Unscathed By The Economic Slowdown, China’s Online Travel Market Remains As Dynamic As Ever!

by Trefis Team
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China’s economy is currently growing at the slowest pace compared to its performance over the last two decades. However, China’s travel market seems to be thriving, with no dearth of both demand and supply. China’s online travel market currently covers over 10% of its total travel spending, however, with China’s internet penetration reaching almost 50% and the rising trends of online booking, the future growth in this sector looks promising. Hence, it is no surprise that the different players are trying their best to capture a piece of the China online travel market pie. Though Ctrip is the undisputed leader in the sector currently, we expect the growth of its rivals to provide stiff competition to the company in the future.

Chinese Travel Market Shows No Signs Of Slowing Down

China’s travel industry doesn’t seem to reflect the general slowdown faced by the Chinese economy. According to the China National Tourism Administration, in the first half of 2015, the Chinese people engaged in over 2 billion trips, reflecting around 10% year-on-year growth.  Travel related consumption reached around 1.65 trillion Yuan (~15% year-on-year growth) and was higher than retail sales growth by 4.1%. Chinese outbound tourists increased over 16% year-on-year to reach around 62 million. The domestic travel in China is expected to rise by 25% in 2015. [1]

While the world’s second-largest economy is expected to grow at around 7% in 2015, its worst growth rate in the last 25 years, the tourism industry is seen as a major growth driver. Hence, from 2013 to 2020, China’s government has decided to double leisure spending to 5.5 trillion Yuan ($886 billion) by building tourist attractions such as campgrounds and amusement parks. The government believes that tourism can provide a significant boost to the ailing Chinese economy. [2]

In Q1 2015, China’s online travel market transactions reached ~95 billion Yuan ($15.28 billion) reflecting an over 50% year-on-year growth. [3] Currently, China has a 46% internet penetration.  China’s online travel market is expected to continue its double-digit growth and cross $75 billion by 2017. [4]

china-online-travel-q1-2015-c

(Source: China Internet Watch)

Under this scenario, it is relevant to explore how competition is rising in the Chinese online travel market. Though Ctrip International (NASDAQ:CTRP) is way ahead of its competitors with an over 50% revenue share, players such as Qunar and Alibaba are gearing up to provide stiff competition to China’s OTA giant in the future.

art-China-Tourists-20-13-620x349

(Source: Travel And Tour World)

Ctrip’s Recent Developments

The Chinese online travel leader is active on its business expansion and investments. In May, Ctrip bought 40% of eLong’s shares from Expedia and entered into a partnership with the latter to share inventory in certain geographies, mainly in the air and packaged tours segment. Post this development, Priceline also increased its investment in Ctrip, and Priceline currently owns an 11.5% share in Ctrip.

Though Ctrip’s global footprints and domestic dominance increased due to these activities, Ctrip also faced some disappointment when its chief rival, Qunar rejected its takeover offer in June, and instead geared up with further investments to provide Ctrip with tougher competition. Currently, Qunar’s strengthened alliance with Baidu, China’s largest search engine, might make it an even stronger OTA player.

Our price estimate of $80 for Ctrip is over 15% higher than the current market price.

See Our Complete Analysis For Ctrip International

Baidu’s Expanded Partnership With Qunar Might Not Be Good News For Ctrip 

Baidu bought a majority stake in Qunar, four years ago, and it recently gained a larger presence on Qunar’s board. The number of Baidu representatives will increase from 3 to 5 and that will mean an increased strength of partnership between the two entities. China’s three internet titans are Baidu, Alibaba, and Tencent (the trio is popularly known as BAT). As a result of this strengthened alliance, Qunar will experience a greater integration with Baidu beyond the usual hotel and air bookings. [5]

Qunar will now have access to Baidu’s O2O (online to offline) platform which ensures an expansion of services to both the company’s respective user bases. The Baidu Qunar integration is an example of a popular trend in China, wherein a smaller firm partners with one of the members of the BAT trio. This gives the smaller firm a better scope to compete with bigger rivals in its field. Hence, this strategic move gives Qunar a more level playing ground with respect to its rival, Ctrip. Post the partnership, Qunar will have access to Baidu’s huge user base and Qunar’s travel products would get preference in Baidu’s search listings. The integration also implies that when a Baidu user tries searching for  travel products, Baidu’s mobile application will automatically direct her to Qunar. Users of Ctrip’s mobile application will also be directed to Ctrip, however the BAT trio has popular applications, which are used almost every day for different purposes, and those users can be further directed to buy travel services from Baidu. Ctrip’s applications, on the other hand, are mostly used for travel purposes. [6]

Additionally, in June, Qunar received a $500 million investment from Silver Lake Partners and another undisclosed investor. Qunar intends to use the capital to enhance its mobile presence, expand its business, and increase its technological capabilities. Although, Qunar is the fastest growing OTA in China, it had been incurring losses in the past, that critics claim might not be sustainable. [7] However, the strengthened alliance with Baidu and the additional investments from Silver Lake, might help diversify Qunar’s offering portfolio, equip it with stronger technological capabilities, and give it access to a greater user base, which might help Qunar emerge as a financially stronger company and a formidable player in the OTA space.

Qunar

(Source: Qunar.com)

Other Players Are Gearing Up, Too

  • Alitrip’s Innovative Services Will Give It A Competitive Advantage 

Alibaba, the Chinese e-commerce giant, launched its online travel business, Alitrip, in October 2014. Alibaba’s $25 billion IPO in September 2014 provided it with the adequate resources for gearing up in the Chinese online travel space. Alibaba invested $457 million to acquire 15% of the hotel technology firm, Beijing Shiji Information Technology Co. — one of the largest property management system and central reservation system operators in China. Alitrip’s platform includes more than 10,000 vendors providing flight tickets, vacation packages, and services for hotel booking, visa applications, and tour guides. Alitrip’s mobile applications is a crucial attraction for the Chinese travelers. [8]

In March 2015, Alitrip launched “The Hotel of the Future” program which would use network and Big Data technology to provide better services to travelers and help hoteliers gain a loyal customer base. The model aims to provide facilities such as online self-selection of rooms and digital check-ins. Alitrip’s previous model called Post Post Pay, launched in collaboration with Alibaba’s credit agency, Sesame Credit, allows guests with sufficient sesame credit scores to make cashless hotel stays. The expenses are debited from the users’ Alipay accounts. Over 5,500 hotels in China use the Post Post Pay service, currently. [9]

  • NetEase And HNA Group Collaborated To Produce A Formidable OTA

A new entrant in the China online travel market would comprise of a proposed joint venture between NetEase – a NASDAQ-listed internet services business in China with a market cap of over $19 billion, and HNA Group – a conglomerate with stakes in aviation holdings, capital, tourism, and logistics, with $27 billion in revenues in 2014. HNA Group’s hospitality group includes 450 hotels in China and abroad, and its tourist unit handles nearly two million passengers a year. The group includes  73 travel agencies, luxury cruise operators, and a foreign exchange business. [10]

Conclusion

Hence, with all the emerging players and collaborations, the competition in China’s online travel market is expected to become even more fierce in the future. China’s travel industry seems to be unscathed by economic slowdowns and the interest of both the international players and domestic tech leaders in it, suggests that the industry holds future promise, too.  However, whether Ctrip will be able to sustain its leadership position, or will have to make way for one of the emerging players is a question which only the future can answer.  In the meantime, the Chinese travelers will continue to enjoy the benefits of this competition, in the form of the best of travel choices at the most competitive prices.

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Notes:
  1. Do Chinese Female Travelers Hold the Key to Hotel Growth?, Added Value China, September 3, 2015 []
  2. China Invests in Its Tourism Infrastructure in Effort to Boost Travel Spending, Skift, August 13, 2015 []
  3. China Online Travel Market Exceeded US $15 billion in Q1 2015, China Internet Watch, May 21, 2015 []
  4. Chinese Travel Platform Qunar Raises $500M, Turns Down Ctrip Acquisition Offer, Tech Crunch, June 1, 2015 []
  5. Baidu to Gain More Seats on Board of Chinese Travel Booking Site, New York Times, September 10, 2015 []
  6. Baidu’s travel play no holiday for Ctrip, TradingFloor.com, September 11, 2015 []
  7. Chinese Booking Site Qunar Bulks Up With $500 Million Investment Led by Silver Lake, Skift, June 1, 2015 []
  8. Alibaba Launching New Alitrip Travel Brand, Going Head To Head With Ctrip, Skift, October 2014 []
  9. Alibaba launches Alitrip into hotel IT solutions space, Tnooz, March 31, 2015 []
  10. Plenty of room? Heavyweight-backed, China gets a brand-new online travel agency, tnooz, May 27, 2015 []
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