Nickels & Dimes & Billions: Ancillary Revenue Notes

An article just the other day at Travel Agent Central hints at just how deep the well of ancillary travel revenue may be. According to a cited Amadeus/IdeaWorks report, ancillary revenues could triple from $32 billion to over $100 billion on the heels of electronic miscellaneous documents (EMDs). But, the real story beneath transactions may be the travel story of 2012.

Since the airlines began to embrace the concept of a la carte services, and the suggested transactions, a confusing lot of cash only transactions ushers in additional revenue, but with the ensuing confusion and lack of efficiency too. Put bluntly, no one can really get a good handle on more revenue streams without losing some tracking effectiveness and confusing or angering customers on the service end of things. The answer, EMD’s, will make the flow of services and revenues better between airlines and travel agencies. But, it’s the ancillary revenues we would like to focus on.

Readers can engage in understanding EMD’s via the IdeaWorks website here, as well as glean a better understanding of how innovation can optimize revenue further. The ABC’s of EMDs (PDF) can also be viewed here. However, for our discussion, EMDs reflect a tangent of coming trends in online booking and business overall. At the very core of edgy new monetization structures, a la carte and specialty services stand to represent the only real margin aside economic operations. Let me explain.

Our client, Magnuson Hotels, built a massive hotel inventory of one premise – guaranteed visibility and simple solutions – the efficiency of “a la carte” hotel management services. I harp on Magnuson, we work for Magnuson, for two really concrete and logical reasons. First, everyone we know likes the man and his people. Secondly, his scrutiny of the current travel industry situation is spot on. There is no room for true growth – period. Hilton or others can run some poor shmuck out of business and take over his or her share, but serving guests – if you think about it, is as finite a business as there is. We just don’t make babies that fast.

Growing Up – Travel’s A la Carte Menu

So much for plugging Global Hotel Exchange and Magnuson Hotels, now let’s delve into “how come” we are so focused on this term “ancillary revenue” – the nebulous world of “of a kind” service. First, let’s deal with what we will term “bad ancillary fees” – a good example being baggage fees airlines have profited from. The billions in revenue from these are really just a bait and switch necessity – what I mean by this is, airlines were forced to get their “gas” from someplace, price competition being what it is, they had to charge travelers for extra bags, extra weight. A worst case of this will end up being weighing the passengers themselves.

Without making a huge value judgement here, let’s wrap up “bad ancillary revenue” by suggesting all hidden or bad charges are what you asked for when you tried to save $2 on  plane ticket. I call price driven shopping at the extreme a “Walmart mentality” – a process where consumers cannot see the end of their own noses. Now you are out of work… see other articles about the economy. On to more positive ancillary ideas.

When Expedia first took off, airline revenues were the driving revenue stream that propelled online travel’s most prominent brand. Today, less than 14% of Expedia’s revenue comes from airline tickets. In fact, the company reported subsequent declines in this revenue stream in each of 2005, 2006, 2007, and perhaps even more in 2008/9 – only the sheer volume of airline ticket sales, plus the value added aspect, even makes selling Delta tickets worth the trouble.

Enter hotel and car rental dissatisfaction with OTAs of late – and just why Magnuson scares the hell out of them. Price, place, timing, quality, budget, the realm of a la carte services is expansive – so expansive only a free market can accommodate.

As Orbitz Decline, Expedia’s Sun Sets

According to the data here on HeBS Digital, hotels account for about 40% of all OTA revenues. Expedia is a perfect example of how the industry is actually changing though. This article on the Toronto Star Morning Star offers a hint at Expedia weakness – disguised as a strength. Expedia’s publicized growth in revenue may be more from ancillary and ad revenue than any real booking strength. An article I wrote yesterday about the new WIHP marketing service, that also showed clearly TripAdvisor is ramping up the ad aspect. In my view, Expedia is back peddaling as fast as they can just to keep investors happy. Think about this as we venture into “real” ancillary sectors.

Let’s get real. Looking at a case study by HeBS Digital below, picture how the lonely hotel owner must feel, revenues being sucked up by Expedia and others – worse yet, in the toughest times in modern history. (courtesy HeBS)

Expedia’s Revenue from a New York City Luxury Boutique Hotel under net rate contract:

• ADR: $275/night
• Average Length of Stay: 2 nights
• Total Booking Volume: $550
• Net room revenue to hotel: $412.50
• Expedia mark-up/commission: 25% = $137.50

This distribution cost is 2650% higher compared to the $3-$5 cost per booking on the hotel own website.

Magnuson’s Global Hotel Exchange model, for instance, would cost $2.99 for the whole stay. Now, unless you are paid by Expedia to disagree, let’s head off into how any alternative OTA can “expand” and grow revenue streams realistically. If you visit that GHX link up there, it will take you to a Travolution article about GHX. At the end of the article one comment offers a multifaceted objection to not only Magnuson’s new model, but any new model. I would classify the comment as from an Expedia or Orbitz troll, but the points are well taken. Where will Magnuson or anyone else monetize if not through commissions? Let’s be smart.

Ancillary services: luxury travel, packages, premium services, transparent product offerings (not hidden baggage fees), transportation menu selections, ease of utilizing EMD verified a la carte selections of myriad proportions and depth. In short, anyone with half a brain could monetize GHX or any other travel platform. Your argument is against, you say? Okay, let me prove it.

Expedia is already doing it, first off, just not very nicely – so called “dynamic packaging” is taking an ever important seat at the OTA table. Secondly, some arguments against any disruptive engagement are:

• Consumer Booking Fee Tolerance – Let’s see, $2.99 versus $137.50 versus rising ATM, versus OTAs charging hidden fees out the ying-yang? Case rested.
• Consumer Value Creation – This is a no brainer, in a price driven model, reduced price is the biggest value. Add in the value of being able to trust that price, ancillary services up front and priced on the menu, and a range of hotel and service choices not previously visible…
• Traveler Awareness – It’s the digital age, marketers have so many channels, it’s a matter of time and pressure. How were you made aware of the iPhone? After you were aware, were iPhone revenues used to promote iPhones?
• Technological Sophistication – Talking of scale and real time transaction capability is muddying waters. Integration of any number of products can accomplish tech issues cheaply. Google wallet to this list of tools from none other than TripIt, no one needs to build missiles here.
• Industry Support – Major brands may not accept or adopt. Well, if they don’t. 65 percent of hotels and B&B’s in the UK are not visible on ANY GDS. Let me express this differently, MOST hoteliers are still invisible in this world. End discussion.
• Funding – Some people wonder at how GHX or any other new OTA model might be funded. With money, obviously. Kayak got $223 million so far, for creating a meta travel search engine. TripIt created the world’s most used business travel “ap” for $13.1 million or less. Twitter engaged the world in 140 characters for under $45.2 million. Exactly what kind of question is funding to garner 65 percent of a market?

Now that we have addressed, at least, a few negative approaches to real growth, let’s suggest some qualities people who travel will not mind paying for. Billions in a la carte, luxury, and premium services are up for grabs, and some people already know it.

• Skyscanner buys “door to door” travel search startup Zoombu – any questions?
• Refined luxury at a discount, Mr & Mrs Smith Winter Escapes – easy buttons in luxury travel at a discount.
• Special delivers vehicles – River cruises to thematic vacations, companies like Avalon Waterways afford superb a la carte cruise aspects to larger plans. Imagine the value of vastly more complex “easy” travel.
• Gorilla Trekking, Rail Trips, Family Tours, and… This Travelmarket report should clue the obtuse out there.
• Google & GoMo & beyond. In  case you missed it, Google is going integrated. G + and other Google services and platforms are rapidly being joined together. Imagine the ancillary revenues possible in travel when an Amazon buy, a Google ad click, hotel room booking, car rental, slash restaurant choice enhance revenue streams. We have not yet begun to interlace.
• Factoring in the vacation rental gem – all those “invisible UK hoteliers” are joined by even more people who rent fantastic properties around the world. No one, NO ONE, has yet created a distribution perfection for this. Could GHX or some other new OTA?

Growth Equals Redistribution

This article has rambled on a bit, this is out of necessity sometimes, in order to get back to a concrete central idea – central fact. All growth is really a redistribution of wealth, commodity, flow. Expedia and the other OTAs only disrupted the flow of money to their distribution channel and away from others. Now they are reluctant to give up on commissions. It’s time for a new conduit, but everyone is resistant. Not many can see that all this is cyclical. Innovative companies innovate, insert, interject, compete, cut prices, filtering out all possibilities for further growth – and then either die or become a monopoly.

This is, of course, a drastic oversimplification. However, Google has monopolized search. Microsoft now rules operating software. Amazon has no equal where online retail is concerned. But Expedia? Orbitz? Travelocity? Their “value” is far more obscure, competitive, and less refined than any of the others mentioned. Maybe their original model for business was flawed in the first place? Whatever the case, disruptive innovators like Tom Magnuson, niche innovators like TripIt, developers in understanding like Skyscanner CEO Gareth Williams, and others, have a real window into the travel game, and the big OTA’s left it open.

Magnuson, in an email to me last week, encapsulated hotelier’s situation in the UK, and around the world too, with this:

“Over the past 3 years, rates and occupancy have declined across the UK provinces, and no doubt they wil continue. We are not going to see a nice cyclical or seasonal rebound out of the mess we are in… It calls for a big solution.”

In concluding, we have to examine both ends of the travel market. Provider and guest satisfaction – the “perfect” meld of business interactions in between. In order for travel to prosper, “grow” (I use the term cautiously) – high commissions and hidden fees simply have to go. There’s no more room. If Magnuson can offer a better hotel in Scotland, for a better price, and especially with more clear and complete ancillary offers, Hilton and Expedia have some big problems. But, what is more important is – guests will win big. So will the little guys.

There’s more than 6,500 hotels in the UK that the big global distribution services (GDSs) don’t even list. That’s just in the UK. There must be another 15,000 in Europe, maybe more. In other words, the supply of nice rooms, the potential price and value breaks, are simply not online to be found reasonably. And no “Billboard Effect” (a BS term for what you already know) even takes effect for 90 percent of Expedia listed hotels. At the other end of the spectrum, if you want a superb luxury experience, Mr & Mrs Smith already created the model at the other end.

Let us know your thoughts on all this. More, much more, later on.

Baggage chart courtesy IdeaWorks PDF here. Menu image background courtesy © plrang – Fotolia.com – menu image courtesy © Doc RaBe – Fotolia.com – Ideas image courtesy © Mike Kiev – Fotolia.com.

By way of added disclosure, Global Hotel Exhange retained our PR firm, the parent of Argo Travel News, as their AOR. Now that this is more than clear, these editorials will always continue. We leave you with more food for thought.