TRAVEL: Ctrip Goes Offline, Tongcheng Finds Profits

Bottom line: Ctrip’s offline travel alliance campaign looks like a shrewd move with good chances of success, while Tongcheng’s move back into profits shows the sector is heading into a new stable period.

Tongcheng travels back to profits

A couple of travel-related stories are in the headlines today, led by a blitz into the offline realm by leading online agent Ctrip (Nasdaq: CTRP). The other item has smaller rival Tongcheng reporting its first profit in four years, as it becomes the latest to emerge from a prolonged price war that bloodied the entire industry and sent most companies into the loss column.

Neither of these stories is huge, which partly reflects the fact that this industry is finally emerging from a brutal period to a new one of relative calm. But Ctrip is clearly looking for its next battle front, after consolidating its position by taking over most of its major rivals, including Qunar and eLong, to end the price wars.

I was surprised to read in a recent report that online travel agents currently account for only 10 percent of the market in China, since most people I know now buy their air tickets and book hotels online. (English article) But perhaps that’s not too surprising, since many people may not feel comfortable spending such larger sums online, and I also occasionally turn to real-world travel agents due to limitations of Ctrip and others for some kinds of more complex bookings.

Against that backdrop, Ctrip’s recently named new CEO Jane Sun is going on a campaign to tell the world that tie-ups with real travel agents are the next big thing for the company. One local media report says Ctrip has signed tie-ups with 100 real-world agents over the last 2 to 3 months, averaging one new sign-up per day. (Chinese article) Among those, 50 of the tie-ups are now active.

This looks like Sun’s attempt to put her stamp on Ctrip, and shows the future direction she plans to chart. Such a move does seem prudent if 90 percent of the market is still controlled by such agents, since Ctrip is already the dominant player in online bookings and is likely to see slowing growth from that business. Given the company’s previous track record of strong execution, I would give this latest campaign a relatively strong chance of success.

Like many of its Internet peers, Ctrip’s shares have rallied sharply this year, gaining nearly 50 percent since January. The company’s revenues grew 46 percent in its latest quarterly results and it forecast similar growth for the current quarter, as it enjoyed the fruits of the end of the years-long price war. But that growth will probably start to slow next year, which is probably adding urgency to this new initiative.

Move Back to Profits

That takes us nicely into Tongcheng, which isn’t publicly traded but apparently is feeling the need to tell the world it moved back into the profit column in July. (Chinese article) The company is saying it posted a relatively modest 30 million yuan ($4.4 million) profit for the month, ending 43 months of continuous losses. Tuniu (Nasdaq: TOUR), the only other major listed online travel agent, also reported a net loss in its latest reporting quarter.

Thus it appears that all of the travel companies are slowly emerging from the loss column, albeit slowly, as the price wars rapidly subside. Ctrip’s comments seem to indicate it won’t initiative a new price war anytime soon, since it’s focusing on the offline market for now. Likewise, I wouldn’t expect Tongcheng or Tuniu to launch any other major price wars for now, since all are still feeling the pain of the last round.

That could set the stage for a period of smooth sailing for these companies, at least for the next year, which means we could potentially see Tongcheng make a long-anticipated IPO, which it’s talked about several times in the past but hasn’t actually made. If and when that happens, I would expect it to get a ho-hum reception, since Ctrip is already the clear first choice for investors and the industry appears set for a growth pause in the next year or two.


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