SCREW the bastards. Superficially, that seems to be the negotiating strategy in travel distribution these days with a number of very public disputes taking centre stage in the trade press.  But dig a little deeper and there’s a much bigger story at hand.

And it is this –  a lack of consumer demand in key markets means the balance of power has finally shifted away from suppliers and is now firmly back in the hands of the very large distributors. Yes, the once reviled middleman is back in town.

The issue has been brought into focus over the past two weeks by Expedia, the world’s biggest online travel agent, dropping Choice Hotels because it wouldn’t agree to terms which included last room availability and rate parity.

Yet it’s even happening with airlines and big traditional travel agents. For example, Flight Centre outlets – and there are more than 500 in Australia alone – have effectively boycotted Singapore Airlines (SQ) in a dispute over commission.*

How the worm has turned. It has been years since distributors and retailers have been in such a powerful position – in fact you’d have to go back to the last major economic crisis in 2001, when demand also slumped –  to find a comparable scenario.

The major difference this time around, supposedly, is that suppliers are so much more mature about setting rates and adhering to yield management strategies. Back in the early 2000s, the travel web sites were used a dumping ground for distressed inventory.

It was a mess. Everything was so new many suppliers had no idea what they were doing.  In particular, some allowed a situation to develop where they were actually competing with, and getting beaten by, Online Travel Agents on key points such as price.

However as demand exploded during the boom years, suppliers made every effort to regain control of their stock through initiatives such as Best Price Guarantee. Many were also intent on ensuring that the most profitable rooms or seats – generally those last to be sold – are theirs alone to sell.

Now things have inevitably changed again. Thanks to the GFC, demand has tanked and suppliers need all the distribution channels they can get to fill rooms and seats that would otherwise stay empty. They have lost pricing and distribution power to the distributors.

This brings us to the dispute between Expedia and Choice Hotels, which neatly encapsulates the present situation.  The issue made the news because Choice CEO Stephen Joyce cleverly cast his company as David battling a corporate Goliath.

This is actually wrong – Choice is a damn big company and can look after itself – but believeable because there’s no question Expedia is increasingly being seen as the industry’s bad guy, a corporate bully charging commissions well in excess of 25% while demanding unfettered inventory access.

This perception has not been helped by the fact Expedia has barely said a word to the industry on the issue, leaving all the talking to Joyce.

But the reality is that while it’s easy to see Expedia in a negative light, based on what’s come out so far, it’s done nothing wrong here. Also, let’s not forget Choice had a choice. Maybe one it is now regretting.

Dara Khosowshahi, CEO of Expedia, finally explained his company’s approach in a results call with analysts.  

“This doesn’t signal any kind of a change in our overall philosophy as far as how we work with our hotel partners and what we’re looking at. It’s not really an issue of economics. It’s more an issue of our wanting rate parity and inventory parity for our customers.

“When our customers come to Expedia, we want them to know that they’re getting the best prices and certainly we’re insistent on that. To the extent that Choice doesn’t want to work under those terms, we won’t be doing business with each other.

“Those are terms that we work with, with our other strategic partners. They’re comfortable with it. We’re comfortable with it. So it’s nothing unusual from what I would say is typical practice for us and most of our other OTA competitors, so to speak.”

It may not be unusual, but the big difference now is that with consumer demand unlikely to rebound to pre-GFC levels any time soon, the negotiating power now firmly resides with the middleman.

And after years of being on the outer, make no question they will extract their pound of flesh. 

*In the  past year (August 2008 to August 2009) SQ’s official Australian market share has slipped from 12.2% to 9.4%. No word on why, though fair to say having Australia’s most powerful travel agency against you hasn’t helped.

Update: Choice and Expedia have now apparently kissed and made up.

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