Holiday Is over for E-Travel Companies in Tough New Market; Rise of mobile Internet means industry leader Ctrip is facing a host of new challengers like Qunar

05.09.2014 18:11

Holiday Is over for E-Travel Companies in Tough New Market

Rise of mobile Internet means industry leader Ctrip is facing a host of new challengers like Qunar

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By staff reporter Qin Min

(Beijing) – The landscape for China’s online travel services is changing fast with the rise of mobile Internet and the arrival of several new entrants in recent years.

Ctrip.com International Ltd., which provides hotel accommodations, airline tickets and packaged tours in China, still leads the pack. With total revenue of 5.72 billion yuan in 2013, it is the country’s largest online travel agent.

But rivals are catching up. Qunar Cayman Island Ltd., a search engine for travel reservations that is similar to the American company Kayak, is bent on competing with Ctrip head-to-head by transitioning into a one-stop website for travel service. The threat is real because Baidu Inc., one of the country’s Internet giants, is Qunar’s biggest shareholder, holding a 54.8 percent stake.

Tang Lan, Ctrip’s senior vice president, said it would have no problem continuing to operate independently, but analysts said it will need to pick a partner sooner or later.

Acquisition Frenzy

The biggest question in the online travel industry is whether Ctrip will find a supporter among the Big Three Internet firms, namely Baidu, Alibaba Group and Tencent Holdings.

In July 2013, media reports that Tencent had offered to buy 51 percent of Ctrip for US$ 6 billion appeared. Then in February, it was reported to be in talks with Alibaba. Two months later, reports emerged that Ctrip is in talks with Qunar about a possible merger.

Merging with Qunar also means joining Baidu’s camp. A source from Ctrip confirmed it has been in touch with Baidu, but formal negotiations had not started.

Both firms would benefit from an alliance, a source close to Ctrip said.

“Baidu can give Ctrip the traffic it needs and turn Qunar from a foe into a friend, helping it compete with rivals in Alibaba’s and Tencent’s camps,” he said. “Ctrip can help Baidu secure more entry points on the mobile end and share resources with Qunar to improve the latter’s search function.”

Ctrip’s CEO, Liang Jianzhang, said in response to merger reports that “Ctrip would like to consolidate with the better companies in the industry, but it is not at that stage yet.”

Both Qunar and Ctrip fear losing independence after a merger, so talks have stagnated, a source close to Ctrip said. It is unlikely Qunar could take control of Ctrip after a merger given their current business models, he said. Qunar a travel information aggregator whereas Ctrip is more like an online travel agency.

Changing Landscape

Ctrip is being challenged by at its strongest points: hotel reservations and airplane ticket bookings.

eLong Inc., established in 1999, the same year as Ctrip, has already given up building a one-stop travel service site to focus on hotel reservations. It has partnered with more than 300,000 hotels around the world, CEO Cui Guangfu said.

A recent deal with a smaller company, Suzhou Tongcheng Travel Network Co. Ltd., will help eLong catch up with Ctrip in hotel business, Cui said. Daily reservations for eLong in 2013 approached 26 million. Adding Tongcheng’s 5 million would get eLong to about 80 percent of Ctrip’s volume.

Ctrip is also facing competition in its flight ticket business unit. Qunar is known for offering cheap tickets. It works with many small and medium-sized travel agencies to get lower prices and offer frequent discounts. In the third quarter of last year, Qunar sold more plane tickets than Ctrip did, its financial report shows.

To defend its leading position, Ctrip has sought to integrate companies in related industries through a slate of investments. It spent more than US$ 110 million in 2013 for stakes in two car rental companies. Ctrip also invested in several firms that handle reviews, hotel management and wholesale goods for hotels in addition to hotel chains in a bid to enhance its leading position in reservations.

“Ctrip saw great potential in niche markets related to travel, such as ones for entrance tickets for tourist sites, cruises, car rentals and train tickets,” said Tang, Ctrip’s senior VP. The company will boost investments in these markets this year, she said.

Other players want to build a one-stop site for all travel-related services, including Qunar. Company CEO Zhuang Chenchao said Qunar wants to take on Ctrip in areas such as flight tickets, hotels and tourism site tickets.

But a source in the industry said the approach might weaken Qunar.

“Its competitiveness is in aggregating travel information and customer reviews and it makes money by selling traffic and ads,” he said. “In this sense Ctrip, Tongcheng and eLong are its partners, not rivals

“If Qunar wants to do everything itself, then it would need to deal with the inevitable conflicts between its roles as an advertising channel and travel agent.”

Also, the sub-categories in online travel services have certain entry barriers and Qunar lacks the resources in these markets. For example, it hired thousands of people to develop partnerships with hotels but the progress has been slow, the source said.

Other players in the industry have opted to avoid businesses dominated by Ctrip. Instead, they are looking for opportunities in other areas of the industry, such as matching travel companions, restaurants and rental cars.

Qyer.com, for example, grew from a niche travel forum for students who study abroad into one of the largest online communities for travelers in the country, CEO Xiao Yi said. It provides suggestions and information to outbound tourists. Users have contributed more than 8.5 million original travel journals to the site and monthly traffic is in the millions.

Qyer’s goal is clear: it wants grow into a larger community and a traffic driver for partners, Xiao said.

“The online travel industry has two big players and several small niche players,” a veteran in the industry said. “The big ones are building ecosystems and the smaller ones are forced to focus on their strongest business.”

But the transition to mobile Internet would give the smaller players a chance to get ahead.

“There is no too-big-to-fail in the online travel market,” he said. “The game has just started.”

Going Mobile

Performance on the mobile end will ultimately determine the outcome of the competition, several online travel companies said. The latest data from state-run China Internet Network Information Center shows the country had 500 million mobile users as of December, compared to 618 million Internet users.

The opportunity is substantial and the major players are feeling the pressure.

A rule of thumb is that traffic or number of searches coming from mobile must account for 50 percent of a company’s total businesses, Zhuang said. “Fifty percent is the survival minimum. It’s not safe. In three years, 80 percent of our businesses will come from the mobile end.”

Qunar has developed six Android apps and gained 53.8 million users as of the end of 2013, Zhuang said, adding that its mobile department can spend as it sees fit.

Ctrip is still leading the race with more than 100 million users of its app by the end of last year. “Almost all of Ctrip’s products are presented on its apps,” Tang said.

Xiao, at Qyer, said half of its 200 employees work on mobile business, and more users are accessing Qyer through smartphones and tablets than through personal computers.

“The companies are in a price war to acquire the mobile market,” Zeng Guang, an analyst at Guosen Securities said. Ctrip has thrown its weight around by offering a rebate of up to 201 yuan for people who book a hotel using its app and up to 730 yuan for an airline ticket. Its competitors have followed suit by providing better deals for app users.

Zhuang and Tang both said they are willing to stick to the price war for the sake of long-term growth.

But an industry analyst said the fierce mobile competition is hurting the user experience. For example, if a user found a hotel deal provided by eLong on Qunar’s app, he or she would not be able to go to the deal’s page. The user needs to download the eLong app, find the deal again and then place the order. Such a complicated process deters most users, the analyst said.

Although the competition is sizzling, the companies said they want to develop independently. Tongcheng and Qyer even said they eventually want to list. In the next seven years, the country’s travel market will grow by four to five times, Tang said, meaning there are big opportunities in the niche markets of online travel service.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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