Considering the market penetration of online travel in China, still a long way to go on growth, and mobile is just getting started. Homegrown players dominate the market, and the only way larger global players can get in is buy their way in.
Editor’s Note: We are starting a new regular series on Skift, “Skift Country Profiles“, which are primers on the online travel market in countries across the globe. The goal of this series is to look beyond the usual suspects of U.S., UK and major European markets we and other travel media cover regularly.
The country profile will convey the larger picture on online and mobile adoption, the major players in the online travel market, the up and coming startups in the country (when we can), the competitive scenario and the future growth prospects of the industry at large, among other issues.
We are starting with a big, rather than an obscure market: China. For the first profile, we’ve “borrowed” the details from the latest S-1 IPO filing by online travel service provider Qunar, as it prepares its $125 million IPO on the New York Stock Exchange.
The S-1 Qunar filed last week has a long section the online travel sector in China, the major players, and the most recent numbers on their market share, etc, which we’ve used below:
Growth of the Chinese Travel Industry
The travel industry in China has undergone rapid growth driven by several trends such as the rising disposable income, an expanding middle class, growing consumer demand for travel, rising car ownership, new emerging travel transportation means such as high speed rail, and supportive government policies.
Total revenues of the travel industry in China grew from RMB1.16 trillion (US $190 billion) in 2008 to RMB2.57 trillion (US$419 billion) in 2012, representing a CAGR of 22.0%, according to iResearch. Total revenues of the travel industry in China is expected to reach RMB3.76 trillion in 2016, representing a CAGR of 10.0% from 2012, according to iResearch.
However, both the number of domestic trips per year per capita and travel expenditure per capita in China remain low compared to those of developed countries such as the United States. According to Euromonitor, the number of domestic trips per year per capita was 1.8 in China compared to 3.2 in the United States in 2012. Tourism travel expenditure per capita was US $296 in China, compared to US $2,698 in the United States in 2012, according to Euromonitor.
The following table contains data from iResearch regarding the total revenue of China’s travel industry.
|Total Travel Industry||1160||1290||1870||2250||2570||2850||3140||3450||3760|
Price Competitive Airline Industry
The airline industry in China grew from RMB190 billion (US $31 billion) in 2009 to RMB240 billion (US $39.2 billion) in 2011 in terms of airline tickets transaction value, representing a CAGR of 12.4%, according to iResearch. The airline industry in China is relatively concentrated with 36 passenger airlines, with the top three airlines groups in aggregate accounting for a 75.5% share as measured by the total number of passengers carried in 2012, according to the Civil Aviation Administration of China.
Since April 2004, the PRC government no longer directly sets domestic airfares but instead sets benchmarks and allows the actual airfare to fluctuate within these benchmarks. Chinese airlines have adopted a multi-tiered pricing structure to distribute airline tickets through various channels to optimize yield management.
Local airline offices often have power to grant different commission structures to different air-ticketing agencies. As a result, airfare can vary significantly depending on factors such as air route, fare class, region purchased, timing and competitive pressure. As Chinese regional airlines tend to have strongholds in their own geographic areas, some airlines, especially smaller ones, have historically cut prices in an attempt to win market share in their competitors’ home markets.
Fragmented Lodging Industry
The lodging industry in China consists of upscale luxury hotels such as four and five-star hotels and other accommodations such as one-, two- and three- star hotels, economy hotels, as well as guest houses and private accommodations.
According to Euromonitor, there were 313,926 travel accommodations, including 27,359 chain hotel properties, 74,910 independent hotels and 211,657 other travel accommodations in China in 2012. As of December 2012, the top five hotel groups accounted for a 12.3% market share in terms of retail value in China, as compared to 54.3% in the United States, according to Euromonitor.
Although economy hotel chains are growing rapidly, their development still remains in an early stage. In addition, increased leisure travel has translated into strong demand for affordable guest houses and boutique hotels, especially in areas near popular tourist attractions. However, most independent hotels and guesthouses in China are small and lack of IT infrastructure and online marketing capabilities. In contrast, hotels in the United States tend to be technology savvy and have sophisticated information technology infrastructure and online marketing capabilities.
Fragmented Travel Agency Industry
Travel products are mainly distributed through a highly fragmented and multi-tiered travel agency system in China. According to the China National Tourism Administration, there were 22,784, 23,690 and 24,944 travel agencies in 2010, 2011 and 2012, respectively, in China.
A majority of travel agencies tend to be unaffiliated and small local office operations. Even the large travel agencies that operate on a nationwide basis are often structured such that each local office operates independently from others. In 2011, traditional offline travel agency channel in China accounted for 61.6% of the total airline ticket sales in China, according to iResearch, as compared to 49% in the United States, according to PhoCusWright.
The requirement for each air-ticketing agency to obtain a separate license from the Civil Aviation Administration of China to conduct business in any city has further hindered the ability of local air-ticketing agencies to operate in multiple locations.
In addition, travel agencies must obtain a separate license from the China National Tourism Administration to conduct other travel-related business such as hotel reservations. The fragmented and complex travel agency system results in low transparency for a large amount of travel information and persistent price differences for travel products and services.
Online Travel Market in China
The Internet has emerged as an efficient medium to conduct travel business in China. The online travel market has significant growth potential as there were 564 million Internet users in 2012 in China, the largest Internet population in the world, according to the China Internet Network Information Center, or CNNIC.
The online travel market in China grew from RMB48.6 billion (US $8 billion) in 2008 to RMB170.9 billion (US $27.8 billion) in 2012, representing a CAGR of 36.9%, according to iResearch. The online travel as a percentage of the total travel industry in China expanded from 4.2% in 2008 to 6.6% in 2012, according to iResearch.
Leisure travel has become a growing trend in China and leisure travelers are increasingly making their own travel arrangements and bookings online. However, the online travel market as a percentage of total travel market value in China is still low compared to developed countries such as the United States. According to PhoCusWright, the online travel market as a percentage of the total travel market in the United States was 40% by the end of 2011.
Airline tickets are the largest category of travel product searched and purchased online, representing 61.0% of Chinese online travel market in 2012 according to iResearch. Online airline ticket sales grew from RMB45.4 billion (US $7.41 billion) in 2009 to RMB104.2 billion (US $17.02 billion) in 2012, representing a CAGR of 32.3% according to iResearch. 21.2% of the airline tickets were sold online in 2011 in China, an increase from 12.4% in 2009, according to iResearch. In comparison, 51% of total airline ticket sales was conducted online in the United States in 2011, according to PhoCusWright.
Hotel bookings are the second largest category of travel product searched and purchased online, representing 23.3% of the total online travel market in 2012 according to iResearch. According to iResearch, online hotel bookings grew from RMB12.8 billion (US $2.1 billion) in 2009 to RMB39.7 billion (US $6.5 billion) in 2012, representing a CAGR of 45.8%. However, online hotel bookings only account for 12.4% of the total hotel bookings in China as of 2011, representing an increase from 6.3% in 2009, according to iResearch. In comparison, 31% of total hotel and lodging was booked online in the United States in 2011, according to PhoCusWright.
The following table contains actual and estimate data from iResearch regarding the revenue of China’s online travel market from 2008 to 2015.
|Total Travel Industry||1160||1290||1870||2250||2570||2850||3140||3450||3760|
|Online Travel Industry||48.6||61.8||94.9||131.4||170.9||223||280||340||400|
Growth Potential of Mobile Internet Travel Market in China
China’s smart phone connections have reached 270.7 million in 2012 and are expected to grow to 567.2 million in 2016, representing a four year CAGR of 20.3%, according to Informa Telecoms & Media. The smart phone connections as of total mobile connections in China are forecasted to grow from 23.2% in 2012 to 37.2% in 2016, according to Informa Telecoms & Media.
Trends such as the rapid 3G infrastructure buildup and 4G LTE rollout in China, the high growth rate in per capita income and the rising popularity of smart phones and other devices such as mobile tablets are expected to further fuel the growth of mobile Internet usage in China. Although the mobile Internet travel market is nascent, it is expected that an increasing number of Chinese travelers will use mobile devices and mobile applications for travel search, planning, booking, payment, itinerary management and photo sharing.
According to an online travel user survey conducted by CNNIC in September 2012, 42.3% of respondents named Qunar’s mobile travel application as the most frequently used by users, followed by 31.7%, 12.5%, and 2.9% for those of Ctrip, Taobao, and Tuniu respectively.
|Smartphone Connections (million)||33.9||80||180||270.7||351.6||428.2||501.2||567.2|
|Smartphone connections as of mobile connections (%)||4.6||9.5||18.3||23.2||28.3||31.8||34.8||37.2|
Source: Informa Telecoms & Media, as of April 2013
Increasingly Fragmented OTAs in China
In addition to the thousands of offline travel agencies in the traditional distribution channel, there are a growing number of online travel agents (OTAs) and travel-related websites. The OTA market in China has become increasingly fragmented as a result of increasing competition among OTAs as well as low barriers to entry into the OTA space due to availability of low cost basic web design technologies.
The following table shows the market share of OTAs in China.
The OTA market in China is relatively more fragmented than that of the US. In comparison, Expedia, Orbitz, and Priceline accounted for 43%, 22%, and 11%, respectively, of the OTA market in 2011 in the United States, according to PhoCusWright.
Challenges of the Travel Market in China
Chinese individual travelers remain under-served by a complex and under-developed travel distribution system with a lack of transparency on pricing and availability of travel products and services. Although the Internet has greatly increased the amount of information readily available to travelers, searching, purchasing and managing travel online can be a frustrating process for travelers as information is often fragmented and confusing across hundreds of traditional travel sites of OTAs, direct service suppliers, and other travel-related companies.
Furthermore, these traditional travel websites can be slow, and often lack real-time, comprehensive and accurate information on price and availability. The quality of information provided by traditional travel websites is often unreliable due to frequent changes in prices and availability. Travelers often have to search through multiple traditional travel websites to compare the prices and options to meet their needs.
Challenges for Travel Service Providers (TSPs)
TSPs want to effectively distribute their travel services and products to as many travelers as possible in order to maximize yield on available demand on a real-time basis.
In many developed countries such as the United States, advanced technology systems such as global distribution system (“GDS”), property management system (“PMS”), central reservation system (“CRS”) and search engines facilitating the distribution of real time travel information and transaction processing have emerged to provide easier access to organized and comprehensive travel information so as to more efficiently connect travelers and TSPs. In comparison, the existing travel distribution system in China is fragmented, and technologically under-developed. At the same time, most small TSPs lack the IT capability and economies of scale to build their own IT infrastructure. As a result, many small TSPs have to distribute their products through third party OTAs.
Although Chinese OTAs and travel-related websites have improved TSPs’ ability to achieve better yields compared to traditional offline travel distribution channels, many of them still rely on call centers to process sales offline and lack advanced IT capability to target travelers with desired products in a cost effective manner.
Some TSPs, such as airlines and hotel chains, are directly serving consumers through their own websites. However, suppliers’ direct sales to consumers remain low in China. Direct online airline ticket sales in China in 2011 accounted for 35.2% of the total online airline ticket sales and 7.5% of the total airline ticket sales, according iResearch, compared to 72% of total online and 37% of total airline ticket sales in the United States in 2011, according to PhoCusWright.
The table below shows the monthly unique visitors, or UVs, of the top five non-state-owned travel websites in China.
Photo credit: Kuxun, one of the larger players in the Chinese online travel market.