TRAVEL: China Southern Deals Big New Blow to Qunar

Bottom line: China’s airlines are likely to permanently ban independent travel agents from selling on Qunar and other third-party platform operators, dealing a serious blow to their air ticketing businesses.

Dead end near for Qunar air tickets?

The bad news just keeps coming for travel agent Qunar (Nasdaq: QUNR), with word that its online sales platform could soon be banned for sale of tickets from China Southern (HKEx: 1055; Shanghai: 600029), the nation’s largest airline. Media are reporting that China Southern is preparing to roll out a wide-ranging new policy to govern the agents who sell its tickets. A key part of that will ban agents from selling China Southern’s tickets over third-party platforms like the one that Qunar operates.

This particular bad news is significant but also incremental, since China’s major airlines have been slowly freezing out Qunar this year due to complaints from people who buy their tickets over the company’s online platform. That platform allows independent travel agents to sell tickets on Qunar’s site, with a growing number of agents using deceptive or even fraudulent practices to make sales.

What’s most surprising in all this is that investors in Qunar’s US-listed stock don’t seem to mind all the controversy that could put a serious damper on the company’s largest single revenue source. Qunar’s shares are down about 30 percent since last December, largely in line with a broader sell-off on China’s stock markets. But the stock has remained remarkably stable since the start of February when most of the recent controversy has happened.

Qunar was hardly an attractive company in my view to begin with, due to its huge losses that seem to keep getting bigger. Its business model once looked like one of its biggest strengths, since it allowed Qunar to focus on running an online marketplace rather than dealing directly with the hundreds of airlines and hotels whose products are sold on its site. But now that business model is looking more and more like a major liability due to the mischief that third-party travel agents on the site are creating.

According to the latest headlines, China Southern is preparing to issue a major new policy directive governing its relationship with third-party agents who sell its tickets, and plans to implement the policy on July 1. (Chinese article) The policy covers a wide range of areas, from fees to how agents make payments. But the most noteworthy is a condition that appears to ban agents from selling their tickets over third-party platforms.

The new conditions, which will be distributed to agents before the end of this month, appear to be aimed at platform operators like Qunar. They would also affect similar but much smaller platforms run by other big names like e-commerce giant Alibaba (NYSE: BABA) and group buying leader Meituan Dianping, according to one analyst, quoted in the reports.

Direct Sales Only

China Southern and most of China’s other major airlines already banned their tickets from being sold on Qunar by third-party agents starting earlier this year, in response to the growing number of customer complaints about deceptive practices. (previous post) The reports say tickets from most of the airlines are still available on Qunar’s site, and a visit to the site confirms that. But it notes that all of those tickets are being directly sold by the airlines rather than through third-party agents.

Leading online travel agent Ctrip (Nasdaq: CTRP) mostly sells air tickets directly from the airlines to consumers on its site, though more recently it has launched a platform similar to Qunar’s. In the meantime, Qunar, which underwent a major management overhaul at the start of the year (previous post), says it remains in discussions with the airlines over the matter. (Chinese article)

At the end of the day, Qunar and even Ctrip don’t hold much leverage over the airlines, most of which are state-run, not extremely concerned about profits, and want to reduce their fees to third-party agents. Accordingly, I do see the online travel agents ultimately capitulating to the airlines, sharply undermining their air ticketing businesses that accounted for more than half of Qunar’s total revenue last year.

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