Value Enhancement in the Thai Tourism Industry-Implications of the Online Travel Business

Abstract

Findings 1. Tourism contributes 6% of Thailand's GDP at 323.5 billion Baht - increasing at 6% per annum, in contrast to 3.4% for GDP (five-year compound averages); this topic demands close attention. 2. The value chain shows the travel intermediaries as a key extractor of revenues from end users and suppliers due to informational barriers. 3. Evolving from low-margin manufacturer to high-margin design and marketing provider is possible by developing domestic (online) travel intermediaries. 4. Travel intermediaries must progress from service of demand-supply matching and payment transferal, to demand enhancement, database analysis, and financial contract issuance for revenue and risk management. 5. The market structure of tourism is analogous to that of agriculture, railroads as well as airlines, characterized by high entry cost and low marginal cost with inadequate information flow between suppliers and consumers. This leads to destructive competition and/or intermediary exploitation, particularly when intermediaries have market power. 6. Dynamic pricing can be extended and managed by online intermediaries. 7. Contracts between intermediaries and hotel operators are comprised of pre-paid contracts and reserved allocations that may involve a fee analogous to an option premium; remaining capacity is sold on a free-sale basis analogous to commission sales. These contract prices exhibit characteristics of spot prices, forwards and options. 8. The agriculture industry resolved the price elasticity risk induced by market structure problems and separation of consumers from producers through the mechanism of forward and futures contracts. This approach offers great promise for the airline and hotel industries. 9. An analytical solution to the hotel operator's seasonal capacity allocation problem can be based on a linear/quadratic programming approach that determines the choice fixed or variable contracts and accommodates risk and seasonality. 10. An analytical solution to the intermediary's problem of assuring supply to meet predictable demand is based primarily of unconstrained maximization of expected revenues by choice of fixed or variable contracts. 11. Intermediaries can profit from economies of scale by developing and exploiting databases. This permits optimization of the agent's problem in contract choice as well as the hotel operator's problem, the latter solution being sold on a consulting basis to hotels lacking the capacity and expertise to analyze demand. 12. The key element in resolving contract choice is generating precise estimates of demand on a seasonal basis. Much of this is a combination of statistical analysis and personal experience and understanding of sub-markets. 13. An important ancillary aspect of the intermediary's operation is the design and marketing of alternative tourism experiences in order to balance seasonal disparities and increase domestic value-added capabilities. Specific recommendations 1. An intermediary should design and produce a scheduling tool, such as the example given, for the use of hotel operators in planning their capacity utilization. 2. An intermediary should select its own mix of supply contracts through a tool based on analysis of demand patterns and linked to revenue maximization, as indicated by the example given. The creation of futures markets with standard contracts in hotel rooms and air tickets would enhance the markets in both products and aid risk management.