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A Window Into How the Online Travel Business Works
By Dion Lefler, The Wichita Eagle, Kan.McClatchy-Tribune Regional News

Oct. 14, 2007 - If you believe TV commercials with talking lawn ornaments and animated bellhops, you might think you're getting the best price when you book a hotel online.

"I did," said Bob Zandt of Wichita.

But when he booked a room in Goodland through an online service in August, he wound up paying $108 for a room that regularly rents for $77 a night.

Online travel experts say that's not unusual.

They say behind the glitzy marketing campaigns lie hidden fees, tax charges that are the subject of lawsuits, manipulation of online search engines to get your attention and low-price guarantees that aren't worth the photons marching across your monitor screen.

Bill Carroll, a senior lecturer at the School of Hotel Administration at Cornell University in New York, said negotiating directly with a hotel will probably yield the lowest price.

Any time you book online, you should expect to pay some cost for the convenience, he said.

But he said things have gotten increasingly dicey since the big travel sites, in an effort to compete with each other, have signed on thousands of "affiliates" -- essentially miniature travel agencies that largely make their own rules and add extra charges.

"What you're seeing there is the tip of the iceberg and there's a lot of ugliness under the ice," Carroll said. "It's caveat emptor (buyer beware) in the wild hospitality west."

Online travel industry officials say they provide a valuable service for travelers and that the fees on users are how they get paid for the work they do.

Online reservation systems "require and have required millions and millions of dollars of investment," said Art Sackler, executive director of the Interactive Travel Service Association, a Washington-based group that represents and lobbies for online travel services.

"They are charging for the service, which is predicated on those terrific Web sites which are easy to use and multifunctional," he said.

The online services' fees "represent a return on the investment in the service and some sort of reasonable return."

Taxes, fees and guarantees

Zandt's experience offers a window into how the online travel business works. Usually, the rate that an online travel service pays to a hotel is invisible to consumers and taxes and fees are combined on the bill to keep competing companies from "reverse-engineering" the rate.

But the receipt Zandt got -- by accident, according to industry officials -- showed that the hotel actually was paid $69.56 for his room. The online site charged him $86.95.

In addition, the online service tacked on a hefty $21.44 charge for "taxes and fees" for a total of $108.39.

The actual tax paid on the room was $7.34, meaning Travelocity paid $76.90 total.

A check of 11 online travel service Web sites found that a traveler who booked the same hotel as Zandt online would spend $4.50 to $17.33 more a night, compared to calling the hotel directly.

The eight that listed the hotel showed a basic rate for the room of $89.95 or $90 -- $4.50 to $4.55 more than the hotel's "rack rate" of $85.45.

The rack rate is the undiscounted published price for a room that anyone off the street can get.

On top of the basic rate, the online sites added taxes and fees ranging from $9.49 to $21.84.

Orbitz.com and Cheaptickets.com listed the hotel as "no rooms available." But that doesn't mean "no vacancy." There were plenty of rooms available, just not through Orbitz or Cheaptickets. Almost all the sites offered some form of low-price guarantee. But it's unlikely you would get much use out of it.

According to the fine print, you'd have to find a lower price on the basic hotel rate -- excluding the Web sites' tax and service charges -- for an identical booking on another Web site. All the ones The Eagle checked were within a nickel of each other.

In addition, you'd have to file your claim within 24 hours of making your original reservation.

Lawsuits over fees, taxes

Two consumer class-action suits are pending in court, claiming that online sites routinely add hidden charges and miscollected taxes.

Seth Safier, a San Francisco lawyer, is preparing for a trial expected early next year in a consumer suit against most of the big names in the online travel business.

Safier said consumers can end up paying as many as four fees for a single transaction, without knowing it. Here's how, he alleges:

--Higher basic rates -- The online site charges the customer a higher basic rate than the price the travel service has negotiated with the hotel. The travel service keeps the difference.

--Fixed fees -- The travel site levies a set service charge per night or per booking.

--Variable fees --These are often rolled in as part of a single line item labeled "taxes and fees," making it difficult to impossible for the customer to separate the taxes from the fees. Some online services round their fees up to the nearest dollar, so a fee of $2.01 would go as a $3 charge to the customer.

--Incorrect taxes -- The online site estimates customer taxes based on the marked-up room rate that the customer pays to the travel service. Then the travel service pays taxes on the discounted room rate it pays the hotel, and pockets the difference.

More than 30 cities and counties have filed their own lawsuits alleging they're being shortchanged on taxes collected from customers.

"In short, defendants collect a greater amount in hotel taxes from the general public than they remit to the hotels," alleges one lawsuit, filed by the cities of Columbus and Dayton, Ohio.

Online travel industry officials have argued that they don't operate hotels, so they're not responsible for remitting hotel taxes to the government.

"We're not in the business of charging tax and keeping it, absolutely not," Sackler said.

What you actually pay when you book online is usually labeled a "tax recovery fee," which includes the estimated tax and part of the site's charge for conducting the transaction between you and the hotel.

"Online travel companies don't buy or sell or resell or rent hotel rooms," Sackler said. "What they do is enable you to book your own room online."

As for the lawsuits, "We're taking these one at a time and... vigorously defending every one of them," he said.

Sackler said of the 30 to 35 lawsuits filed by municipalities, two have been dismissed on their merits and nine have been dismissed or withdrawn on technical grounds.

"So far, there have been no judgments against defendants, nor have there been any settlements," he said.

A growing industry

Except for what used to be called mail-order catalogs, no industry has embraced e-commerce like travel reservation services have, according to U.S. Census statistics.

Despite taking a hit after the Sept. 11 terrorist attacks, online travel services have gone from a $6.1 billion industry in 2000 to a $9.8 billion industry in 2005, the most recent year for which figures are available.

By 2005, e-commerce accounted for nearly a third of travel service industry revenue, the Census statistics show.

That's been good for everybody, Sackler said.

"So you're going to Goodland, Kan., and you want to stay there and you plug it in, and a half dozen or a dozen hotels may pop up," Sackler said. "You then get to... do a little comparison shopping -- price, amenities, location, you name it."

It also helps hotels, particularly smaller mom-and-pop operations, to promote themselves around the country, he said.

"There's real value on both side of that coin," Sackler said.

The Rev. Barry Dundas of Trinity United Methodist Church in Salina is an experienced traveler who has booked interstate and international mission trips online.

He said he appreciates the convenience of being able to research different hotel chains' prices and locations all at once.

"It's an easy way to comparison shop," he said.

Dundas said he usually gets the best price by researching online and then calling a hotel directly. However, a few times, the Web has offered a lower price than the hotel is willing to match, he said.

Affiliates and search-engine marketing

About 80 percent of online travel business goes through one of three companies, Travelocity, Expedia or Orbitz, Carroll said.

Each has a large network of "affiliates" who operate their own sites but use of the Big Three's booking engines, he said.

The site Zandt used is called kansashotels.org -- one of many sites operated by Palm Beach, Fla.,-based HotelsByCity.net.

HotelsByCity, in turn, is an affiliate of World Choice Travel, which is owned by Travelocity, said Travelocity spokesman Joel Frey.

Becoming an affiliate can be as easy as clicking a link on any of the Big Three's home pages and filling out an online form.

The affiliation can be as simple as a link to a travel site on a Web page, or as complicated as a full-service online travel agency.

World Choice says it is unique in the field, because in addition to paying commissions to its affiliates, it also encourages them to charge extra "Opti-Fees" of as much as $30 on each transaction.

The Opti-Fees are split between the Web site operator and World Choice.

According to its Web site, World Choice provides online booking engines to 2,400 affiliates with more than 6,000 Web sites in 42 countries.

The primary qualifications to affiliate with World Choice are that you plan to start within 30 days, that you not sell competing travel products, that you plan to sell more than 40 bookings a month and that you have experience with search engine marketing.

According to Carroll, search engine marketing in this context means the ability to get your Web site pushed to the top of the screen when a consumer searches for a hotel.

Carroll said there are two ways to do that.

Businesses can simply buy keywords from search engine operators that guarantee top-of-the-page treatment in so-called "sponsored links."

Or, they can try to figure out the algorithm the search engine uses to rank Web sites and tailor their own sites accordingly, he said.

One resolution

Affiliate programs are becoming increasingly controversial in the travel business, Carroll said.

"There's a three-party war in online travel," involving the hotel chains, the major travel sites and their affiliates, Carroll said.

The major hotel operators are complaining that they're getting blamed for travel site affiliates' high fees and questionable marketing practices, he said.

"They're saying you better get this stuff under control," Carroll said.

"The other side is, 'I can't control my affiliates, there are thousands of them,' " he added.

Zandt's experience has led to a few small changes.

After Eagle inquiries to Frey at Travelocity were relayed to kansashotels.org, the site stopped marketing itself as the "Official Kansas Hotel Site."

And Zandt got a partial refund.

"We are sorry for the confusion and have reimbursed his account $31.49," said an e-mail from Frey to The Eagle.

The amount represents the difference between what Zandt paid the Web site and what the Web site operators paid the hotel.

HotelsByCity chief executive Randy Schartner said he was not directly familiar with Zandt's case because his company is almost exclusively a marketing firm and all the bookings and customer service are handled by World Choice and Travelocity.

He said he is contractually obligated not to reveal the commissions his company makes from Travelocity, but that it is between 6 and 12 percent.

HotelsByCity operates 400 travel Web sites and charges a $10 Opti-Fee on transactions, in addition to the commissions it receives.

Without that, "It would be very difficult for us to be competitive and stay in business," he said.

So how does Zandt feel about it now?

"I'm not going to lose a lot of sleep over it," he said. "Would I ever do it again? Hell, no. I've learned my lesson: Deal with the people directly."

Reach Dion Lefler at 316-268-6527.

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To see more of The Wichita Eagle, or to subscribe to the newspaper, go to http://www.kansas.com.

Copyright (c) 2007, The Wichita Eagle, Kan.

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