In 2012 Priceline.com surprised the travel industry by paying $1.8 billion in cash and stock for Kayak, a search engine specialising in flights and hotel bookings. The deal was the largest in Priceline’s history and part of its effort to close the gap on its rival Expedia. “Online travel in the US is mature,” Henry Harteveldt, an analyst at Hudson Crossing, told the New York Times at the time. “There isn’t double-digit growth like in the late 1990s and early 2000s. Online travel agencies are exploring new ways to reach more people – acquisition and investments.”
China’s online travel market, on the other hand, has plenty of organic growth ahead. Although Chinese travellers spend more on aggregate than any other country, only about 10% of their trips are booked on the internet, says magazine The Economist.
PhoCus Wright, a research firm, reckons that will grow aggressively, reaching 24% by the end of 2015 and represent a market that’s worth around $30 billion.
But when news leaked last month that one of China’s equivalents to Priceline – Ctrip – was considering a merger with its rival Qunar – which shares a business model closer to Kayak – analysts were not surprisingly soon drawing comparisons with events in the US market.
Ctrip has been interested in acquiring Qunar for a while (last year Ctrip and Qunar had market shares of 33.9% and 22.1% in the online travel business, respectively). In 2011 they were rumoured to be close to a deal but they failed to reach terms once search giant Baidu had stepped in with a higher bid for Qunar, paying $306 million for a majority stake.
That hasn’t stopped Ctrip from trying again. Sina Technology, a portal, quoted a company insider as saying that Ctrip’s bosses have proposed selling a chunk of Ctrip to Baidu – likely through a share swap – in exchange for a controlling stake in Qunar. If successful, the Ctrip takeover at Qunar would create a clear industry leader with a market value of about $10 billion (Ctrip’s market cap is about $7 billion at the moment).
Ctrip and Qunar compete in the same market but their business models are different. Ctrip generates most of its revenue by offering online hotel and air ticketing services. It also operates call centres for travellers more comfortable making their travel plans with agents. Qunar, on the other hand, offers an aggregator platform for customers to compare prices across more than 1,500 travel agencies, generating the majority of its revenue from advertising.
So in many ways Ctrip and Qunar have complementary services. Combining the two would create a potent business.
Relations between the two travel agencies haven’t always been amicable. Qunar filed lawsuits in 2011 and 2012 against Ctrip after allegations of deceptive business practice and defamation. The two also crossed swords commercially in the first half of last year, as each tried to lure customers away from the other with promotional offers and discount coupons.
Price wars are commonplace in China’s online travel market, leaving incumbents with limited pricing power. That is reflected in Ctrip’s declining margins. Its operating profits have dropped from 38% three years ago to 22% last year, although Ctrip says the decline was more due to increases in sales and marketing fees.
Of course, these are expenses that might be reduced by further consolidation in the sector, even if Ctrip’s chief executive Liang Jianzhang expects the marketplace to remain competitive for the foreseeable future.
“Competition among OTA (online travel agents) is far from over. The price war will go on for at least another 3-5 years,” he told Southern Metropolis Daily in an interview.
To that end, Ctrip is looking for other allies in the industry. In May it spent $220 million for a 30% stake in another rival site Tongcheng. That same month it also paid $15 million for a holding in Tuniu, an online tour package provider, ahead of its IPO on Nasdaq. The investment gives Ctrip a position on Tuniu’s board, although Tuniu will maintain independent operations.
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