Commissions in the Hotel Industry:
Agents for Change?


By: Robert Mandelbaum

Concurrent with the increased us of the Internet, travel agencies may go the way of the buggy whip and the carbide lantern.  The Internet is now a major channel for the travel industry to reach potential customers.  It gives consumers more options to book their travel and provides airlines, car rental firms, and hotels the ability to reach these same consumers directly, therefore bypassing third-party agencies.

Like all industries, the travel industry constantly examines the relative cost / benefit of the various distribution channels available to make contact with customers.  Because of this comparative analysis, most airlines, and a growing number of car rental firms, have determined that travel agents do not represent a relatively cost-effective channel for booking business given the cost of commissions paid.  Therefore, these segments of the industry are beginning to eliminate or severely reduce the commissions they pay to travel agents.

U.S. hotels have yet to implement the industry-wide changes to travel agent commission policies that we have seen in the airline and car rental sectors of the travel industry.  Historically, hotels have been less dependent on travel agents for their guests, as compared to airlines and car rental agencies.

Given the current industry downturn, hotel owners and operators are looking at all expenses.  Seeing what the airlines and car rental firms have done, hotel managers are now examining their policies toward travel agent commissions.  For a hotel or company to properly analyze the cost / benefit of travel agent commissions, the following data are needed:

  • Commissions paid
  • Volume of revenue / profit derived through travel agents
  • Potential lost revenue / profit
  • Lost revenue / profit that could be captured through an alternative channel
  • Cost of operating an internal distribution channel
  • Cost of alternative distribution channels
In an effort to provide some context to the magnitude of travel agent commissions as an expense to the hotel industry, we extracted data from our Trends in the Hotel Industry database.  An analysis of travel agent commissions was performed on 696 �same-store� hotels for which we have consecutive years of data from 1995 through 2001.  The sample consisted of 420 full-service hotels and 276 limited-service properties.  Please note that hotels only report rooms revenue and travel agent commission data for our Trends survey.  Therefore, the other data listed above is not available to complete a full analysis.

Small, Yet Declining

From 1995 through 2000, travel agent commissions for the entire study sample averaged 2.0 percent of rooms revenue.  This same ratio varied from 1.1 percent for the limited-service hotels to 2.3 percent for the full-service properties.  The year-to-year increases in commissions paid tracked closely to the annual increases in rooms revenue.

While the commission-to-revenue ratio has not changed much from 1995 through 2000, we see a shift in this strong relationship during 2001.  As expected, the drop in rooms revenue experienced in 2001 caused a decline in the amount of commissions paid to travel agents.  On average, the typical hotel in our sample paid $472.32 per available room (PAR), or 2.0 percent of rooms revenue, in travel agent commissions during 2001.  This is down from the $532.82 PAR, or 2.1 percent of rooms revenue, paid in 2000.

Of note is the disparity between the magnitude of the decrease in commissions paid compared to the degree of decline in rooms revenue.  In 2001, our sample of hotels suffered a 10.9 percent decline in rooms revenue from the prior year.  This compares to the 11.4 percent decline in travel agent commissions paid.  That suggests two factors at work.  Either the volume of revenue booked through travel agents declined to a greater degree in 2001, and/or hotels have already begun to adjust their commission policies.

The decline in commissions paid was greater at full-service hotels than limited-service hotels.  From 2000 to 2001, our sample of full-service hotels experienced a 12.5 percent decline in rooms revenue.  Concurrently, these same properties paid 14.3 percent less in travel agent commissions during the year.  For the limited-service sample, rooms revenue declined 5.5 percent in 2001, while travel agent commissions dropped 13.6 percent.
 



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Source: Hospitality Research Group of PKF Consulting

Alternative Channels

As an expense that consistently equaled less than two percent of total revenue during the 1990s, travel agent commissions were not given much attention.  After all, revenues and profits were improving at record levels.  During the current industry recession, U.S. hotel managers are examining all expenses.  However, any changes in a hotel�s policy towards travel agents commissions has to be examined for its impact not just as an expense reduction, but also for a potential loss in revenue as well.

Given recent history, there appears to be good reason to believe that the falloff in revenue for most hotels would not be that great from either an elimination or decrease in travel agent commissions.  Of course, the relative revenue and cost impact for a resort property in a remote destination may be different than that of a roadside motel, so each individual property�s situation should be thoroughly examined.

Looking at the airline industry for guidance, it appears that people who continue to need the services of a travel agent for airline reservations have just absorbed the service fees charged by the agents.  As an alternative to travel agents, people are already getting comfortable booking their air travel directly through the airlines� sites, or through services like Expedia or Travelocity.

If travelers can gain a comfort level and an understanding of how to book air travel on their own, then they certainly can achieve that same skill for the process of reserving a hotel room.  A November 5, 2001 Lehman Brothers study reported that the Internet already accounts for four percent of Hilton�s reservation volume and three percent of Marriott�s.  For Hilton, the increased use of the Internet by hotel guests was just one factor that contributed to a 38 percent reduction in costs per reservation from 1992 to 2001.

We believe hotel companies should begin to examine their policies towards travel agent commissions.  If hotel companies can efficiently and effectively operate their own websites, they can not only reduce the commissions paid to travel agents, but also save money in their reservations department and earn back some of the �spread� captured by other third-party booking channels.

Robert Mandelbaum is the Director of Research Information Services for the Hospitality Research Group of PKF Consulting.  Alexander Feneck assisted with the research for this article.


 
For additional information contact 
Robert Mandelbaum at the firm:
email [email protected]
PKF Consulting
3391 Peachtree Road
Suite 420
Atlanta, GA  30326
phone  (404) 842-1150
fax  (404) 842-1165
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