Online travel sites putting pressure on hotel rates

By Andrea Orr

P>PALO ALTO, Calif: In the Bear Stearns report, lodging industry analyst Jason Ader has said that sites like Expedia Inc., Travelocity, Orbitz and Hotels.com are now doing for hotel rates what occurred they helped accomplish with air fares a few years ago, giving consumers more options and making the market more transparent.

Ader said that online travel sites, once used mainly to book air travel, are increasingly being used to reserve hotels. He predicted that online lodging revenue in the year 2005 will have more than tripled from the $3.8 billion generated in 2000.

"This trend will cause continued pressure on hotel rates, even as the economy rebounds and demand for lodging increases," he said, adding profits and stock prices of hotel companies could suffer in upcoming quarters. Several hotel operators have already indicated that their own revenues are soft. After a steep downturn following the Sept. 11 terror attacks last year, the industry initially rebounded, but has more recently found business travelers slow to go back on the road.

In his research report, Ader predicted that there would be no meaningful recovery in hotel room rates before the end of 2003 or the beginning of 2004. He cautioned that even then, rates might remain below 2002 levels. Ader's report devoted considerable space to discussing the ways a new sales medium like the Internet may upset the usual supply and demand-based pricing and bring about a permanent change in rates.

When rate discounting continues for an extended time he said, "the effect can be the lowering of the public's perception of what is a fair price to pay of a hotel room. As a result, it becomes harder to raise prices even when the economy is getting stronger and demand for rooms is growing."

Ader said that phenomenon has already occurred in some markets, such as New York City, where travelers who once simply accepted $300 room rates now expect to pay no more than $250. The report also addressed the growing use of reverse online auctions, in which competing hotels bid on corporate business, as another trend that could hurt pricing.

"Despite the traditional supply and demand curves that historically have caused prices to rise and fall, the rate transparency caused by quick access to competing hotels' rates and availability has introduced a third variable that will limit hotel operators' ability to rapidly increase prices as demand rebounds," he said.

© Reuters