Amid a cutthroat price war in China’s $116 billion travel market, Expedia cut its losses Friday and shed its majority stake in eLong, potentially allowing rival Ctrip International to tighten its grip on the country’s booming online booking sector.
Expedia sold its 62.4% stake in the struggling Chinese online travel agency (OTA) for $671 million. Ctrip picked up a 37.6% stake in eLong for $400 million. Ctrip shares leapt 18% Friday to a record high, eLong climbed 9%, and Expedia gained 7%, also hitting a new high.
An employee works the front desk at Ctrip’s offices in Shanghai. AP View Enlarged Image
The shift comes as the industry flirts with consolidation, after an onslaught of heavy spending and promotional activity savaged margins at Ctrip, eLong and Qunar, an OTA-metasearch hybrid that is majority owned by Chinese search leader Baidu.
Mobile Growth Explodes
“We appear to be at a point of maximum pain, and central to our view on CTRP is that this competitive dynamic may push the group towards consolidation sooner rather than later,” said Guggenheim Securities analyst Jake Fuller in a note a few days before the eLong deal.
The Chinese travel sites have been focusing their investments on mobile users, who will soon account for half of China’s overall Internet use and are increasingly turning to their smartphones, not PCs, to buy air tickets and make hotel reservations.
Mobile travel bookings in China skyrocketed to $3.5 billion in 2014 from just $70 million in 2012, according to Fuller.
“Success is increasingly a function of the ability to spend on marketing and invest in technology, whether that be in mobile or simply ongoing site optimization,” he wrote.
Adding to mobile users’ desirability is the sense that they are “stickier,” say analysts, meaning they are likelier to spend more time on an app they like and come back to it time and again.
Smartphone apps in particular are key to keeping mobile customers engaged. Recent IPO Tuniu, an online travel firm that offers package tours, boasted China’s leading travel-guide mobile app as of last fall, according to digital consulting firm China Internet Watch.
‘Travel Smorgasbord’ Apps
OTAs Ctrip and Qunar have been pushing app adoption aggressively, said Phocuswright travel analyst Maggie Rauch.
Both companies overhauled their apps in late 2013 or early 2014 so that they offer customers, who tend not to use several different apps, a “travel smorgasbord,” including discounts for booking via app and arrangements with shopping centers to provide app users with store discounts. By comparison, Expedia’s and Priceline’s apps are “basic,” she added.
The results of Ctrip’s and Qunar’s efforts are apparent. Ctrip’s mobile app downloads in Q1 soared more than 550% from a year earlier to hit 800 million, and about 70% of all of the company’s online transactions in Q1 were mobile.
“Ctrip has definitely created the biggest footprint in the (mobile) space,” Piper Jaffray analyst Mike Olson told IBD. “Given that mobile will be the majority of online travel transactions in China going forward, it’s going to be a huge advantage.”
Meanwhile, Qunar’s mobile revenue jumped 401% in Q4 (the most recent data available) and made up half of total revenue. And eLong, which is backed by Chinese Internet heavyweight Tencent, said in its Q1 report that it has 200 million cumulative app downloads, with over 65% of eLong-brand room nights from mobile bookings.
While it’s hard to pinpoint the amount that China’s OTA players spend on mobile, their operating margins offer a glimpse. Ctrip’s operating margin, which was 45% in 2010, plunged to -14% in Q4 2014. Olson said margins have been hit hard due to heavy discounting, but also because of mobile development.
Whether Ctrip can return to an operating margin north of 20% in the next 3-4 years is difficult to say, he added. Operating expenses grew almost 69% in Q1. At least on the mobile front, the company is probably dialing it down, said Olson, noting that its operating margin bounced back to -1% in Q1.
“I think the situation going forward is that Ctrip is going to be able to go into a little more of a maintenance-spend mode on their mobile investment,” he said, “because they already have such a massive mobile footprint now that it’s probably hard to make it incrementally larger.”
But as the Chinese OTA players work hard to secure mobile market share, competition could get even hotter.
Alibaba Looms Over OTAs
Alitrip, essentially the combination of Alibaba’s Taobao and Tmall travel sections, debuted last October. It allows consumers to book travel, reserve taxis and even apply for travel visas. The brand is “more bark than bite” for now, said Olson, and hasn’t made much of a dent in Ctrip’s lead.
But, he warned, “You need to be cautious when such a large and well-resourced competitor is getting into the space.”
Alibaba’s travel arm has a smaller market share in terms of bookings, but it has a trusted online payment platform and a wide consumer reach, Rauch also cautioned.
“It signals a more serious entrance of an Internet giant in China,” she said. “The potential is huge.”
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Article: Inversor’s Business Daily