Apr. 19, 2004 - INCREASED COMPETITION, TRANSPARENCY FLATTEN OUT GAINS FOR HOTELS: While the Internet is stoking more bookings for the US hotel industry, it is not necessarily translating into higher average daily room rates because of the huge price discounting that has resulted, according to PricewaterhouseCoopers.

The PwC study, Effect of the Internet on Pricing, was circulated at the recent International Hotel Investment Forum in Berlin last month. It was designed to develop an estimate of the effect of the Internet on lodging room rates, based on the question: What would have been the level of room rates in 2003, without the effects of the Internet?

According to the Travel Industry Association of America (TIA) figures quoted by the study, the number of Americans using the Internet for travel research rose from three million to over 50 million between 1996 and 1999. By 2003, over 60 percent of Americans regularly used the Internet and approximately 35 percent used it to research travel.

It said that the availability of "real-time" rate information on the Internet has allowed business and group travellers to examine all rates listed by hotels and re-book reservations if lower rates are posted. Therefore, business and group rates, instead of being true negotiated rates, are becoming negotiated maximum rates.

The Internet has also reduced search "costs", particularly for leisure travellers, made it easy for travellers to compare prices among hotels in a given market and enabled independent hotels to compete more effectively against brand-affiliated hotels and cost-effectively reach potential customers worldwide.

After performing simulations of its econometric industry model to assess the impact of the Internet on room rates, PwC estimated the net Internet effect on the US lodging industry in 2003 to be minus $1.27 billion.

Said the study: "This $1.27-billion loss is composed of two components: (a) foregone revenues of $1.987 billion due to lower average daily room rate (ADR) resulting from increased transparency and price competition, and (b) additional revenues of $715 million due to incremental bookings stimulated by the lower rate.

"PwC estimates that in 2003, chain hotels experienced a $1.987-billion loss in revenue from lower ADR due to Internet effects. While ADR for US hotels averaged $83.28 in 2003, PwC estimates that room rates would have averaged about $85.40, or 2.5 percent higher, if it were not for the Internet.

"Travellers booking on the Internet in 2003 achieved average room rates estimated at $71.27, fully 17 percent below the non-Internet average rate of $85.40."

The study noted that the availability of Internet-only sales or deeply discounted rates on certain web sites entices some travellers to take spontaneous trips or stay at a hotel instead of at the home of family or friends.

Internet reservations consisted of about 13 percent of all US hotel reservations in 2003, according to PhoCusWright data. PwC estimated that about 7 percent of these online bookings were incremental reservations, made by travellers who would not have reserved without the existence of low Internet rates. These totalled about 26,000 rooms per night in 2003, resulting in an additional $715 million in revenue for US hotels.

In 2005, the study said, the net Internet effect on the US lodging industry will have increased approximately 30 percent to negative $1.66 billion.

This will be composed of: (a) foregone revenues of $2.9 billion due to lower ADR resulting from increased transparency and price competition, and (b) additional revenue of $1.24 billion due to incremental bookings stimulated by the lower rate.

The ADR is forecast to increase by 4.9 percent between 2003 and 2005, compared to the 9.3 percent increase forecast for the same period if it were not for the Internet, the study said.

About 75 percent of online reservations in 2003 were made by "discount seekers" who use the Internet to secure the lowest possible price and who achieved the largest discounts compared to non-Internet room rates.

The remaining 25 percent of reservations were made by "convenience bookers," who use the Internet as a reservation tool, to avoid speaking with a travel agent or calling reservation centres. Compared to discount seekers, convenience bookers realise a relatively small discount from non-Internet rates.

While PwC estimates that the number of Internet bookings as a share of all hotel reservations is expected to increase from 13 percent in 2003 to approximately 24 percent in 2005, the growth in Internet reservations is expected to come about equally from discount seekers and convenience bookers.

Thus, while Internet bookings as a share of all hotel reservations will increase between 2003 and 2005, the average percentage discount achieved by Internet bookers will decrease.

PwC estimates that in 2005, chain-affiliated hotels will experience a $2.9-billion reduction in revenue from lower ADR due to Internet effects. While ADR for US hotels is forecast to average $87.40 in 2005, PwC estimates that room rates of $91.00 would have been achieved if it were not for the Internet.

Incremental room demand is expected to increase to roughly 52,000 rooms per night in 2005, resulting in an additional $1.24 billion in room revenue for US hotels.

The price transparency created by the Internet will continue to affect the ability of hotels to increase room rates during low seasons. However, during high seasons, the transparency of the Internet may, in the near future, enable hotels to increase rates more rapidly than was possible before the Internet.

Imtiaz Muqbil is executive editor of Travel Impact Newswire, an e-mailed feature and analysis service focusing on the Asia-Pacific travel industry.

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