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Print Edition> Business
UPDATED: July 11, 2011 NO. 28 JULY 14, 2011
Budgeting for Travel
Websites provide enhanced services as they look to profit from China's ballooning travel market

WISE OLD OWL: Travel website Daodao.com shares the same owl logo with its parent company, Tripadvisor, the world's largest travel site that allows customers to gather travel information, post reviews and engage in interactive travel forums (CFP)

Reservations made at official websites of airline companies, hotels or travel agencies stood at 32.5 billion yuan ($5 billion), or 84 percent of all online sales, and those made with online distributors such as Ctrip and Elong amounted to 6.1 billion yuan ($938.5 million), or 15.8 percent, said the Entgroup report.

In total, the travel e-commerce market reached a value of 39 billion yuan ($6 billion) in 2010, up 42 percent year on year, and will grow 30 percent annually to reach 68 billion yuan ($10.5 billion) by 2012, said the report.

Major players

In June, China's search engine giant Baidu announced a $306-million investment in Qunar, its largest investment to date, while the country's largest Internet company Tencent bought a 30-percent stake in Elong for $84.4 million in May. This has inspired a lot of discussion about who will rise to challenge market leader Ctrip's dominance.

Qunar offers a specialized search engine focusing on product and pricing comparison, presenting available options in its search results and redirecting users to other distributors or travel agencies.

Its revenue comes mainly from advertising and traffic redirection, unlike Ctrip, which makes profits largely on commissions from selling air tickets and hotel rooms.

Baidu, China's largest portal to online content and services, controls nearly 80 percent of China's search traffic and boasts a diversity of applications based on that traffic.

"Qunar chose Baidu because of its unmatchable resources and huge search traffic, which will allow us to cooperate in diverse ways," said Zhuang Chenchao, CEO of Qunar.

The partnership will get Qunar more traffic and advertising, and help Baidu improve its search results by leveraging Qunar's travel-related search technology and content.

But Morgan Stanley said the deal has had a limited impact on Ctrip and maintained Ctrip's stock "overweight" rating in its June 27 report.

"We do not view Qunar as a direct competitor to Ctrip," the report said. "Ctrip does not rely heavily on third-party search engines to win new customers, since nearly 60-70 percent of these are word of mouth and direct sales. In addition, Ctrip enjoys a loyal customer base and generates 70-80 percent of sales from repeat customers."

And Qunar targets price-sensitive customers, while 70 percent of Ctrip's sales come from business travelers and high-end personal travelers, said the report.

Ctrip criticizers focus on its high commission rate, which mainly comes from its high labor costs. Unlike its overseas counterparts which complete their sales mostly online, Ctrip has 80 percent of its 10,000 workforce answering calls to conclude a large portion of deals.

In contrast, Qunar has less than 700 employees. And Qunar is free from additional operating costs common for traditional B2C companies such as logistics burdens from goods transportation, storage and delivery.

"The fact Qunar as a light-asset company boasts of a gross profit rate of 85 percent makes it a best investment targets," Zhuang said.

Qunar may not compete with Ctrip directly, but Elong does, especially after Tencent partnered with Elong to make its first foray into the online travel market. Tencent, China's largest instant message service provider, has 674 million users.

While Ctrip is busy increasing stakes in hotels, Elong will use Tencent's investment to acquire small hotel reservation sites, said Elong's CEO Cui Guangfu.

Hotel reservations are Elong's core business, accounting for 68 percent of its total revenue in the first quarter of this year. For five consecutive quarters, Elong has grown faster than Ctrip in terms of hotel sales, and online reservations will exceed dial-in reservations in volume in the second quarter, becoming the major source of Elong's growth, said Cui.

Elong now boasts the largest hotel coverage in China. It had established a partnership with 20,000 hotels in 700 cities nationwide by May 31, according to its financial statements. Through Elong's platform, customers have access to more than 135,000 international hotels on Expedia, the world's largest online travel site, which is Elong's largest shareholder with a 56-percent stake.

Key to success

Baidu and Tencent have chosen to invest in a market leader instead of launching similar services by themselves because "they don't have the genes to do e-commerce," said Chen Shou, an analyst with information technology consulting firm Analysys International in a 21st Century Business Herald report.

Technology is a barrier too. A vertical search engine, like that used at Qunar, focuses on a specific segment of online content and is distinct from a general Web search engine, like Baidu, Hong Bo, an observer of the information technology industry, told the National Business News.

Even if Baidu can overcome technological barriers, there are operational costs—a team should be organized to collect and process all kinds of information to tailor products for airline companies and hotels, which will also demand coordination efforts between Baidu's departments, Hong said.

Smooth integration of both sides' complementary strengths and a distinctive business focus are the key to the success of these kinds of investments, Chen said.

But Chen said he didn't think it's possible to surpass Ctrip in the near future because of "a lack of distinctive and diverse business models that are as successful as Ctrip's."

Usually there are four focuses of travel sites: hotel reservation and air ticket booking, travel-related search, travel information and travel sharing community.

And most of China's travel websites are crowded in the first two categories. "They provide solutions to questions like how to travel to the destination and where to stay, and seldom address issues like what to see and where to eat," said Lvmama's founder Hong Qinghua.

That's where small travel sites like Lvmama and Uzai began to innovate and challenge market leaders.

With extensive consulting experience in scenic attraction design and planning, Hong moved into the online travel business by helping managers of scenic attractions to do precise marketing. Lvmama has signed contracts with more than 3,000 scenic attractions, with several million registered users.

Uzai was designed as a travel planner. "We are not a flea market where customers are left on their own about what to buy. Instead, we select competitive travel routes and create different vacation packages to meet varied needs," said Li Daishan, founder of Uzai.com.

Innovation will help travel websites find a distinctive business model. But like technology, the business model is replicable and the ultimate answer to success is with the team's capabilities in executing projects, said Zhang Dian, CEO of online travel firm Hubs1.

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