Hotels are being warned that booking cancellations are on the rise, as consumers become used to exploiting more flexible terms offered during the pandemic.
The issue hit a peak at key periods in the summer, as the UK government switched overseas holiday destinations onto its safe list – and frustrated Brits cancelled city centre visits for the alternative of a trip to the Mediterranean. There have also been growing concerns among restaurant operators, as no-shows hit levels of returning business through the summer.
But with the hope that cross border travel is on a sustained return, hotel groups are looking to wean consumers off their Covid flexible cancellation policies.
Major hotel groups loosened their cancellation policies in response to the pandemic, but by last autumn were returning the policies to earlier levels of restriction. Most of the big brand groups such as Hilton and Marriott now offer cancellation up to 24 hours before arrival, without penalty – but only for guests who have committed to the fully flexible reservation, usually at a premium price. In mid-July, Choice hotels formally revised its policy, requiring cancellation notice a minimum 48 hours prior to arrival – with the period halved for loyalty programme members.
Michael De Jongh, chief commercial officer of online marketing specialist Avvio, said the problem was felt most sorely at the end of July, as consumers were suddenly able to go abroad for a break, telling The Independent: “Guests are cancelling their bookings at the last minute and going abroad instead – some hotels are seeing cancellation rates of 50 per cent or more. They are hitting the city centre hotels hard.”
Avvio says cancellations have been consistently rising over the last few years. In a recent white paper, it warned: “Analysis of a subset of 2.3 million direct booking transactions across 400 independent hotels shows cancellation rates rising steadily every year. The share of direct booking revenue lost due to cancellations has risen from 11% in 2016 to 15% in 2019.”
More worryingly, Avvio predicted that by 2022, as many as 20% of reservations will be cancelled, as a combination of factors act to encourage the behaviour. Covid has, they warn, led consumers to expect flexibility in bookings; and this is likely to combine with efforts by the OTAs to defend or increase market share, with offers such as free cancellation.
One root cause of the current situation has been the behaviour of OTAs, which introduced “free cancellation” as an option for hotel bookers. The pain-free booking, having been offered, can now lead to a situation where guests make multiple bookings for a trip, choosing where to stay at a later date.
“A steady creep of the same buying behaviour is now evident on the direct channel,” warns Avvio. It says that in 2021, up to 7% of direct bookers hold multiple hotel bookings for the same stay dates.
Avvio’s data shows couples are the most likely to cancel reservations, and a high number of cancellations take place in the week leading up to the trip date.
One answer from Avvio is its Allora service, designed with artificial intelligence that helps to personalise the online booking experience, improving booking performance and also reducing cancellations. The company also notes that the data it has can be used to reduce cancellations using a combination of other customer management techniques.
The online travel agents, having promoted the benefits to the consumer of free cancellation, tell hotel partners to use the offer judiciously.
On its partner site, Booking.com notes: “Though plans might have to change, we want to encourage guests to postpone rather than cancel. That’s why – following Coronavirus-related cancellations and whenever possible – Booking.com will fund incentives for guests to rebook the same partner property.”
Among the OTA’s top tips for hotels, are to manage cancellation policies, and “consider offering non-refundable rates”
It advises hotel partners: “Non-refundable rates are very attractive to bookers and can increase your visibility on search engines. On average, we see that adding a non-refundable rate plan can help reduce cancellations by at least 9% – and increase bookings by at least 5%.”
The OTA notes that a quarter of cancellations are within 24 hours of a reservation being made. “By setting a grace period and waiving cancellation fees for guests who cancel 1, 4 or 24 hours after making a booking, you can reduce no-shows by 20%. This will significantly reduce the manual work involved in managing cancellations and reselling rooms, and help you secure revenue as quickly as possible.”
One concern is that AI will find its way into the OTA booking machines, allowing consumers to cancel and rebook a hotel room, should the hotel’s pricing algorithms reduce a room rate after a reservation is made. This concept has already been tried by platforms such as travel booking site Kayak, which serves up alerts should flight or hotel room prices drop.
HA Perspective [by Chris Bown]: The pandemic forced all of us to move into a world where arrangements could change at short notice. And hotels, along with other businesses, reacted to that world, by being more flexible too.
But now’s the time to nip the flexible, easy cancellation habit in the bud. It’s a habit that doesn’t only hit hotels, it afflicts restaurants, where for some, no-shows have had a major impact on trading.
How? Well, there are plenty of options. The direct booked budget hotel brands don’t have a problem: they offer a menu of choices, with the cheapest booking which is paid on reservation, to other more flexible choices for a price premium. When Whitbread introduced their flexible rate, then CEO Andy Harrison noted it had improved revpar overall.
And as Booking notes, hotels don’t have to follow the free cancellation route. Not everyone is making up their trip as they go along; and so they won’t take offence is asked to make a payment up front. If required, a separate covid-19 refund guarantee can, if still needed, be offered separately to the main reservation/cancellation policy.
Additional comment [by Andrew Sangster]: Why has it taken so long? Airlines have been offering differential pricing for flexible versus fixed date fares for years. And yet the introduction of this approach is presented as “innovation” by the hotel sector. Belated catch-up would be more accurate.
Partly this reflects the complexity of the hotel distribution model but it is also the product of outdated technology at the back end of booking systems. The likes of Avvio are changing things for smaller chains while the global brand majors are finally updating their own systems too.
This brings into focus an interesting question: who will win the booking battle in the recovery? Historically, since the advent of OTAs more than two decades ago, it would be a very easy bet to say it would be OTAs. Hotels were simply not up to the job.
It would be wrong to suggest that hotels have fully caught up – they haven’t – but are they close enough to make no difference? The answer is a definite maybe. At least for some.
Analysts at Bernstein have taken a look at the OTA business model and believe that the intermediary versus direct battle is now being won by direct. It is not an overwhelming victory, but sufficient to mean that OTAs can no longer drive revenue growth by squeezing out direct bookings.
In all fairness, squeezing direct bookings was the smallest of the three drivers of growth in the period 2010 to 2019 identified by Bernstein. For Booking and Expedia combined, CAGR revenue growth was 2.5% in the intermediary versus direct battle. The growth in online reservations at 7.5% and the market share gains of Expedia and Booking from other online rivals at 8.1% were much bigger.
The bad news for the two giant OTAs is that all three drivers of growth are forecast by Bernstein to collapse in the period 2021 to 2030. The best, online penetration, drops to just 2.0%.
Of course, these are forecasts and Bernstein are somewhat outliers with their negativity on OTAs. But it suggests that there is a chance that the recovery will be different this time, at least in regard to the dominance of OTAs.