The business of selling airline tickets and resort vacations to China's holiday-happy middle class is now a battleground for Internet giants, following a deal that brings Ctrip.com International Ltd. to the fore.
Ctrip was already the country's biggest online travel agency before announcing a share-swap agreement on October 27th that gave it virtual control of traveler services provider Qunar Cayman Islands Ltd., a subsidiary of the Internet search giant Baidu Inc.
In the deal, Baidu transferred 45 percent of its stake in Qunar to Ctrip. In turn, Baidu got a 25 percent stake in Ctrip. The swap strengthened Ctrip's grip on what market research institution iResearch says is China's 270 billion yuan online travel agency market. Ctrip already owns 37 percent of eLong Inc. and 6 percent of Tuniu Corp.
The tie-up of the two Nasdaq-listed companies with a combined market value of US$ 18 billion set the stage for a three-way travel market battle pitting Baidu and its new partner Ctrip against the nation's dominant social media company Tencent Holdings Ltd. as well as e-commerce leader Alibaba Group.
Tencent has an online travel information section on its qq.com platform, an instant messenger. The company has also invested US$ 84 million in travel service provider eLong in 2011 and US$ 78 million in LY.com in 2014.
Alibaba, meanwhile, has had one foot in the travel agency door since 2010 by selling ticket and hotel booking services through its Tmall and Taobao websites. It's also invested millions of U.S. dollars in several online travel sites including qyer.com and baicheng.com. And in October 2014, Alibaba formally launched its own travel service division called Alitrip.
But through their new partnership, Ctrip and Qunar now account for nearly 70 percent of all revenues generated through the country's online travel market.
Alitrip's is pitching it`s service as an open platform through which travelers and qualified service providers can find each other. Future plans call for offering various traveler conveniences, such as hotel room deposit waivers based on a client's credit record with Alibaba. In its first year of operations the company signed up more than 100 million members and averaged more than 10 million daily webpage views. But it's still lags behind Ctrip and Qunar.
And although big brands rule the market, a number of new players have recently joined the online travel services game. One is the group-buying website company Meituan.com, which for the second half of this year reported 5.3 billion yuan worth of hotel bookings as well as 1.8 billion yuan worth of other travel-related deals. Meituan established a new division in July aimed at expanding its services.
China is also seeing traditional, storefront-based travel agencies increasing their online exposure opportunities through a growing number of new websites.
Nevertheless, the country's online travel giants have fortified their market positions in ways that should keep their new rivals at bay for a long time. For several years the market had anticipated a Ctrip-Qunar merger.
Integrating Services
The main focus of the merger is as a way to streamline business and counteract competitive pressure since many domestic companies in this industry are running in the red.
For the second quarter, Qunar reported an 816 million yuan loss. Elong.com registered a 356 million yuan loss and Tuniu said it lost 292 million yuan in the same period.
Ctrip outperformed its rivals by posting a 143 million yuan net profit for the second quarter, a 5.9 percent increase from the same period last year.
Baidu, meanwhile, has been singled out by market analysts as the biggest winner in the deal between Ctrip and Qunar. The search engine had controlled Qunar since buying a 62 percent stake for US$ 306 million in July 2011, just a few months after expanding into what was then a fledgling market for online travel services.
Ctrip and Qunar will likely continue to operate separately yet complement one another. Ctrip will focus on the business traveler, hotel and ticketing operations, while Qunar will function mainly as a platform for a variety of travel services based on packages, search and price comparisons.
But the merger also presents challenges for the companies involved. Baidu, for example, must figure out how to integrate and distribute traffic and resources between Ctrip and Qunar. In the short term Ctrip and other travel booking sites are expected to continue relying on investments to keep their businesses growing whilst being forced by the competitive environment to offer services at discounted rates.