Love it or hate it, the fee-based business model appears to be here to stay for airlines. But the hotel business is a different story.
Airlines, as even casual fliers are well aware, have been piling on fees for years. U.S. carriers collected more than $6 billion in baggage and reservation change fees last year, an all-time high. For a particularly fee-crazy carrier such as Spirit Airlines, roughly one-third of revenues come from fees—seat reservations, carryon and checked luggage, bottled water—rather than money paid strictly for flights.
To some extent, the hotel industry has followed the airlines down the path to a more fee-centered, nickel-and-dime business model. In 2012, guests at U.S. hotels paid nearly $2 billion in fees.
But the modern-day airline modus operandi—attract customers with a cheap upfront price, then siphon more money out of them by selling all kinds of “extras”—hasn’t been translating particularly well to the hotel business. A recent study from PKF Consulting, cited by Travel Weekly, indicates that revenues for hotel extras such as charges for Wi-Fi, on-demand TV, parking, and food and beverages have essentially remained flat. From 2011 to 2012, the total collected for what PKF calls “other operated departments” (Wi-Fi, in-room phone charges, and such) actually fell 0.8%.
Food and beverage revenues were up slightly, but so were the costs incurred by the hotels for providing these services. The latest big news in the industry concerns how the New York Hilton Midtown, the biggest hotel in the city, is cancelling room service because the property loses money on the service, even when fees and inflated menu prices are factored in. “I don’t think anyone makes a profit on room service because of its labor costs,” PKF senior vice president John Fox told Crain’s. Hinting that many other hotels will also discontinue room service, he said, “I’m sure all the big hotels will be looking at what Hilton is doing.”
Why aren’t hotel guests paying more and more in extras like airline passengers? The answer is pretty simple: Airlines have a captive audience to sell stuff to and hotels don’t — or at least not to the same extent. Once a traveler is booked on a flight, he has no choice but to pay that airline’s fees for seat reservations, baggage, Wi-Fi, itinerary changes, and food and drink if he wants these services. Sure, airlines have competition among each other, but for the most part, they’re competing with businesses that have the same revenue model and charge the same fees. And it’s not like you can simply hop off the plane in mid-flight and hit a nearby convenience store to grab a cold drink.
Hotels, by contrast, face a much more competitive field. Because travelers have so many lodging options, hotels often find it necessary to pile on the complimentary perks—breakfast and Wi-Fi in particular—in the hopes of attracting customers. Hotels would love to charge extra for things like Wi-Fi, but that’s one surefire way to tick off guests. Meanwhile, hotel guests have more options than their counterparts in the sky. Take room service. It’s a delight to some travelers, but chances are, there’s better food at more reasonable prices within easy walking distance of the hotel. The airline passenger doesn’t have a similar set of options.
Hotels also don’t to wallop guests with fees for changing reservations like the airlines do. The standard fee for changing a flight is now $200, and the vast majority of airline tickets are completely nonrefundable. On the other hand, the standard fee for changing or canceling a hotel reservation with a minimal amount of notice remains $0.
Hotels could decide one day to start charging more for things like reservation changes and Wi-Fi, but that game plan would turn off tons of travelers, who’d simply move on to another hotel with more reasonable policies. Or travelers would grow accustomed to booking reservations at the last minute (to minimize the chances of incurring a change penalty) and get in the habit of leaving the hotel for free Wi-Fi and a reasonably priced breakfast. Either way, the hotels charging extra lose out.
So instead of “unbundling” their product and charging for all sorts of extras like the airlines do, hotels have generally been utilizing the old-fashioned way of increasing revenues: They’ve been raising room rates. Unlike hotel fees, which were essentially flat last year, room rate revenues rose 4.4% from 2011 to 2012.