Hotels and airline companies often sell their rooms and seats at deep discounts

Question

Hotels and airline companies often sell their rooms and seats at deep discounts on sites like www.priceline.com and www.hotwire.com. The most discounted seats and rooms are sold 'blindly', i.e., customers don't know which hotel room they are buying or which airline and route they are flying until after they have paid for the room or seat. The prices for these deeply discounted hotel rooms and airline seats are often way below what the company needs to make to cover its costs.

1. Discuss why airline and hotel companies are willing to do this? (Think about the different types of costs as they apply to hotels and airlines when you present your reasoning.)

2. Airlines as well as hotel companies have their own websites where customers can buy seats or rooms. Why do you think they prefer to use priceline or hotwire for these 'deeply discounted' products rather than their own website? (Note: This is not from the text and is really more of a marketing issue. But, it is always interesting to see the interrelatedness of the different branches of business

Explanation / Answer

1)Hotels and airlines resort to deep discounting of their products , to keep their rooms and seats fully occupied.

Unlike hotels, airlines are not typically subject to any type of price equality (as with hotels and ‘rate parity’ agreements) as a part of their distribution agreements,

This means that airlines are able to ‘undercut’, if they choose to do so. This type of practice is not typical, though – airlines generally force OTAs, for example, to compete on an even playing field with regards to fares. Most airlines also do not typically undercut these partners with special pricing that is readily available on their own booking site – even though that site typically produces reservations at lower costs than these other partners.”

With the growth in use of the Internet, hotel rates are more transparent than before. And in addition with the Best Available Rate strategy, package pricing is more or less being eliminated. “Everything is based on BAR. Geographic is no longer a fence.

According to Dietz, a number of factors make airline pricing challenging, including:

1.        High fixed costs, low variable costs: Like most travel and hospitality sectors, scheduled airlines have high fixed costs and low variable costs. As a result, the simple ‘cost plus pricing’ approach traditionally used in many industries simply will not work.

2.        Competition: Much of the public views air travel as a commodity service– at least relative to the sectors like hotels and cruise. As a result, market share can shift significantly whenever an airline is not price-competitive.

3.        Variability in fuel costs: Fuel is one of the top costs for any airline (along with labour) – and its cost to an airline can fluctuate significantly. Accounting for this while remaining price-competitive is challenging.

4.        Multiple offerings: In a typical market, an airline will have a handful (or more) fares that are available to the general public. Each of these fares must be distinguished based on rules and restrictions, or benefits associated with the fares. Managing both price level and segmentation for such a large number of products in a given market is a significant challenge.

All hospitality and travel entities deal with many of the same basic types of customers:

1.        Individuals or families travelling for pleasure

2.        Individuals travelling for business

3.        Groups travelling together

In addition, both hotels and airlines often suffer from over-capacity.

An arduous task

When it comes to differences between the two, hotels represent the most commoditised sector of hospitality and travel. When you delve deeper airline pricing comes across as an arduous task. For example:

·          A typical airline watches competitor fares for changes every day of the year, multiple times a day.

·          In addition, airlines differ from hotel companies in the choice of services they provide (ie: which airports to serve, and what flights to schedule to and from them) and this closely related to pricing (rail companies and cruise lines also do this, to some extent).

2) That way, they can fill their hotels and seats without lowering their publicly advertised rates. The blind-booking websites Hotwire and Priceline won't name the hotel (or airline or car-rental company) we are working with until our credit card has been charged.This is called opaque pricing.

The airlnes or hotels do not want to slash their prices in public view- with teir identity known- which makes things very difftcult for them to restore original prices.So, they offer a portion of their seats/rooms through

these websites.

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