Mr. Glincher

Hospitality Law

Dealing with the Impact of Online Reservation Systems

By Andrew Glincher, Office Managing Partner, Nixon Peabody LLP

These services also pose serious challenges for hotels, threatening to commoditize hotel rooms, dilute the value of brands, and place too much influence over pricing in the hands of third parties. Leaders of the hotel industry are now beginning to understand those issues - both management and legal issues - and develop tactics for dealing with them and harnessing the power of Internet marketing to their advantage.

Online travel services today account for approximately five percent of all hotel bookings. Some experts estimate that about 15% of all bookings will be made through these services by the year 2006. Clearly, while it is not cutting into the majority of bookings, this phenomenon is touching a significant portion of the market, as properties find themselves having to compete with themselves for bookings offered at their own properties by third party reservation services at lower prices.

Unfortunately, the advent of online reservation services and their increased accessibility to a traveling public with widespread access and greater comfort with Internet purchasing, has come at a time when the hospitality industry has gone through a major slump. Initially, faced with steep declines, many properties were happy to sell blocks of rooms at deep discounts to online resellers, who would then market and sell them to the public. But as travel industry began to recover, and these third party services began aggressively advertising and selling rooms at deeply discounted prices, the hotel industry quickly realized that they were, in effect, competing against themselves.

How can properties adapt to this new reality? What issues should concern them and how should they deal with them?

The first issue involves the relationship between the hotel and the reservation service. If a guest arrives believing they have a reservation that was booked through an online service, and the hotel reservation system has no record of it, who's responsible? Does the hotel have to honor it? Does the hotel have to offer a refund if a room is not available?

Agreements to purchase bulk rooms at a discount must make it clear that the service is doing no more than just that. It should be clear that the service is not an agent of the hotel and cannot hold itself out as one. Whatever terms and conditions it attaches to the resale of rooms to travelers should be its own - in no way binding on the hotel itself. The hotel's contract with the online service should make it clear that the service is an independent entity, that is merely buying and reselling blocks of rooms, and that the reservation service must place a disclaimer to that effect on its website.

Then, as hotel managers consider how best to help the clients who have been inconvenienced, their decisions will need to be governed by customer relations considerations, and best business practices.

Hotels also need to get to the point where they are using these discount services only to sell excess rooms. The average business traveler, booking rooms on a regular basis, should not be able to get a deep discount anytime he or she travels, by simply logging onto a travel service website. If that happens, the property is ceding control of its pricing to a third party.

On the other hand, if a convention property knows that a down period is anticipated, when a large number of rooms will be vacant, it may make sense to offer them to online services at whatever discount is required. Some revenue, after all, is better than none. But tight control over the number of rooms that are offered is crucial, to protect both the business and the brand.

Great hotels have never thought of themselves as commodities. They have always differentiated themselves on the basis of service, style, amenities and quality. The Internet should not change that.

Lower cost, two or three-star hotels may need to compete more than ever on the basis of location and price - and therefore need to be even more cautious about discounts offered through online services - but the best hotels should compete as they always have. They should position themselves as distinctive properties that can command higher rates because of higher quality. As the economy heats up and occupancy improves, these properties will find that they don't have to offer deep discounts - online or otherwise - to attract clients.

Hotels can also compete by offering what these third-party services offer - ease of access through the Internet - but doing it better and more effectively themselves. Large numbers of travelers are now booking their rooms through hotel websites, many of which offer three-dimensional views of rooms, public areas, spas and other amenities - giving clients the ability see what they are booking even more clearly than they would by calling the hotel's reservation desk. Booking through the website then allows the hotel to reduce its operating expenses without paying third party fees, or to raise its revenues by selling rooms without a discount to third parties.

Many properties are offering their own Internet only specials, such as discounted rooms and various types of packages. And increasingly, they are offering online rate guarantees - letting consumers know that if they book directly through the hotel, and they see a lower rate advertised through another service, they'll match it.

Setting up an online reservation system like this brings with it a whole set of unique legal and management issues. For example, how do you manage security on the site? Who has access to costumer credit card information? Do you have a privacy policy posted on your website? What guarantees does it offer to concerned users? There is no legal requirement for what a privacy policy says, but whatever it says, you have to live up to it. If you say that no information about customers is ever given to third parties, you have to abide by that - without exception. If you say that you will do everything possible to train employees and employ security measures to prevent hacking, you have to abide by that as well.

A number of companies have faced legal sanctions recently because of a failure to live up to the promises made in policies they post on their websites. Developing them carefully and reviewing them frequently to ensure ongoing compliance is essential.

Internet based marketing and reservations pose a number of challenges and is certainly altering the landscape for everyone in the business, from travel agents who are now positioning themselves for their expertise in planning trips, to hotel owners, who must compete for clients with a plethora of new booking services. But it also offers opportunities for those who understand the arena clearly and are able to shift tactics to compete effectively.

Andrew Glincher specializes in the negotiation and resolution of business and real estate disputes. Mr. Glincher has represented developers and owners of retail centers, hotels, movie theatres, office and industrial buildings and parks, utilities, restaurants, subdivisions, apartment complexes, assisted living housing complexes, long-term care facilities and condominium projects. Mr. Glincher is admitted to practice in Massachusetts, the U.S. Court of Appeals, Third Circuit, the U.S. District Court, District of Massachusetts and the U.S. Tax Court. Mr. Glincher can be contacted at 617-345-1222 or aglincher@nixonpeabody.com Extended Bio...

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