When Giants Get Bigger

By+Zhou+Xiaoyan

Two leading online travel booking giants—Ctrip.com International Ltd. and its archrival Qunar Cayman Islands Ltd.—agreed to a share swap and partnership that will create Chinas biggest online travel service. The tie-up came amid fierce competition for online travel bookings in China， where rising incomes and an expanding middle class are fueling a surge in travel， one of the few bright spots in a slowing economy.

Search engine giant Baidu Inc.， which has a controlling stake in Qunar， will own 25 percent of Ctrip under the deal that was announced on October 26. Ctrip will have a 45-percent stake in Qunar. The two companies will also mix their products and services， according to a statement from Ctrip.

Four Ctrip.com representatives will join Qunars board of directors， including Ctrip Chairman and CEO James Liang and Chief Operating Officer Jane Sun. Two senior managers from Baidu—Chairman and CEO Robin Li and Vice President Tony Yip—will be on the Ctrip board.

Representatives from both companies said the merger will allow them to offer better products and services to clients with less energy going to pricing. Ctrip and Qunar had been mired in a price war to gain as much market share as possible， hurting both companiesprofit margins.

“We are excited by this transaction， which we believe will help build a healthy travel ecosystem in China. This milestone transaction will enable us to focus on providing the best travel products and services to travelers，” Ctrip CEO Liang said in a statement.

Ctrips U.S.-listed shares gained about 35 percent following the announcement， closing at $90.78 on October 26. Qunars U.S.-listed shares rose earlier in the day to five-month a high of $49.71 but closed at $42.65， down about 17 percent.

The two companies will control almost 70 percent of Chinas online travel booking market when combined， according to data from Analysys International， a Beijing Internet consulting company. But the deals structure keeps the combined companies from having a legal monopoly on the market.

“Baidu， Ctrip and Qunar have adopted the cross-shareholding in the partnership， instead of Ctrip directing holding Qunar. Therefore， legally， its not a monopoly. But their partnership will pose a great threat to their rivals，” said Wei Changren， CEO of Ctcnn.com， a Web portal that tracks Chinas tourism industry.

An inevitable trend

The Ctrip-Qunar deal is just the latest in a string of mergers between Chinas rival Internet companies looking to gain additional market share and beat off the competition.

In February， Didi Dache and Kuaidi Dache， two leading taxi companies， combined in a share swap worth $6 billion. In April， 58.com， a classified service similar to Craigslist， joined its archrival Ganji.com. The latest case was a merger between group-buying site Meituan. com and customer-review and group-buying site Dianping.com in early October.

Chinas online travel agency market is expected to balloon in the coming year， according to data from iResearch， a market research firm that focuses on Chinas Internet sector. Transaction values of online travel agencies totaled 87.5 billion yuan （$13.75 billion） in the first quarter this year， a nearly 30-percent year-onyear gain.

But competition between firms has caused many players to burn through their capital at faster rates and hold promotion campaigns and discounts to lure in more customers， squeezing profit margins.

“Ctrip and Qunar have been locking horns for years and both have invested heavily in the competition. The result is Qunar losing big money and Ctrip not making much money either， a sore result that neither companys investors would like to see，” Wei said.

Ctrip and Qunar had been bleeding money for the past year. Qunar saw a net loss of 1.85 billion yuan （$291 million） in 2014， more than its total revenue that year. Despite a sharp rise in revenue during the second quarter of 2015， Qunar again registered a net loss of 815.7 million yuan （$128.15 million）. Ctrip also reported a net loss of $36 million and $ 20 million in the fourth quarter of 2014 and the first quarter of this year， respectively. Ctrip reported a net profit of $23 million in the second quarter of 2015， but its operating margin remained low at 2 percent， according to the companys financial filings.

Liu Zhaohui， founder of online travel consulting company TripVivid， expects more mergers in the Internet industry， particularly in the online travel booking sector.

“Its an inevitable trend. The price wars， backed by a large amount of capital input， are unsustainable. The cooling of the capital markets has also forced Internet companies to come together for partnership，” Liu said.

But the Ctrip-Qunar merger will deal a heavy blow to traditional brick-and-mortar travel agencies， said Liu Simin， Deputy Secretary General of Beijing Travel Society.

Experts and industry insiders say niche players need to develop a specific segment and position themselves more accurately in the market to survive the two giants consolidation.

Smaller players reaction

Online travel， which encompasses air ticketing， hotel accommodation， attraction tickets and packaged tours， is the second largest segment in Chinas Internet sector， recording total transactions worth 366 billion yuan （$57.5 billion） in 2014， according to a Goldman Sachs report released on October 26.

Chinas online travel market is expected to more than triple to $196 billion by 2020 from$60 billion in 2014， with online penetration expanding from 28 percent to 54 percent， according to the report. Ctrip and Qunar will come out on top in the long run with a combined 57-percent share in 2014 of Chinas online air ticketing and hotel booking market.

Few new one-stop shops will be on par and able to compete with Ctrip， Qunar and Alitrip， the travel service brand under the e-commerce giant Alibaba. However， new opportunities are expected to emerge in other market segments， according to the report. Recent cases include Tujia.com， which offers non-standardized accommodation services， and Mafengwo.cn， a company focused on travel experiences.

The era of online travel agencies fighting for an additional piece of the air ticket and hotel reservation segment has ended， and new opportunities are emerging in outbound tourism， said Wu Zhixiang， CEO of travel-booking site LY.com， a relatively small player in the market. He said LY.com will mainly focus on that area in the coming years.

Business-to-business （B2B） hotel booking site Biz.ziztour.net will focus on helping businesses make hotel reservations and increase hotels operating efficiency， CEO Li Shengnan said.

“Ctrip and Qunar have already taken the lions share of hotel bookings by individual consumers. No one can compete with them in that regard. However， opportunities still exist for hotel bookings by businesses，” Li said. “B2B online direct-sale platforms for hotels should focus on how to help hotels do business with better technologies. Its not only about making reservations， but about improving the profitability of hotels.”

Biz.ziztour.net claims it has nearly 20，000 active users， including travel agencies and businesses， covering more than 100 cities in China.

Jia Jianqiang， founder of travel-booking site 6renyou.com， also sees ways for smaller companies to take segments of the market back from Ctrip and Qunar.

“As the business travel market matures， the next battle ground must be recreational travel market for ordinary Chinese. Ctrip and Qunar dont have much market share in this regard. Thats where smaller players can seek growth opportunities，” he said.