TRAVEL: Ctrip Coopts China Eastern with New Equity Alliance
Bottom line: Ctrip’s new alliance with China Eastern continues its strategy of using equity tie-ups to further cement its position as China’s dominant provider of travel products and services.
In what looks like a first for private sector Chinese companies, leading online travel agent Ctrip (Nasdaq: CTRP) has just announced it will invest 3 billion yuan ($460 million) in China Eastern (HKEx: 670; Shanghai: 600115; NYSE: CEA) as part of a new strategic tie up with one of the nation’s top 3 airlines. The deal comes less than a year after US giant Delta Air Lines (NYSE: DAL) invested a similar amount in the Chinese carrier, and provides an important ally for Ctrip with one of its major suppliers.
This deal also comes as Ctrip’s former foe and new ally Qunar (Nasdaq: QUNR) remains locked in its own battle with China’s major airlines in a separate dispute tied to unruly third-party travel agents on its open platform. (previous post) Unlike Ctrip, which sells most of its plane tickets directly to travelers, Qunar’s open platform is home to hundreds of third-party travel agents who are harder to control and sometimes engage in deceptive practices when selling their products and services. As a result, many airlines have recently stopped allowing the sale of their tickets on Qunar’s website.
The bigger picture in this new headline is that Ctrip is using its market dominance to move into areas that once would have been unheard of for private Chinese firms. China’s big state-run airlines have received other outside investment over the years, with Air China (HKEx: 753; Shanghai: 601111) previously tying with Hong Kong’s Cathay Pacific and China Eastern forming its Delta alliance last year. But so far, the big state-run airlines have yet to form this kind of major strategic tie-up with a big private domestic company.
The new tie-up is relatively straightforward, and will see Ctrip provide 3 billion yuan in exchange for shares of China Eastern. (company announcement; English article; Chinese article) One media report, citing Ctrip officials talking at a news conference about the tie-up, says Ctrip will pay at least 6.44 yuan for China Eastern shares, which could give it as much as 3.55 percent of the airline.
Ctrip could increase its holding in the airline to as much as 10 percent in the future, the reports say. They add that China Eastern will use the funds to buy new planes, under a previously announced 15 billion yuan spending program. Details on the actual tie-up are quite general, and simply say the pair will work together in areas like low-cost and international travel, IT technology, travel insurance, and e-commerce.
Ctrip shareholders weren’t too impressed by the plan, bidding down the company’s shares by 2.4 percent after the announcement came out. China Eastern shares were suspended in Shanghai and Hong Kong the day of the announcement, but its New York-listed American Depositary Shares (ADSs) rallied by 3.4 percent.
This new deal is just the latest in a long string of equity tie-ups that Ctrip has forged over the last 2 years. Those include the Qunar investment late last year, with saw the 2 former foes become sudden allies with the landmark deal. (previous post) Ctrip has also invested in domestic peers Tongcheng and eLong, and has another equity tie-up with US giant Priceline (Nasdaq: PCLN).
All of these alliances have previously prompted me to say that Ctrip is looking increasingly like a monopoly in China’s travel services market, since such tie-ups are designed to neutralize these companies as competitors. The China Eastern alliance obviously won’t have that effect. But it could give Ctrip special access to China Eastern’s tickets, especially heavily discounted tickets that some carriers have threatened to withhold from third-party travel agents.
While I’ve called Ctrip a monopoly, I’ve also said the company’s stock looks like a good long-term bet because the nation’s anti-trust regulator doesn’t look set to take any action for the company’s anti-competitive behavior. (previous post) This latest tie-up shows that Ctrip has become quite adept at forming alliances with top names in the travel services sector, and how the company will use such tie-ups to further cement its place as China’s dominant travel agent.
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