Theoretical model and SWOT-analysis of a blockchain-based B2B marketplace to exchange non-refundable lodging reservations and thus minimize financial risk

Table of content

Executive Summary

Introduction

1 Problem Definition

2 Objectives

3 Methodology

4 Main Part
1. Definitions and current overview
4.1.1 B2B Online Market Place
4.1.1.1 Definition B2B Online Marketplace
4.1.1.2 Key metrics
4.1.2 Overview of the travel industry
4.1.2.1 Types of travel companies
4.1.2.1.1 Online Travel Agents OTAs (B2C) and Search
4.1.2.1.2 Supplier (Airlines, rental car suppliers etc.)
4.1.2.1.3 Retail (content aggregators offline)
4.1.2.1.4 Travel Management Companies (TMC) and Business Travel
4.1.2.1.5 Technology providers and GDS
4.1.2.2 Billing models of the travel industry
4.1.2.2.1 Merchant vs Agency
4.1.2.2.2 Merchant of Record vs Customer Direct
4.1.2.3 Merchant model: industry standards on financial operations
4.1.2.3.1 “Booked” vs “Stayed” billing
4.1.2.3.2 Collateral
4.1.2.3.3 Reconciliation and write-offs
4.1.2.3.4 Service and support for multi-vendor environments (24/7, supplier relations, scalable backend systems)
4.1.3 Overview blockchain
4.1.3.1 Origins and general functionality (blockchain/Bitcoin)
4.1.3.2 Ethereum: Smart Contracts extension
2. Theoretical model of a B2B hotel reservations exchange
4.2.1 Market-place sizing
4.2.2 Prerequisites for marketplace participants
4.2.2.1 Business requirements
4.2.2.1.1 Pre-verification by Suppliers/Insurers
4.2.2.1.2 Business relationships to other marketplace participants
4.2.2.1.3 Escrow
4.2.2.2 Technology requirements
4.2.2.2.1 Source code
4.2.2.2.2 API interfaces/connectivity
4.2.2.2.3 Storage technology
4.2.2.2.4 Security systems (PCI DSS)
4.2.2.3 Operational setup
4.2.2.3.1 Initial setup
4.2.2.3.2 ICO and initial FO$ credit awards
4.2.2.3.3 Achieving “consensus” and master validation nodes
4.2.2.3.4 Adding/removing product and recording sales on the distributed ledger
3. SWOT-Analysis of marketplace
4.3.1 Strengths
4.3.1.1 Decentralization of transactions
4.3.1.2 Existing partner basis and industry knowledge
4.3.1.3 Additional income stream for the marketplace provider
4.3.1.4 Easier to enforce contract obligations (via Smart contracts)
4.3.1.5 Cost reduction of reconciliation/accounting procedures
4.3.1.6 Large-scale enterprise resources
4.3.2 Weaknesses
4.3.2.1 Blockchain scaling/speed limitations
4.3.2.2 Additional budget and needed resources
4.3.2.3 Duplicate bookings off the chain
4.3.2.4 Blockchain security risks
4.3.2.5 Escrow dependency
4.3.2.6 Operational risk and financial cost for switch over
4.3.3 Opportunities
4.3.3.1 USP for market place participants to increase customer retention/satisfaction
4.3.3.2 Currency fluctuation risk minimization
4.3.3.3 Future public open marketplace
4.3.4 Threats
4.3.4.1 Possible issues from legal regulations
4.3.4.1.1 Privacy data and General Data Protection Regulation (GDPR)
of the EU
4.3.4.1.2 Packaging Directive
4.3.4.1.3 ICO regulative aspects
4.3.4.2 FO$-token exchange rate fluctuation
4.3.4.3 Visibility of sensitive financial information of competitors
4.3.4.4 Push-back from inventory suppliers
4.3.4.5 Adoption/knowledge on blockchain in travel industry
4.3.4.6 Competition: Alternative Open blockchains

5 Conclusi
5.1.1.1 Initial variant: Private Ledger (only limited partner base)
5.1.1.2 Extended variant: Multi-supply and public ledger model
5.1.1.3 Final conclusion

List of Abbreviations

List of Tables

List of Figures

Bibliography

6 Appendices
1. ITM-Approach
6.1.1 General Economics
6.1.2 Strategic Management
6.1.3 Marketing
6.1.4 Financial Management
6.1.5 Human Resource Management
6.1.6 Business Law
6.1.7 Research Methods / Management Decision Making
6.1.8 Soft Skills / Leadership

Executive Summary

The following master thesis paper explores the possibility of resolving a major issue of the travel industry around how (non-refundable) reservations on lodging proper- ties could be exchanged in a B2B market place by using blockchain technology as the exchange layer.

To provide the reader with background knowledge first an introduction into defini- tions around B2B marketspaces, the travel industry and blockchain are being made. Here the commercial structure of volume-related cost metrics of such B2B market- places are explained. This is then followed by quick introduction into the travel in- dustry, its different distribution segments online (like OTAs) and offline (Retail) and the related suppliers and technology around them.

For a deeper understanding on the financial background operations the two different main billing models are explained: Merchant versus Agency. Whereas the Agency model primarily is based on the traveler settling the bill himself upon check-out, the Merchant model works on collecting money upfront from the traveler (with the effect of usually Merchant rates being cheaper than Agency rates). This further gets seg- mented into who takes the payment (supplier or B2B partner) and how the financial setup works in terms of payment guarantees, billing cycles and dispute handling.

Blockchain technology is explained in the next chapter, from its first known function- ality as a pure cryptocurrency (Bitcoin) to the next step of technological evolution where the payments of those crypto currencies are then tied to a set of business rules called “smart contracts”, rooted in the Ethereum blockchain technology frame- work.

The first step of then building the theoretical model was an analysis of data to find out the addressable market size, which is roughly in an USD billion-dollar annual turnover range. This then was followed by setting up an according market place framework, supported by a set of technology requirements on blockchain operations in order to create a stable and clearly structured business environment. Described steps here are the initial setup, the distribution of the “FO$” crypto coin, overall mar- ket place functionality where underwriters would guarantee stability of both used crypto and fiat currencies.

Based on this theoretical model a SWOT-analysis was then conducted, considering the various internal and external success and failure factors for this framework.

Key internal strengths of the model are the decentralization of the transactions and thus avoiding data base silos with different, not aligned data levels. That an already strong existing B2B environment in travel should be utilized is also deemed as a major advantage. Generation of an additional income stream for the market place provider and cost reduction for current very inefficient reconciliation processes is a further plus. And finally enforcing contracts should be less manual as the exact busi- ness rules are part of the code itself and thus are strictly to be followed.

Perceived internal weaknesses cover the current technical limitations of blockchain technology in terms of transaction speed, security risks by forced fork-offs of the main ledger or duplicate bookings when the principles of the ledger are not being upheld, additional cost for setting up the project internally and certainly also a de- pendency on third-party escrow services.

The most important of the external-shaped opportunities then would be a clear USP for B2B Travel companies giving their clients an ability to re-sell a reservation where they otherwise would have to pay a full or partial penalty fee. Also, a certain guar- antee against currency fluctuation by adding escrow services might be available to help B2B partners mitigate the risk. The possibility of a wider, open-for-all market space (both B2B and B2C) might also then hold a bigger opportunity in the future here.

External threat factors also need to be considered: blockchain projects face a myriad of legal challenges, from privacy data protection laws, to new legislation on travel products and the currently hardly regulated process of issuing cryptocurrencies via an ICO. Furthermore, keeping the “FO$”-token currency stable will require careful planning on possible influence factors and use cases. Participating B2B partners might also have second thoughts on how overall sensitive financial data might be made available to competitors by simply analysis of the markets place transactions.

Based on the SWOT-analysis the conclusion of the paper then holds the authors thoughts on establishing a closed, private B2B ledger first, consisting of a selected and vetted participant group.

The most important success factors are being reviewed again and then furthermore also an extended public model (which would also include other suppliers and prod- uct) with a fully open access to both marketplace and “FO$”-cryptocurrency is re- viewed.

Introduction

With the evolution of the Internet at end of the last century we have seen a myriad of new business types emerging based on this new technology. One of those were B2B online market places which will likely have a global business size of almost 7 trillion dollars by 2020. (de Panafieu, 2017, p. 5)

At the same time, a profound change was seen in the travel industry where a move from traditional brick and mortar travel agencies to “online travel” had taken place, where now an exotic vacation was then finally just a few mouse-clicks away. The author wrote a bachelor thesis in 2007 on this topic and it did contain some bold predictions for the future: a massive market consolidation through establishing “Mega Portals”, new curated offers for certain target groups and most importantly: the inclusion of “Time-Share” properties which later on became an actual reality via the stellar rise of travel online booking portal AirBnB – thus back in 2006 the author was able predict some trends spot on, however also falsely guessed on others (like whether oil price will be a major factor, which it did not turn out to be) (Oberhummer, 2007)

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 - Bachelor Thesis Fritz Oberhummer 2007

As the author in his professional career has set a focus within the B2B arm of the travel industry, it was his natural desire to explore a relevant future topic which com- bines both online travel technology and the B2B aspect of this business. Especially travel technology has undergone a major transformation within the last five years, allowing a scalable basis for decentralized real-time travel data networks: cloud computing, solid-state technology, ISP speed and finally robust open-source soft- ware are the foundations of this.

This foundation serves for a new type of interconnected B2B travel networks which in turn could allow new technology and business models via permanent information exchange between participating peers.

The emerge of the blockchain technology principle, which is based on a general ledger for transactions and can serve as a decentralized, secure and smart con- tracting solution between peers in the network, is nothing short of being the next step of evolution in travel and many travel companies are in early exploration stage of use cases. As an example here the travel giant TUI could be named where its CEO Fritz Joussen announced in 2017 that TUI will put a major focus on blockchain technology in the future to resolve inhouse issues (Montali, 2017)

And the author firmly believes that with this technology framework one of the biggest pain points for the travel industry might eventually be tackled: paying penalty fees for non-refundable lodging reservations. These charges are always a major source of friction between lodging companies, travel intermediaries (suppliers), travel agen- cies (both online and offline) and, of course, the end customers. Here it is always simply the question of “Who will pick up the tab?” and the time and effort spent between all those parties for any of them to avoid or charge fees.

The question on who “picks up the tab” might never be fully resolved; but modern technology could deliver an answer by building a decentralized B2B network where such hotel reservations could be exchanged openly between any participants. The following master thesis shall then provide a possible answer to this problem by cre- ating a theoretical model of a Blockchain-driven reservations exchange marketplace and the subsequent analysis of the model.

And given where the overall discussion around blockchain and travel seems to be heading to (Bujarski, 2018), the author thinks it will just be a question of time before a new kind of marketplace, based on this technology, will created by any of the travel companies out there…

1 Problem Definition

The author tries to address the cumbersome and problematic process of travel com- panies not being able to swap or re-sell existing lodging property reservations through current technology setup where a no-show or cancellation fee will apply.

2 Objectives

The objective is to create a theoretical framework which specifies the technical, legal and commercial setup to operate a blockchain network to create a B2B marketplace where hotel reservations can be exchanged. This model shall then be examined by further analysis.

3 Methodology

First a data analysis of the business opportunity in terms of annual USD trading volume of lodging properties was made. The focus was set on industry available data from travel organizations, research companies and public domains.

In the next step, the different underlying frameworks and possible market place par- ticipants were examined, analyzed and basic process diagrams set. This served as the further basis for a set of informal, non-recorded interviews with industry experts.

A theoretical model on what the addressable marketplace size was then estab- lished, also consisting of the pre-requisites for participants and the network itself.

The combined information was then reviewed via a SWOT-analysis (Berry, 2018) where internal (strengths, weaknesses) and external (opportunities, threats) factors of the framework model were be reviewed.

4 Main Part

1. Definitions and current overview

4.1.1 B2B Online Market Place

Initially the phrase “B2B Online Market Place” was heavily used during the “Dot.com” period (around the year 2000 and after), primarily as a buzz-word for the- oretical models (Dai and Kauffmann, 2002), and not so much as a realistic descrip- tion of the soon to emerge B2B online market place systems.

Hence far less in-depth informational material can be found in recent years on the theoretical part, but rather only the focused in-depth analysis of existing sys- tems/companies and their respective issues and strengths. In the authors opinion, this here origins from a large-scale market consolidation that has put three compa- nies in the middle of the global B2B market focus: Alibaba, Flipkart and the B2B division of Amazon (Peermohamed and Krishnan, 2017) and thus naturally a lot of emphasis had been set on reviewing those players.

Furthermore, companies have focused on technology changes where E-commerce systems are interconnected with above mentioned markets and at the same time also via interfaces to inhouse online shop systems, ERP interfaces or even POS for brick and mortar sales (Thürling, 2015).

Thus, the author here thinks that in today’s Internet-dominated world the term “B2B Online Market Place” has just simply become just a part of a larger overall-intercon- nected Online- and Offline business model framework that both SMEs and large- scale corporations use to various extends.

Nonetheless, to still give a bit of background information for readers on the topic the author would like to give an overview of definitions and theory around online B2B marketplaces in the next chapter. He deems this to be a crucial part of understand- ing the wider concept, especially when putting “traditional” B2B online markets in context to the newer peer-to-peer models proposed by blockchain technology in later parts of this thesis.

4.1.1.1 Definition B2B Online Marketplace

The phrase here consists of two parts:

1. B2B

These transactions are taking place between companies only (and not end clients) (investopedia.com, no date), very often in higher product quantities and unfinished products. Usually these transactions have different legal re- strictions in terms of return policies, warranties and other legal frameworks around them, especially on cross-border transactions where different legal systems might apply (Edwards, 2005, p. 5)

2. Online Marketplace

Abbildung in dieser Leseprobe nicht enthalten

Figure 2 – Samples of Hospitality

Onlin e Marketplaces - Source: versionone

An Online Marketplace is defined as a technol- ogy based online environment where inter- ested buyers can meet an aggregated number of sellers and then also fulfill their wish of busi- ness transactions with them via that platform.

The main reason for existence of such market- places is that they provide an easier solution for both buyers and sellers to do business and more so to find each other in the first place to do just so. (Wertz and Tran Kingyens, 2015, p. 6)

4.1.1.2 Key metrics

Usually the main metrics of B2B marketplaces are the following (Wertz and Tran Kingyens, 2015, p. 8):

- Transaction volume (in currency or item count)
- Turn-over ratio
- Fees

In a B2B market environment those three metrics are usually tightly correlated to a definition of profitability of the market place itself (for both participants and the pro- vider). The usual type of fees (and subsequently financial models) here are listing fees, transaction fees or a combination of both.

Although each of those fee systems each has its own advantages and disad­ vantages, a clear trend of online-based travel industry is that transaction fees are becoming the favorized revenue model.

The author like to name such a transition of revenue model when its employer Ex­ pedia Group acquired the alternative lodging platform homeaway.com in 2015 for $3.9bn (Schaal, 2015a).

A big part of the acquisition was the announcement of transforming HomeAway's listing-based business model to a transaction-based approach which initially trig­ gered strong reaction from participating home owners (O'Neill, 2016). However, by now the transaction fee model is so widely accepted, due to competitors like AirBnb, Tripadvisor and Booking.com also working with the same business model, that this has become the current standard and the listing-based fee model is fading out.

4.1.2 Overview of the travel industry

To better understand possible marketplace participants (and their needs) a defini­ tion of the most important travel businesses will be given in the next chapter.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3 - Types of travel companies- Source : Author

4.1.2.1 Types of travel companies

4.1.2.1.1 Online Travel Agents OTAs (B2C) and Search

Those companies came into place first when the Internet arrived and promised to be a cheaper, easier-to-book and more direct interface for travel bookings. Expedia and Travelocity both launched in 1996 and are great examples of the early days where a complete vacation (flights, hotels, cars, insurance and tours/activities) can be booked in a one-stop shop fashion.

4.1.2.1.2 Supplier (Airlines, rental car suppliers etc.)

The supplier segment consists of any travel company that owns physical assets and the according services which are then provided to end clients. These are the means of transportation, hospitality and activities that are usually part of an travel arrange- ment.

The types of companies here consist of a mix of large, global conglomerates (Ex- amples: Lufthansa Group, American Airlines, Marriot, Enterprise or Hertz rental cars etc) and local, smaller scale focused agencies (local tour guides, regional tourism organization, smaller hotel chains etc). Here currently a market consolidation is go- ing on, mainly driven by price pressure and low-cost fares across the industries. A great example is the merger of the two leading US-based low cost carriers Alaska Air and Virgin Express in 2017 (Alaska Airlines, 2018)

Out of this pressure then stems the determination of those players to absolutely control their own destiny and thus this results into a certain aversion to third-party distribution channels (like OTAs). Main reason here is the associated commission fee costs, which can be quite substantial, and be as high as and over 20% of the booking value.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4 - Average Commission rates for hotels - Source: Skift Datasheet 2017

Especially airlines have battled this distribution cost by cutting down on commis- sions – or eliminating them completely and even adding extra booking fees to coun- ter attack (Schaal, 2015b).

Furthermore, OTAs and others create unwanted competition in online marketing channels (such as Google) by creating targeted ads for the services of the suppliers available on an OTA website. This in turn drives up the prices for clicks and cost of acquisition for transactions online (Karthick, 2014).

Thus, the best-case scenario is that the suppliers want to have full control over trav- elers via direct bookings only and then to sell additional services from 3rd parties to complement the travel purchase.

This is known by the industry term “Cross Sell” and achieved via displaying product from third parties on checkout-pages, manage-my-booking areas, pre-flight Emails, newsletters, retargeting landing pages etc.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5 - Cross-sell widget from hotels.com for airlines – Source: hotels.com

Even beyond the cross-sell opportunity many of the suppliers (especially airlines) have undergone a radical change by changing their websites to become a “one-stop shop” and thus go from a pure technical online booking facility over to an all-over encompassing travel experience (Schaal, 2013)

To apply further pressure on third-party distributors the suppliers often offer loyalty incentives such as points programs across all products, special member-only rates and short-term low fare sell-offs.

However, suppliers still might need the reselling power from partners global distri- bution networks to make sure that they can unload their inventory slots completely. Thus, in industry circles the term “the relationship between those different parties it is not black or white, but rather layers of grey” has become a common phrase to describe this complicated setup.

As much as there is a wish of the travel and hospitality industry that the middleman here disappears, this rather looks like an unlikely scenario. Instead new business models, such as “Mega Online Travel Retailers” (Gibergues, 2018, p. 7) or “Travel Market Places” (Gibergues, 2018, p. 12) will likely be established and thus the rela- tionship between suppliers and distributors will further be tightened.

4.1.2.1.3 Retail (content aggregators offline)

This encompasses the brick-and-mortar businesses which were the main part of the travel industry before the arrival of the Internet age. Even though early on predic- tions were made that this part of the industry will vanish (and would be replaced by online shops), it seems that the decline in last years has not been as fast or strong as expected or even in parts reversed (see graph below). Retail is still playing a major role, for example in the US market share still was at 52% at end of 2017 (Sileo,

Abbildung in dieser Leseprobe nicht enthalten

Table 1 - Number of Travel Agencies in Germany, 2002-2016

These businesses usually run on different aggregator software which perfectly serves the needs of an agent sitting in front of a computer screen and interacting with clients either in person or via other channels (phone, social media etc). The final product is usually a travel package which includes different travel components (very often combined from different sources) and an agency fee placed on top of the package.

There is even such a thing as a “online to offline brand” where big brands such as Expedia (Expedia Cruiseship Centres) or the Chinese online travel giant Ctrip (O’Neill, 2017a) are building up offline franchise travel stores in order to make sure that part of the market is also captured.

There seems to be a certain need to get some expert advice on destinations and to book complicated trips that online become a real hassle when multi-destination flights, cities and other transport are involved. (Jet, 2017)

In any case major research institutes like Phocuswright predict a reemerge of offline which the author can also clearly see in his day-to-day work experience.

Abbildung in dieser Leseprobe nicht enthalten

Figure 6 - Development of sales channels in the US - Source: Phocuswright

4.1.2.1.4 Travel Management Companies (TMC) and Business Travel

The arrival of the Internet also massively changed on how business trips are orga- nized, conducted and expensed. Whilst in the pre-internet age it usually was an associated travel agency who took the booking orders from a secretary, the new age then allowed a more direct way to also book travel at a shorter notice, compare prices and availability without the help of a travel agent. This then also created much bigger flexibility and possible cost savings.

The below image shows the original patent from SABRE on an electronic travel management system which functions have in essence not changed much in today’s world. (Vance et al., 1997). Functionality for planning and managing trips, over dif- ferent interfaces and integrated functionalities (in today’s world mostly mobile appli- cations) are still key to provide a seamless (and by the employer controllable) travel experience for any business traveler.

Abbildung in dieser Leseprobe nicht enthalten

Figure 7 - Sabre Patent on TMC in 1997 - Source: US Patent Office

On a global stage it is pretty much only handful companies who control the corpo- rate travel markets: American Express Global Business Travel, Carlson Wagonlit, BCD, FCM and Expedia-operated Egencia. (Grant Thornton UK LLP, 2016, p. 12)

There are also other smaller players, but in last years a large market consolidation is under way, with the most recent acquisition of Hogg Robinson Group by Ameri- can Express GBT (for around GBP 400 million) sending shockwaves throughout the industry (Fox, 2018).

Especially in this segment the technology advances of creating an interconnected travel experience will further change on how those companies operate and whether they have a future. Mobile device full integration as a “traveler compan- ion” (Gibergues, 2018, p. 10), voice search and automated chatbots are becoming more and more of a standard here (Sheivachman, 2018).

4.1.2.1.5 Technology providers and GDS

The very beginning of global interconnected travel systems comes from airlines building out flight booking systems in the 1960s and 1970s which allowed direct ticket bookings electronically. The forerunner here was Sabre (created by American Airlines), followed by Apollo (United Airlines). When TWA introduced their PARS system in 1976 the name “Global Distribution System”, or in short “GDS”, was born. Europe had its “Amadeus” system founded by an alliance of airlines around Lufthansa and the local competitor Galileo was founded by a host of other different European Airlines (Warner, Quadri-Felitti and Chandnani, 2010)

The foundations of making this technology available for the Internet age were laid by American Airlines creating their “eAAsy Sabre” software which allowed users to book via a personal computer interface. Eventually then cars and hotels were added and a separate company then created, called Sabre Interactive (Schaal, 2017, p. 6).

The main idea behind those systems was to be a hub connection point between airlines, hotels, car rental suppliers and other suppliers on one side and the end- client interfaces of travel agencies (and other bookings services) on the other side.

The GDS companies, despite the arrival of the Internet, are still going on strong today and SABRE, Galileo, Travelport and Amadeus were able to largely adopt the new travel technology and still play a major part in the overall offline ecosphere.

Currently Amadeus here leads the way with a market share of 42.4%, followed by SABRE at 36.2% and Travelport with 21.2% in 2018 (Jonas, 2018).

Inspired by those GDS-companies, and as a measure to break the gridlock that they have on the market, a myriad of travel-technology companies have been established in the last years. The product offering here goes from a fully-integrated offline/online solution on template basis to pure content aggregators combining different product feeds into one API.

A major advantage of such players is the ability to build bespoke solutions for each travel segment based on suppliers having now widely available interfaces (APIs) and cost of computing decreased by cloud service hosting services such as Amazon Web Services (AWS). With this travel companies can outsource their tech and host- ing operations and can concentrate more on scalable further growth of business.

Abbildung in dieser Leseprobe nicht enthalten

Figure 8 – Widely known travel technology companies – Source: Author

4.1.2.2 Billing models of the travel industry

In the authors opinion any technology change in this industry should be based on considerations how the business landscape around it and according processes work. This also because there are certain, historically grown business models which have prevailed over time and have set a standard on how travel companies can work together on the billing side on a global scale.

The two known billing methods here are “Merchant” and “Agency” billing.

4.1.2.2.1 Merchant vs Agency

Those two models usually define with which business model the travel company contracts with its suppliers. Both have advantages and disadvantages and the two most dominant players in the online market (Expedia Group and Booking Group) have built their core model on one of each. (Uenlue, 2017)

The Merchant model is the classic industry model where product allotments get bought in bulk from inventory providers (such as lodging operating companies) and this usually happens quite some time upfront. Through guaranteeing those usual high-quantity allotments early the travel companies then can negotiate better prices than the standard, publicly made available prices of suppliers.

This inventory is very often resold to other travel companies. In the lodging industry this reseller model is very often just known as the “bedbank model”, a phrase also being a core part of the marketing message from the globally leading bedbank-type inventory provider Hotelbeds. Operating under this model any travel company then itself becomes a “supplier” (for clarity this phrase will be used in the rest of this thesis when the model applies).

Abbildung in dieser Leseprobe nicht enthalten

Figure 9 - Hotelbeds homepage with claim - Source: hotelbeds.com

In exchange of having the inventory slots guaranteed the travel company then can ask for upfront payment of interested travelers which can give a cash-flow ad- vantage over competitors. (The financial model for suppliers will be explained in 4.1.2.3 “Merchant model: industry standards on financial operations”). Also, usually those rates then can be bundled with other products (flight, ship, rail, car) and a wider variety of combined travel products offered. Those special rates are usually then called “package rates” and do have certain restrictions tied to them (Expedia.co.uk, 2018, p. 14)

The big disadvantages of the bed bank model are a certain inflexibility for lodging properties to change rates and allotments quickly and thus not being able to in- crease booking values in a compressed market situation.

For travel companies using this model there is always a certain risk that the inven- tory slots do not get sold. Prices then might need to be heavily discounted close to the allotted check-in dates to unload all the guaranteed inventory. In a worst-case scenario some (or all) of the inventory does not sell at all and the bedbank faces cash-flow shortages for having to pay the lodging property which in turn could even lead to a bankruptcy (as it was the case with the bedbank Transhotels going bank- rupt in 2014 with a massive EUR 50mio debt (travelmole.com, 2014)).

The agency model in turn is rather a fixed commission model where the supplier sets the final price upfront and payment of services is usually provided past check- out (or past rendered services) directly at the lodging property. The supplier then pays the travel provider (“agency”) a fixed, pre-negotiated marketing fee afterwards. In general, this allows the lodging property to be very transparent about their pricing to their end clients (in contrary the Merchant-model rates are often marked-up with- out the end traveler knowing what the initially provided rate was).

Abbildung in dieser Leseprobe nicht enthalten

Figure 10 - Expedia’s Merchant model ("Expedia Collect") and Agency Model ("Hotel Collect) - Source: Expedia

It also helps a 'b'avelcompany to quickly scale up inventory across the globe as the fee collection process is much more simplified - the online travel giant Booking Group has built its $100bn business on this model and thus was able to become one of the biggest online travelproviders in the world.(Uenlue,2017,p.9)

This model has one major disadvantage: as the travelers do not need to give any payments upfront,and/or usually those rates are not part of a travelpackage,there is less pressure on the travelers to uphold their reservations (also as OTAs push the model of a traveler just upholding a reservation for •inspirational" purposes (Delgado, 2016,p.2))

The above then combined with quite liberal cancellation policies (up to 72 hours before without any charges) creates very high cancellation rates which makes it much harder for the lodging property sell out the property at 100% occupancy level.

An external view on the consumer brands of Expedia and Booking Group below from the Spanish Mirai consulting group shows the major differences between cancellation rates via the different booking chanels.

The big difference here between Expedia and Booking is that Booking.com's business model is currently an •agency model• only which results in much higher cancellation rates (this is also known to the author from having different conversations with industry experts over the years).

Abbildung in dieser Leseprobe nicht enthalten

Figure 11 - Comparison from 140 hotels in Spain on Cancellation rates on booking.com and Expedia in 2016- Source: Mirai.com

4.1.2.2.2 Merchant of Record vs Customer Direct

One more important aspect is who takes payment from the traveler and then sub- sequently owns the traveler from a customer care perspective pre-, during and after the journey. Whilst this largely has to do with financial operations (to be discussed in next section), a big part here is the question on who owns and/or controls the traveler’s personal data here.

This is handled in the following way:

Merchant-inventory suppliers usually let the travel companies take the payment from the end client thus letting them become the “Merchant of Record” for the transaction. In turn then, those companies need to pay the supplier who then in turn pays the inventory provider (as explained in 4.1.2.3.1 ““Booked” vs “Stayed” billing”).

Abbildung in dieser Leseprobe nicht enthalten

Figure 12 -Merchant of Record principle – Source: IATA

Handling the traveler is being made possible by those travel companies having their own customer support call centers (usually first-level support for general inquiries and second-level support for any urgent or complicated scenarios).

For bigger, international players the caveat is to have coverage around the globe 24 hours a day, seven days a week. This usually is achieved my multiple call centers around the globe and a combination of in-house and outsourced resources. When getting contacted by the traveler the travel companies then first try to assist the traveler themselves and for further steps get in touch with the supplier via an agent- to-agent support system (electronically via agent tools/Email or very often still simply via a phone call).

In the Agency model the situation is different: hotels need to make sure they can take the payment from a traveler even if payment guarantees (such as credit cards) are not given or are declined, hence the hotels will need to have the possibility to contact the end client via all known channels: phone, fax, E-mail and postal. After all, here it is the hotel who takes the payment and usually not the travel com- pany.(Lodging Partner Services, 2015)

As an alternative also the “Customer Direct” model exists where the supplier (or lodging property) deals with the end client directly and the travel company only pro- vides minimal customer support. As this usually comes with extra cost to both end client and travel company, (Burg, Carlo and Head, 2017, p. 6) a lot of companies rather try to operate under the “Merchant of Record” model.

4.1.2.3 Merchant model: industry standards on financial operations

As the above-mentioned Agency model is quite simplistic from a financial point of view (inventory provider takes payment from customer after checkout and then pays the travel company a commission fee), the Merchant Model in contrary is much more complex, especially when the travel company also acts as a supplier.

When the travel company takes payment themselves (the “Customer Direct” model, as described in section 4.1.2.2.2 “Merchant of Record vs Customer Direct”) the pro- cess is quite simple:

- The inventory had been bought/guaranteed upfront by the travel company
- An end client books and pays the travel company at time of booking
- The travel company pays the inventory provider past check-out date (quite often this is done via a virtual credit card setup)

To illustrate this better please see the official scheme from Expedia Group below:

Abbildung in dieser Leseprobe nicht enthalten

Figure 13 - Merchant model of Expedia Group, the process explained to hotels

When the travel company itself becomes a B2B reseller of the inventory (then as previously stated becomes a “supplier”), the Merchant-of-Record is then a 3rd party travel company (distributor) who takes the payment of the end client and in turn then needs to guarantee the payment of bookings to the supplier.

A reason why many travel companies work with this scenario is that they do not need to build up their own supplier purchasing teams (which will face stiff competi- tion on the market, especially from both Expedia and Booking Group, as they own a lot of the available inventory slots globally and thus naturally have a tight grip around hotel contracts (innfinie, 2012))

Furthermore, they do not need to pay or guarantee for a massive amount of inven- tory upfront to have a relevant product offering. And lodging properties in turn get access to a global distribution network which they under normal circumstances would not have if they go out on their own (Yieldplanet, 2015).

4.1.2.3.1 "Booked" vs "Stayed" billing

The general billing process looks as following (Edgar, 2018):

Abbildung in dieser Leseprobe nicht enthalten

The timing on when payment needs to be made then can be split into two main models used by the travel industry:

a. "Booked" means that payment needs to be made in that moment when the traveler has made the booking. Here usually bookings are compiled over a certain time period and then subsequently paid to the supplier within a certain time period (usually this is weekly, bi-weekly, monthly, bi-monthly or even half-annually/annually). An example for industry lingo here would be "7-7- booked", meaning the bookings from the last 7 days, payable within 7 days.
b. "Stayed" here means that payment only needs to be made after the traveler has consumed (checked out) the travel product. Other than that, the same principles as "booked" is to be applied: bookings will also be compiled and are then payable within a certain time period. So here "7-7-stayed" would mean all checked-out bookings of the last 7 days, to be paid within 7 days.

4.1.2.3.2 Collateral

Naturally any travel company would prefer the “stayed” billing model as it then has a major advantage in terms of cash flow as it then can stretch the time period be- tween “accounts receivable” (customer pays for booking) to “account payable” (sup- plier’s final payment date) and then to use the liquidity to finance other areas of the enterprise (such as wages, marketing, technology etc.).

In essence any supplier here becomes a creditor which lends out a monetary-tied value (hotel inventory slot) to a third-party, thus taking on a financial risk in case the third party might have cash flow issues or even goes into insolvency.

Thus, suppliers here usually ask their distributors for financial guarantees to make sure that they are covered in case the distributor runs into financial trouble. Basis of those guarantees are internationally known and accepted standards and frame- works, such as the “Basel III” framework from the WTO (Auboin, 2010).

For example, only certain banks who fulfill standards under the “Basel III” frame- work, and have a certain creditor rating from one of the big rating agencies (such as Standard&Poor’s), are accepted for payment guarantees (also called “collateral”).

As suppliers are conscious that receiving the most straightforward form of collateral, a cash deposit, can drastically cut into a companies cash flow, there are usually then also other alternative collateral types such as following:

- Letter-of-Credit: this is a standardized, international method to guarantee payment (Standard Chartered Bank, 2018)
- Trade insurance: the market leader here is Euler Hermes here who had a market share of 36.2% in 2017 (De la Pontais, 2017) for overall trade insur- ances and from the authors experience/industry knowledge this will be well above 80% for the travel industry.
- Bank guarantees: usually only applies to certain countries as Letter-of- Credit is here preferred due to the internationally normalized standards

[...]