Commission Cut Next on Hotels' To-Do List?

Not yet, but get ready to perform for pay

By: Lisa Jennings

With online hotel sales soaring, and analysts predicting a drop in travel agent-generated bookings, the unpleasant question again rears its ugly head: Will hotels go the way of airlines in eliminating or reducing standard 8 to 10 percent agent commissions?

When asked, officials at several of the largest hotel chains responded with a resounding “No” followed by a qualifying “at least not yet.”

Still, analysts say the way travel agents make money by putting heads in beds is likely to change significantly in coming years.

Bill Carroll, author of the recent PhoCusWright report and visiting assistant professor at the School of Hotel Administration at Cornell University, said the traditional commission system will give way to what he calls “pay for performance on steroids.”

With online hotel bookings expected to increase to one in five by 2005, traditional travel agencies’ share is expected to drop to 18 percent, down from 21 percent in 2001, according to the report.

“Although that decrease may not seem significant, travel agencies currently represent only one-fifth of all hotel sales, and, despite GDSs’ efforts to increase hotel transactions, that share will decline even further,” the report states.

Agents are still making money on hotels.

“But how prepared are they for the possibility that hotels will follow airlines and eventually eliminate commissions?” the report asks. “Or, if hotels offer lower rates exclusively on their web sites, much as the airlines do with their discounted web fares? At such a time, only those agencies that have access to volume deals and wholesale rates will prosper with hotel sales,” says the report.

To survive, travel agents will need to adopt new compensation and “value-proposition” models.

Here’s how hotel officials interviewed by PhoCusWright predicted travel agent compensation will change in the future:

Travel agents will charge client service fees for finding and booking properties, and helping businesses manage hotel costs.

Agents will charge clients a reasonable fee (shared with GDS) for handling bookings, cancellations, and re-bookings and take on the mindset that they’re earning those fees for professional services rendered.

Agents will earn performance payments overrides or net rates for generating new business, shifting share in markets and during off-peak times, and attracting higher paying customers or booking more expensive rooms or services.

Suppliers will pay travel agencies for marketing, and for sharing information, particularly about loyal and/or corporate clients.

Agencies will create opportunities for hotels to promote their services using multimedia, such as advertising on the agency website.

Those predictions have already become reality for many mega-agencies.

Still, in interviews, hotel officials swore allegiance to the traditional agent commission system.

If hotel chains do start cutting commissions, “I think they’d be crazy to do it,” said Michael Handlery, chairman of the American Hotel and Lodging Association.

Handlery, who is also president of Handlery Hotels Inc., based in San Francisco, estimated that travel agents generate about 20 to 25 percent of business at his two hotels.

“We love paying commissions,” he said. “The more in commission you’re paying, the more business you’re getting.”

Hoteliers representing some of the largest chains agreed.

The standard 8 to 10 percent hotel commission for travel agents “is still a very efficient distribution model,” said Hubert Tupay, director of corporate and travel agent marketing for Best Western. “Travel agents are a tremendous resource and an extension of our sales force.”

Still, Tupay noted that bookings by traditional travel agents were down. “Travel agents need to reinvent themselves and become smarter about what they book.”

Last week at a conference of hotel officials in Los Angeles, Henry Silverman, chairman, president, and CEO of Cendant Corp., predicted that travel agents will be forced to “morph into a fee-for-service business.”

“The traditional agency that depends on payment by suppliers won’t exist three to five years from now,” said Silverman.

Though there are no immediate plans to change the commission system at Cendant, Silverman said the company would be evaluating the issue with input from franchisees, and watching what other hotel companies do.

In November, Best Western launched a program with ASTA to improve the business skills of travel agents. The “Model Travel Agency Program” identifies core principals for survival during turbulent times, marketing plans, financial analysis, and advice about technology systems and more.

Marriott International has also joined forces with ASTA to study the creation of an innovative travel foundation that would conduct research relevant to travel agents.

Looking at the costs of online versus traditional travel agents to hotels is potentially the type of research the foundation could evaluate, said Richard Copland, ASTA president.

Copland said there is little chance hotels will drop agent commissions altogether, but he does see more reliance on pay for performance in store.

Still, said Carroll, no matter how sophisticated hotel web sites might become, they will never be able to handle certain details like a warm-bodied travel agent for the travelers who want more than just a place to sleep at the cheapest price, said Carroll.

“It’s often not about a better price, it’s about a better deal.”