Bad trip

Airlines like China Eastern are worried about Ctrip's market power

Every nation has its own version of Microsoft, and in China’s case, Ctrip seems to have been propelled into the “dominator” role. Competitors, customers and vendors have all been making noise about its purportedly excessive influence in the marketplace.

Ctrip is an online service that allows users to book airline tickets and hotel rooms in China. Since listing on Nasdaq in 2004 the service has enjoyed 63% annual compound growth, and works with 5,600 hotels as well as all China’s major airlines. In 2008 its hotel booking revenue reached Rmb764 million or $111.5 million (up 13% on 2007) and its air ticket revenue hit Rmb659 million (up 31%). Sina Finance notes that: “In only a few years it has established a dominant position in online booking, with traditional ticket booking agencies now at the brink of loss or even bankrupt.”

The sales pie for Ctrip is big and set to get bigger. China will have an estimated 1.5 million hotel rooms by 2010, and iResearch forecasts that online hotel bookings will grow 28.2% a year, to reach Rmb2.6 billion by 2020.

Ctrip meanwhile already has 20 million members and has grown rapidly due to a user-friendly booking system. And having been in business since 1999, it is reaping lucrative economies of scale, thanks to what might be termed the ‘network effect’. The bigger it becomes, the more choice it offers, and the more of a default option it becomes for consumers booking their travel.

But sometimes you can be too successful for your own good, and Ctrip has recently been a victim of public sniping and legal action.

First off, China’s beleaguered airlines envy its profitability and worry that it has too much power over ticket distribution. Although Ctrip accounts for just 10% of seats booked, it is the single biggest distributor for the airlines, and takes around a 10% cut on bookings.

So worried is China Eastern Airlines’ chairman, Liu Shao Yong that it has been reported he approached Alibaba’s boss Jack Ma about creating an alternative online booking service – using Alibaba’s Taobao.com service, which has 98 million members.

Worse was to come in a spat with hotel group, Green Tree Inn, which has complained that Ctrip’s fee of Rmb66 per room booked is 50% above average for agents.

The row escalated earlier in the year when Green Tree sought to bypass Ctrip by offering its own online members’ club Rmb80 million in special discounts.

Ctrip argued that this ran counter to its standard hotel cooperation agreement. The internet firm offers a big rebate to any user finding a better price at one of its hotel partners – a sort of lowest price guaranteed policy. Ctrip thus argued that Green Tree Inn’s discounts left it heftily exposed to a wave of rebates. So it removed Green Tree Inn’s hotels from its booking system. Last month Green Tree Inn announced that it was going to sue Ctrip in a Shanghai court – maintaining the ‘cooperation agreement’ was not breached by its discounts.

This was not the first occasion that Ctrip had come to blows with a hotel group. Another chain, Jinling Hotel – the nation’s third biggest – had ended its relationship with Ctrip in 2007 because it regarded its commission as too high.

A further legal embarrassment – in which Ctrip became indirectly involved – featured customers who’d been sold fraudulent travel insurance. Last November, a couple from Yunnan booked tickets on Ctrip between Sanya and Kunming. They purchased ‘accidental death’ policies, using one of Ctrip’s partners, Sanya Chenlong Airline Tickets Selling Co. But on receiving the policy they figured there was a problem. Their flight departed at 11.25pm on November 18 and arrived at midnight. The policy covered them for the whole day of November 18. They wondered what would happen if their flight was delayed – or if they died during landing early on November 19. They feared they wouldn’t be covered. The couple sought legal redress and the China Insurance Regulatory Bureau turned up something even more embarrassing: the insurance being sold – allegedly underwritten by Ping An – didn’t even exist. It was a fraud. Last month, the regulator revoked Sanya Chenlong Airline Ticket Selling Co’s license to sell insurance.

Given it was bought on Ctrip’s website, the company also caught some flak. Ctrip’s CEO, Fan Min said that of all the recent incidents that have occurred this one put him in the “worst mood”. But he still came out fighting, claiming that Ctrip was a victim of the fraud itself. And for good measure he drew an analogy with the aftermath of the recent tainted milk scandal stating that the victims sued Sanlu, but nobody sued the supermarket. “It is the same with this event,” he says.

In fact, Fan is feeling a bit aggrieved by the recent criticism. He feels it points to a deeper problem – people in China do not believe “services” firms like Ctrip should be making good profits. This is a fundamental misunderstanding on their part, Fan insists, as service businesses play a key role in the value chain.

Perhaps Ctrip has been getting an unfair press. After all, it has achieved its current position thanks to a decade of hard work, clever technology and access to capital.

Fan may be right too in saying that the company is under-appreciated. In fact, you could argue it has created a whole new industry segment: the economy hotel chain (something akin to a motel, in Western parlance). Its booking system has spawned a wide array of these price-friendly city-based rooms across China. Ctrip itself owns a stake in Home Inns. And the founders of Hanting Inn, 7 Days Inn and Orange Hotel – all economy chain hotels – previously worked at Ctrip.

This category of hotel is proving a boon for China’s travel industry at large, and is a tangible legacy that Ctrip can point to having encouraged. However, the company’s vice-president of services, Zhuang Yuxiang also knows that the recent debacles cannot just be shrugged off. “The insurance-related incident has sobered us after past success. It was an effective prescription and will help push Ctrip to the next peak of development,” he says.

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