24.11.2015, 13:30
Fitch: Tough Times to Continue for Chinese Online Travel Agencies
OREANDA-NEWS. Leading Chinese online travel agencies' profitability will remain under pressure from price competition and hefty marketing spending, even if the industry consolidates further, says Fitch Ratings.
Most of the leading Chinese online travel agencies have yet to generate operating profits due to intense price competition. Four of the top five Chinese online agencies - Ctrip, Qunar, Elong, and Tuniu - which held a combined 68% share of the market by revenue in 1H15, posted wider operating losses in 1H15, despite a 78.3% yoy increase in aggregate revenue.
The recently announced alliance between Ctrip and Qunar could help both companies' margins as price competition between them is likely to ease, and their combined bargaining power with suppliers will be stronger; their combined market share was around 69% at the end of 1H15.
However, we think that margins industry-wide will continue to be under pressure even if further consolidation occurs. Pricing power is likely to remain weak even for the large companies as their products are highly homogeneous, which makes price a key driver of purchase decisions. Users' switching cost is also very low, given plenty of substitutes, including offline products. Leading China-based group deal websites, such as Dianping and Meituan, have launched travel booking services in direct partnership with hotels, threatening the market positions of existing online travel agencies.
In addition, the leading operators, including Ctrip and Qunar, will continue to step up marketing spending to increase brand loyalty and user stickiness. Travel bookings, especially for leisure, occur much less frequently, but at higher average selling price per transaction than some high-frequency online-to-offline services, such as taxi-hailing and food delivery services, where brand loyalty can be formed more quickly.
The growth potential for the Chinese industry is still very strong due to robust travel demand and still-low online booking penetration, which was below 10% in 2014, compared with 50%-60% in the U.S.
Most of the leading Chinese online travel agencies have yet to generate operating profits due to intense price competition. Four of the top five Chinese online agencies - Ctrip, Qunar, Elong, and Tuniu - which held a combined 68% share of the market by revenue in 1H15, posted wider operating losses in 1H15, despite a 78.3% yoy increase in aggregate revenue.
The recently announced alliance between Ctrip and Qunar could help both companies' margins as price competition between them is likely to ease, and their combined bargaining power with suppliers will be stronger; their combined market share was around 69% at the end of 1H15.
However, we think that margins industry-wide will continue to be under pressure even if further consolidation occurs. Pricing power is likely to remain weak even for the large companies as their products are highly homogeneous, which makes price a key driver of purchase decisions. Users' switching cost is also very low, given plenty of substitutes, including offline products. Leading China-based group deal websites, such as Dianping and Meituan, have launched travel booking services in direct partnership with hotels, threatening the market positions of existing online travel agencies.
In addition, the leading operators, including Ctrip and Qunar, will continue to step up marketing spending to increase brand loyalty and user stickiness. Travel bookings, especially for leisure, occur much less frequently, but at higher average selling price per transaction than some high-frequency online-to-offline services, such as taxi-hailing and food delivery services, where brand loyalty can be formed more quickly.
The growth potential for the Chinese industry is still very strong due to robust travel demand and still-low online booking penetration, which was below 10% in 2014, compared with 50%-60% in the U.S.
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