European Union: Online Bookings: Competition Law Impacts Online Travel Agencies (OTAs)… A European Perspective

Last Updated: 19 October 2015
Article by Andrew P. Armfelt

Online travel agencies (OTAs) which greatly helped maintain occupancy rates during the difficult years in the 1990s have been accused of exploiting their position of strength in a manner that contravenes the rules of fair competition.

Following a number of actions and investigations in the UK (Med Hotels, Skoosh, IHG), class actions in California and other states in the US, a Bundeskartellamt investigation in Germany and investigations pending in Austria, Switzerland and Hungary, the European Commission has designated France, Sweden and Italy as chef de file (in other words, to provide the precedent for the rest of the EU) in an attempt to establish a harmonised EU approach.

In France, a complaint had been made against (Booking) by a number of hotels and trade associations.

The French Competition Authority found that:

  1. Booking proposed an online lodging reservation service where the lodging operator (hotel, apartment, etc) offers rooms for rental whereby visitors to the Booking website can make their reservations directly on Booking.
  2. There are three principal methods of selling hotel rooms i.e., those sold (i) individually or (ii) as part of a package including transport, car hire, etc., or (iii) through arrangements with companies where preferential corporate rates are negotiated.
  3. With regard to the sale of isolated room nights, these can be sold either directly by the hotel, on- or-offline, or through online agents (i.e., OTAs who specialize in hotel reservations or generalists who offer other travel services alongside which they also commercialize room-nights). Booking, and are categorized as reservation platforms (PRH), i.e., specialists in hotel reservations, whereas entities such as Expedia are considered to be general travel agents.
  4. It is the PRH that has a direct relationship with the hotel operators who make available to these OTAs the number of available room nights which are then advertised through a variety of internet portals, including those of the general travel agents. The room nights distributed by the PRH are generally sold in isolation, while the other OTAs can sell the room nights as part of pre-assembled packages.
  5. More than 90 percent of potential clients consult an online service, although for the time being, the majority of reservations are still made offline. The OTAs represented approximately 70 percent of online reservations made between 2011 and 2015, and about 24 percent of gross revenue of hotels, all of which pay commissions to the OTAs equivalent to, or less than, 5 percent of their total gross revenue.
  6. The importance of the OTAs is not simply the reservation itself. The public uses their services to find hotels and for price comparison. It is, therefore, essential for the hotels to be represented on the OTAs' websites, thus assuring visibility to the public. The commission charges by the PRH are between 10 percent and 30 percent of the retail price including VAT. In certain cases, if a hotel wishes to achieve a better placement on the site, the commission can exceed 30 percent.
  7. Booking, as well as the majority of the OTAs who have a direct link with the hotels, only act as an intermediary between the hotels and guests. Booking does not buy or sell room nights. Guests do not pay a commission or other remuneration as they pay the hotelier directly. The hotelier transfers the commission to Booking once payment for the stay has been made. This is in contrast with tour operators who buy room nights from hoteliers after which they sell them to customers at prices determined by the tour operators. Accordingly, the intermediary model permits the hoteliers to control the price of the room nights. This is necessary for proper yield management, and also because it is the hotel that will be at risk as far as empty rooms are concerned.
  8. In the general scheme of things, the OTAs rank below search engines. Below them sit the specialist hotel pricing comparison services such as Trivago, TripAdvisor and Kayak. In particular, the PRH are by far the most important clients of the price comparison services. They are remunerated by a fixed payment per click for each visit to their website.
  9. Generally, it is only the largest hotel chains that are direct clients of search engines and price comparators, while other hotels can appear on these two platforms via the OTAs which reference them on their sites.
  10. Accordingly, the OTAs who have a direct link with the hotels are placed at the heart of the business of the sale of room nights.
  11. This inevitably gave rise to complaints concerning certain practices, principally the parity clauses, excessive commission rates , appropriation of hotels' clients, clauses permitting suspension or unilateral termination, and clauses exempting responsibility.

Generally speaking, these parity clauses consist of an undertaking by the hotel to assure Booking the parity of its room rates and their availability. The room rate parity signifies equal, or more advantageous, prices for the same lodging on the same dates and for the same services. The parity being in respect of other websites or the lodging establishment's own applications, including its reservation system, as well as any other OTA or third party. The availability parity also covers the widest selection of competition and concentrates on the ability to dispose of available rooms.

Booking argued that, even if not specifically mentioned in their general conditions, price parity does not apply to group bookings or other arrangements that are not available online, where corporate rates have been agreed for particular companies. Booking's argument was that a parity clause protects the it from potential losses especially when visitors go to its website for price comparison but do not end up making their reservations on Booking, thus depriving it of a commission which it says is its only revenue.

The decisions in Sweden and Italy varied slightly from the one in France. In the two countries, Booking gave a commitment to (1) suppress completely the parity obligations towards other OTAs and (2) narrow the price parity obligations for hotels.

After looking at the rulings by the three National Competition Authorities, we can deduce that (i) parity clauses reduce competition between OTAs and (ii) they prevent competing offers from reducing commissions as they would not benefit the end customer. The other effect is that the price parity obligations deprive the hotelier of the possibility of recovering part of the commission that it would otherwise have to pay to Booking by lowering room rates on its own website.

As a result of the commitments made by Booking, the following rules are to apply in the European Union from July 2015:

  1. Hotels can propose lower prices and offer more favourable conditions to other OTAs.
  2. Similarly, these lower prices can be offered directly to customers offline (i.e., not published online or through an app).
  3. Better availability of rooms for sale can be proposed to other OTAs and on the hotel's own website.
  4. Booking cannot impose clauses to the contrary nor incentivise hotels to accept such contrary clauses.

Booking has announced that it will give the same commitments in Germany from 1st July 2015. The Competition Authorities will be seeking similar commitments from other OTAs (such as Expedia). with the intention of implementing them throughout the European Economic Area in order to achieve an industry- wide solution which all OTAs will comply.

Since then, however, two recent developments in France may have an effect on the status quo achieved by the Commission, namely:

  1. The Economic Reform Law (Loi Macron), which has now been passed, includes a provision to the effect that price parity clauses are inoperative and;
  2. Accor announced in June that, having acquired a small OTA, it plans to open it to independent non-Accor branded hotels.

It remains to be seen whether Booking will try to argue that its commitments to the Competition Authorities are now rendered invalid by the change in ground rules by the Loi Macron. It might also argue that independent hoteliers may be attracted by the reduced commission rate charged by the Accor site, and the fact that Accor brand franchisees have accepted the idea of competition with non-Accor branded properties on the same reservation system.

Originally published 7 October 2015

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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