Stephen Grambling explains how changes in booking habits could redirect billions in travel industry spending. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Stephen Grambling, Morgan Stanley’s U.S. Gaming, Lodging, and Leisure analyst. Today: how AI could transform hotel bookings and reshape the economics of the travel industry. It's Monday, November 2nd, at 10am in New York. So, we all love dreaming about and going on vacations, right? But you know what we don’t love as much? Scrolling through dozens of hotel listings, comparing prices across websites, contemplating where and how much we can use our rewards or maximize points or wondering if we’re getting the best deal for the right experience. So, imagine the relief of having an AI assistant understand you and your families’ preferences, all of your status and loyalty points, aggregated details and reviews of all the hotels you’ve ever travelled to and might want to travel to – and all you need to do is evaluate locations? Then it finds the right hotel and books it for you. That future is coming into focus, and it could reshape the economics associated with the marketing and distribution behind the $640 billion global hotel industry. We estimate that every year the lodging industry spends between $22 to $55 billion on marketing. Add roughly $30 billion in fees collected by online travel agencies, or OTAs, and we're talking about $55 to $85 billion in spending that AI could influence. Today, when you book through a third-party travel website, hotels typically pay commissions of 10 to 20 percent if it’s a branded hotel, or 20 to 30 percent if it’s independent. Booking directly through a hotel's website costs the brand closer to only 5 percent. That difference can have a meaningful impact on profitability for their owners. As AI agents increasingly help travelers find hotels, compare options, and potentially book on their behalf we could see a major pivot in brand preference and booking channel. In our analysis of hotel searches across eight U.S. destinations, traditional search engines directed travelers to official hotel websites just 13 percent of the time. With AI-powered searches, that jumped to 97 percent. But perhaps the most interesting finding involves loyalty programs. When we told the AI agent that a traveler belonged to a hotel loyalty program, 100 percent of the resulting links pointed to official hotel websites. When we specified a membership in an online travel agency's loyalty program, the results shifted entirely to that third-party booking platform. That means the AI agent is already factoring in your rewards, memberships and loyalty preferences into travel recommendations. We saw similar effects in Europe. For major hotel brands, this creates a significant opportunity. Their large loyalty programs and established customer relationships could help drive more direct bookings at a lower cost. And even small shifts add up. We estimate that moving just 1 percent of bookings from third-party platforms to hotel websites could boost hotel owners' EBITDA by roughly 0.1 percent to 0.5 percent. Looking ahead, we expect hotel margins to start benefiting from these savings in the second half of 2027, with further gains in 2028. Independent and boutique hotels could also profit as AI gets better at matching travelers with unique properties that fit their preferences. Meanwhile, online travel agencies aren't going away. Their extensive hotel inventories, loyalty programs, and scale in payments and fulfillment remain important competitive advantages. For now, AI-driven referrals still account for only a small fraction of travel website traffic. But as AI platforms develop their own advertising and commission models, the economics could change. So, what does this mean for the travel industry? AI could help hotels attract guests at a lower cost while making it easier for travelers to find the right stay. Hotel brands have an edge with their loyalty programs; whereas online travel agencies can leverage unique inventory, boosting independent hotels. It's too early to declare an outright winner but expect more from us as this battle evolves. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
