it and few understood the possibilities of a direct web model. Airlines were early adopters and swiftly shifted to online while hotels were looking to cut deals with the OTAs and avoid unnecessary direct channel investments.
The situation reached its apex after 9/11 when hotels turned to the OTAs to help sell room nights, much out of desperation. OTA room supply quickly grew and promoted low rates.
The $99 per night rate for a Midtown Manhattan hotel was the result of revenue managers not understanding the online channel. We witnessed OTAs selling room nights on peak holiday times for ten times the standard hotel rate.
OTAs would return unsold inventory at the eleventh hour and at times refuse to relinquish rooms when the hotels needed them most.
Not fully understanding the consequences, hotels locked themselves into OTA contracts that required steep discounts, ever-increasing inventory, and multi-year agreements.