News for the Hospitality Executive
By Jean Francois Mourier
April 13, 2010
Airlines and hotels are the two pillars of the travel industry, and they share many characteristics. They are heavily consumer-focused industry segments, with more customer interactions than many other industries. They produce and sell two of the most perishable products in the history of economics: a seat on a flight and a night in a room, both of which ‘spoil’ immediately if not sold. Their product is also dominated by an intangible experience component, the quality of which can accentuate- or ruin- an otherwise perfectly suitable product, i.e., a safe trip, a clean and secure room. They both segment their product by class and charge for upgrades (first or business class on an airline, the suite or club level for hotels). They rely on loyalty programs to encourage and reward repeat business.
The airline and lodging industry segments also feature a variety of auxiliary or ancillary services linked to the core product. Even in this, the options are similar; airlines offer food and beverage in flight, hotels have minibars, room service and restaurants. Airlines peddle personal in-flight entertainment, hotels offer On Demand television. Duty free and SkyMall shopping is available on most flights, and most hotels have at least limited retail options, if not high-end boutiques on premise.
In terms of their ancillary revenue sources, the main difference between hotels and airlines is that airlines had traditionally bundled them into their core product while hotels had traditionally kept them separate (bed and breakfasts and old American-plan meal service being exceptions). As airlines began unbundling the fare, they found that some of those previously-included services could be sold for a fee. A few of these services, like the privilege to check a bag, are integral enough to the air travel process to be considered compulsory- which creates a steady revenue stream. Fees have become big business for airlines in the past few years, and innovation in this area is a dynamic pursuit for the industry segment, while hotels have largely shied away from this revenue generation tactic.
Until now. Hotels around the world are beginning to emulate their airline brethren and charge guests fees for previously included services.
The stories of luxury hotels installing motion-sensitive minibars that automatically impose a room charge if an item has been removed for a certain period, or of vague-sounding ‘resort fees’ cropping up on guests’ final bills have been proliferating lately. Since these stories have been appearing with increasing frequency, and considering the demand drought the hotel industry is just emerging from, there are a couple of perspectives on this new trend that should be given equal weight.
The first reaction, even from industry insiders that are at least sometimes regular travelers, is that such fee imposition is detrimental to customer perception. No one likes to be nickel and dimed, and consumers will push back at tactics that make them feel that way. Of course, the airline industry’s experience with compulsory fees refutes that; since 2008 when checked baggage fees became more or less standard across the major US carriers, revenue from fees rose to almost $2 billion per year. But anecdotal perception of airlines is resoundingly negative, and the hotel industry- with a more competitive marketplace and more options for consumers- ought not to imitate the strategies that result in negative consumer sentiment.
On the other hand, though, fees can serve a productive purpose (beyond creating revenue opportunities). The unbundling of the airfare exposed the airline’s true core product- a seat and safe conduct- which has gone a long way toward changing consumer behavior. The most aggressive fee imposers among airlines (the industry prefers ancillary revenue generators) like Ryanair and Spirit have effectively changed their customers’ expectation as to what a flight should be. The industry in general is moving in that direction, and what that has ultimately done is allow consumers to build their own flight experience. Hotels, likewise, can benefit from this core-product focus, and guests should be able to customize their lodging experience as well.
From a revenue management standpoint, the stripping out of extraneous services and offering them for a fee can have dramatic positive effects on the basic rate. By enabling hotels to advertise a low basic rate, they can attract a wider array of potential customers. The industry effect of this process is an increase of competition based on price, which, in the era of the OTA and online rate aggregator, can revitalize some stagnant markets more quickly than new competition might. Conversely, the imposition of fees by some operators can allow others the opportunity to differentiate their product based on service, or based on how “bundled” their rate is. In the airline industry, carriers like Emirates and Singapore have carved out successful and highly profitable luxury niches by competing based on service.
Fundamentally, though, new hotel fees will only place emphasis on what really matters in a hotel-the room, and the customer service experience. No one is considering charging a fee for cleanliness, or for courtesy. Hotels that continue to execute their central mission well will continue to thrive in a fee-for-service environment, just as high performing airlines like Southwest and Jet Blue have thrived in theirs. It is important to note though, that to avoid the negative perception that the airlines are experiencing because of their new fee structure, hotels must be as transparent as possible during the booking process as to what fees will be charged on top of the daily room rate.
There may be some initial resistance to fees in the lodging industry, but ultimately if implemented correctly, they will not spell doom for the consumer-focused segment. In fact, they may present previously unlooked-for opportunities to increase hotels’ revenues.
Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through www.revparguru.com or by calling +1.786.478.3500.
REVPAR GURU INC.