Tug of war tightens between China’s traditional travel firms and industry’s online upstarts
State-owned mega-firms still dominate – but as more younger, wealthier Chinese travel abroad, companies are having to work harder than ever for every airline seat and bedroom booking
An increasing fierce tug of war is raging between China’s massive traditional travel companies, and the country’s growing army of online travel agencies (OTAs), as they scrap for business especially among younger, wealthier, more ambitious travellers.
The fight for customers has become arguably the most obvious example of just how quickly, and disruptive, information technology has become in reshaping some of the country’s most significant industries.
Yu Zhe is a 36-year-old Shanghai-based white-collar worker who happily spends thousands of yuan each year travelling abroad.
She says she researches her options thoroughly, and sees for herself just how hard companies are having to work to try and hold onto clients – but ultimately she says that’s good for the customer.
“It gives us more choice, and allows us to do some very accurate comparison shopping,” she said. “Moreover, you feel that every single coin you spend on travel is worth it.”
Chinese travellers have become the biggest driving force of the global tourism market, as increasingly well-to-do mainlanders spread their wings further in search of new experiences.
Last year, 117 million mainland tourists travelled overseas, a 9 per cent rise from 2014, according to China National Tourism Administration.
They spent a combined US$104.5 billion on tours, an increase of 16.6 per cent on the previous year.
The administration says the domestic tourism market, meanwhile, raked in total sales of 3.42 trillion yuan, a 13 per cent jump from the year earlier, with 4 billion individual trips made by mainlanders during the year.
“Travel and tourism is a flourishing market because leisure travel has become part of people’s everyday lives,” says Annie Ren, a manager with Shanghai Jinjiang International Travel, one of the various state-owned tourist companies operating in China.
“But the blinding reality is that it’s getting tougher and tougher to do business, as competition grows, despite the rise in customers.”
Ren says she thinks back often to what she calls “the good old days” when local customers flocked to her outlet, to sign up for a tour or book a flight.
Until the early 2000s, travel businesses had been off-limits to public investors, with state-owned firms enjoying a cosy monopoly.
But then like many sectors, Beijing gradually liberalised the market, allowing foreign and private capital to pour in.
Established brands such as Jinjiang used to attract huge numbers of tourists through its doors, who trusted in its quality of services.
She said back then, it was mainly wealthy older people, who wanted comfortable accommodation and transport, and they liked the security of knowing the offerings were effectively state-backed.
Only government-owned agencies, until then, could organise tour groups to many overseas destinations, with small-scale players barred from organising foreign travel altogether.
China International Travel Service, China Youth Tour Service and China Travel Service, all state-owned, have long been known as the “Big Three” travel agencies across the nation, and they have dominated the domestic sector for years.
But the state-owned travel agencies were rocked five years ago, when the authorities fully opened up the industry, allowing companies to handle any kind of travel related business, as long as they met the right capital requirements.
And so dawned the latest tide of OTAs, which have since attracted millions of not just wealthy, but much younger wealthier Chinese, creating a huge challenge to the traditional travel agencies, despite their massive resources to enhance their own competitiveness.
“We have started to see not only a loss of business to OTA companies, but also a brain drain of capable staff, who jump ship to the new internet companies because they offer higher pay and perks,” said Ren.
“Companies such as Ctrip started expanding at a pace much faster than we could have expected.”
Ctrip, formed in 1999, launched an initial public offering on Nasdaq in the United States in 2003 worth US$550 million, which has since transformed the business into the mainland’s dominant online player.
The company initially offered just booking services for hotel rooms and air tickets, but has since evolved into a sophisticated operation encompassing nearly all the aspects of the tourism industry.
Ctrip’s sales of 11.5 billion yuan in 2015, were a 48 per cent rise on the previous year. Its net profit jumped more than 10-fold to 2.5 billion yuan.
And at the end of last year, it announced it was merging with the country’s second-largest OTA, Qunar.
The mega-marriage between the two largest OTA players, however, was seen by industry officials as a double-edged sword.
Many agreed it would certainly help the combined company speed up direct bookings, but the newly created online industry monopoly was not well received by the airlines and other service providers, and some chose to severe their ties with the business because they were selling seats and beds too cheaply.
In the meantime, as the enlarged Ctrip suddenly struggled to convince the operators of its merits, a new name emerged onto the market, which analysts are now predicting will speed up its own expansion – Alitrip, the holiday-booking OTA unit owned by Alibaba Group.
Li Shaohua, its president, says the company is embarking on a different business model than other OTAs.
Instead of building its own travel resources, such as links with overseas travel agents and hotels, Alitrip is positioning itself as an “infrastructure builder”, a facilitator that digitally connects agencies and tourists. It already has 200 million users.
Alibaba, which owns the South China Morning Post, has huge online traffic which can be leveraged to help the e-commerce giant tap into various services, he adds.
Li Wenjie is chief executive of Shanghai Yaheng International Travel, a privately-owned online travel firm.
He is confident OTAs “will sooner or later become the dominant players in the domestic tourism market”, but he adds what makes the difference between smaller firms like his and larger ones, and the older state-owned firms, is “flexibility and diligence”.
Privately-owned travel service companies like his, he says, make more effort to deliver the best products for their clients, many of which are tailor-made – a particular failing of the state companies who can often appear to lack motivation to “fine-tuning their services”, he adds.
Yu Zhe, the regular traveller from Shanghai, agrees with Li’s claim.
“The smaller agencies do show more resolve in getting each person’s arrangements just right, and traditional travel agencies are too rigid.
“But having said that, people are still confident in the reliability and safety of the state-owned firms’ services.”
According to IT consultancy Analysys, the value of transactions completed by travel businesses via the internet hit 473.7 billion yuan in China last year, up 49.6 per cent from 2014.
But that OTA segment still only accounted for just 11.5 per cent of the total tourism industry spend in 2015, a 3 percentage point gain from the year before.
As the state-owned firms continue to lose market share to the internet upstarts, they are banking on consolidation and establishing wider brand awareness to survive, as well as planning to cut costs and enhance management efficiency.
China National Travel Service Group, the country’s largest conglomerate, has launched a 50 billion yuan investment fund – the biggest of its kind on the mainland – to spend on acquisitions by way of consolidating its foothold.
While China National Travel Service, a new entity created with the merger of state-owned China National Travel Service (HK) Group Corp and China International Travel Service Group, says it plans to leverage on its financial resources to better integrate its huge travel industry resources more efficiently and create a world-class tourism giant.
Zhang Fengchun, chief financial officer of China National Travel Service, says it also plans a huge expansion of its digital offering.
“There will be much more consolidation, and a further underlining of our professionalism,” he said. “We also want to further use securitisation to raise more funds for future growth.”
Shanghai Yaheng International’s Li says today’s China tourism sector is an “asset-light industry”.
“But at the end of the day, we need to focus on human resources rather than financial assets, because it’s people who offer the best service to clients.”