Last room availability, when deep discounts are not enough

October 28, 2009 | Hospitality Industry

If the feedback of the majority of our readers is any indication, last room availability is far from being a standard in online hotel distribution today. But it is clearly on its way in, and that may not be such a bad thing.

by Markus Busch

In the old days, last room availability (LRA) was mainly a function of revenue management, nowadays it is becoming increasingly a key driver in the negotiations with the major online travel agents (OTAs).

Last week we asked our readers for their take on the increased attention LRA receives, and how they currently handle it.

Over 500 readers shared their experience with us. Ranging from the major hotel brands to a small independent property on a Greece island, their feedback spans the whole spectrum of our industry, including other OTAs.

A big thank you to all who took the time and offered their view on the timely subject. As promised, we will keep the information you provided us with strictly confidential.

Before we dive into the findings of our query, we would like to make the following points clear:

- This is not about bashing Expedia or any other OTA. This is about understanding the actual trends and the underlying drivers in today’s online hotel distribution landscape. In fact, because we phrased our original query on the basis of the recent Choice/Expedia break, quiet a few of our readers pointed out that they enjoy a very valuable relationship with Expedia.

- This is about Last Room Availability, and not Inventory or Availability Parity. The latter being typically a function of Rate Parity, guaranteeing all OTAs have the same inventory and opportunity to sell a room. But with true LRA your last room available on property or your branded website must also be made available with your distribution partner.

- And lastly, our findings do not include answers that were submitted anonymously. And yes, they represent some of the more aggressive viewpoints.

So what have we learned? Here are the main conclusions:

- The clear majority of our readers (90%) are currently not bound to LRA agreements with any OTA. Among them are major hotel brands, as well as smaller hotel groups and independent properties, based in the Americas, Europe and Middle-East and the Asia-Pacific region.

- About 10% of our readers have LRA agreements with OTAs in place. Again, you will find major hotel brands, as well as smaller hotel groups and to a lesser extend independent properties among them. They are mainly based in North-America and Europe.

- Many reported, that LRA is increasingly becoming a topic when renegotiating contracts with OTAs. A major concern especially expressed from hotels that currently drive on merchant agreements, where contracted net-rates are typically 30% and more below published rates.

LRA or not, and on what basis

Many of our readers that are currently not on a LRA agreement, are still able to open and close their distribution channels as they see fit. That applies also to their pricing strategy, all by keeping within rate and inventory parity agreements.

While that’s clearly the preferred distribution model by the majority of our readers - and the prevailing model they currently have in place with major and secondary OTAs - it looks like that this model is the one that’s under pressure. Especially when negotiating directly with the major OTAs, and for destinations where they have a high market share.

Like with traditional wholesalers, this model is increasingly being replaced with retail and merchant agreements, associated with distribution costs between 10-35%, and based on a combination of fixed and additional room allotments.

Whereas fixed room allotments must be kept alive - with the exception of a few close-out dates - until the cut-off date (same-day to 48 hours prior to arrival) and are not removable, additional room allotments are temporarily in nature in that availability can be controlled at any time by the hotel.

Yet, when LRA comes into play, the perspective changes largely depending on whether you represent a branded hotel or an independent property. The reason being cost of distribution. Which according to our information, can almost double if you are an independent hotel.

Most of the major brands have negotiated substantially lower margin deals with OTAs. If those deals are based on LRA, they are typically based on a retail agreement with a distribution cost similar to a GDS booking (10% commission plus GDS transaction fees).

For them, OTA inventory is strictly tied to their Best Available Rates (BAR). If the room is available on property level and/or branded website, OTAs have equal access to sell that room - assuming it meets the same stay restrictions the hotel imposes on its BAR rate.

The underlying strategy calls for better placement, conversion and channel share with the OTAs they closely partner with. By providing additional placement levers such as LRA, they expect to see more robust demand levels and consequently be able to yield against a stronger demand curve.

That very same strategy can also hold true for an independent hotel, albeit typically at a higher cost of distribution. The LRA agreement is again based on a retail model, with commissions ranging from 12-20% off the BAR rate. So if BAR for a given date is US$ 250, OTAs get 20% off that rate, and if it is US$ 80 for a low-demand day, they get 20% of this. You are in control of your pricing.

What’s more, some of these properties have two different models in place with a given OTA. One model for standalone hotel bookings (Retail Model, BAR, LRA, Distribution Cost: 12-20%), and one for package bookings (Merchant Agreement, Net-Rates, no LRA, Distribution Cost: 20-35%).

Just say no?

So is LRA a topic? Yes, most definitely. However, it is typically only on standalone bookings with a moderate margin of 12-20% off BAR - not the 20-35% deals.

Because if you end up with those hotels, that on the hight of the recession signed LRA agreements with OTAs based on a five year term and merchant rates, it will be very difficult to get out of these contracts, as the big OTAs are not likely to give up on the ground they gained.

Yet, this might be a good time, to embrace LRA on a more strategic level, especially, when you always had your concerns with distributed room allocations, and/or collecting money from your distribution partners. Use the technology available today, and interface directly with your preferred OTAs based on a moderate retail model margin off your BAR rate, and have full control over your pricing.

LRA should not be an issue, as long as the distribution cost is in line. If you manage to negotiate a distribution cost comparable to your GDS cost or lower, LRA makes perfectly sense - especially when you are able to fully integrate and automate the booking process. No costly manual hand overs in the booking process is key here. A big cost saver, and great contributor to reduce your overall distribution costs.

However, if your negotiations still end up with margins of 20-35%, stay away from LRA, as it has the potential to put you in real troubles. Or as one reader puts it, it would be like committing revenue suicide. Then again, that’s common business sense, or not?

Markus Busch is the Editor/Publisher of Hotelmarketing.com and can be reached at markus.busch ‘at’ hotelmarketing.com.