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An easy way to lose friends in China is to talk about how its companies receive state money and protection from foreign competitors.
But you can’t evaluate the performance of travel technology giant TravelSky without looking at how it benefits from having a total monopoly — with zero rivals in its domestic market for its flagship services.
The state-backed company continues to grow. On Friday, TravelSky released its audited annual results. In 2018, the company generated $1.11 billion (RMB 7,472.1 million), representing an increase of 11 percent year-on-year.
However, some Chinese airlines that heavily depend on its services may wonder if TravelSky is adequately keeping pace with global needs for online distribution, retailing, and passenger services.
Like its counterparts abroad — Amadeus, Sabre, and Travelport — airlines created TravelSky. All of the domestic Chinese airlines participated in TravelSky’s birth in 2001, and a few continue to have ownership stakes.
Last year TravelSky’s revenue growth of 11 percent was slightly less than its overall volume of passengers process, though it was broadly in line with an estimated 11 percent increase in passengers flying domestically in China. TravelSky has a lock on the data exchanges related to domestic flights. But it would need to grow at a rate faster than the average in passenger growth to suggest it is growing faster in new products, such as the retailing of ancillaries, and not merely sticking with its cash cow businesses.
Like its foreign counterparts, TravelSky has become more profitable on average than the airlines it serves. In 2018, it generated profits after taxes of $394.8 million, representing a rise of 3 percent, year-over-year. Profit represented about 35 percent of revenues for the year, in line with average profit at its foreign peers. Domestic and foreign airlines typically earn profits of less than 15 percent of revenues, at best.
Last year TravelSky saw its expenses rise, it reported Friday. It spent about $130 million last year toward completing a new, 18-building operating campus and data center in Beijing.
More importantly, its commission and promotion expenses increased quite significantly last year. The company raised its average commissions to agents, paid more in commissions to agencies to develop its overseas distribution, and spent more on marketing its distribution services.
On a call with investors on Friday, research analysts expressed concern about rising costs. Executives said the rises in commissions took place in its domestic market. Commissions on tickets served by foreign airlines, with fees averaging slightly less than $4 a segment, remained stable partly because international competition is restricted.
Airlines are increasingly distributing their tickets through direct connections via their own channels and agencies, which is pressuring TravelSky to offer volume discounts, experts said.
TravelSky’s other operating expenses increased 68 percent, to $74 million, year-over-year, mostly related to moving its staff to the new buildings and paying wage increases. Its headcount fell slightly.
Tension With Airlines?
Like its foreign counterparts, TravelSky faces private grumbling by some carriers, who prefer to drive more customers to shop directly than route them through third-party systems.
Exhibit A: In April 2018, China Southern, Asia’s largest carrier, stopped allowing passengers to use online check-in services powered by third parties. TravelSky’s subsidiary Umetrip, along with other providers like VariFlight, Ctrip, and Alibaba’s Fliggy, no longer can provide check-in services online. China Southern forces passengers to check in online via its mobile app or via its software that handles passenger requests by text-message and WeChat message.
China Southern’s snub of TravelSky’s UmeTrip product is a blow as it undercuts the tech giant’s plan for the consumer-facing mobile app to become popular with Chinese customers. In a half-year report for investors, TravelSky said that UmeTrip has had “stable growth” without offering an update on how many people use it.
China Southern has also been using a mix of internal and foreign technical capabilities to link directly with foreign players. Earlier this month, China Southern began to let American Airlines staff help members of its frequent flier programs redeem miles for flights on China Southern using Sabre’s system. By year-end, each airline’s loyalty members will be able to book flights directly through the other carrier’s website and earn and redeem miles reciprocally.
To be sure, China Southern still uses TravelSky’s vast array of distribution and operational software and the airline still owns nearly a tenth of the tech company, though it has been selling some of its shares recently.
TravelSky has dozens of subsidiaries, and some of them face domestic rivals. Yet in its largest businesses, it is insulated from rivals.
For instance, TravelSky has little competition in selling operational technology to new airports in China. China has been undergoing an airport-building spree, and TravelSky has ridden the wave by helping to install new equipment. In September, Beijing’s new capital airport is slated to open, and TravelSky will benefit, having invested about $22 million in providing passenger processing tech.
The company has, like its counterparts abroad, been working to adopt new airline expectations for how airfares and add-on products are sold and distributed.
However, TravelSky’s insulation from market competition risks creating complacency.
Executives are aware of the issue. In 2016, TravelSky acquired OpenJaw Technologies, a Dublin-based electronic retailing service for airlines, for $39.4 million. The deal gave the company more exposure to foreign players and their digital expectations. As a side benefit, in 2018 the Irish government gave it a subsidy of about $2 million for its investment in the company.
TravelSky has overseas objectives. As Chinese airlines expand flight networks to cover more international destinations, the company has to make sure that its distribution network and services can reach all these places.
Secondly, it wants to defend its current market share in providing distribution services to foreign airlines flying in and out of China and, if possible, expand it at the expense of Amadeus, Sabre, and Travelport. Only since 2013 have Amadeus, Sabre, and Travelport been able to work in helping airlines and agencies sell outbound services but they have been making slow progress.
A typical company statement was its recent one that its “system is following and anticipating the international distribution trends but also allows us to serve our key market in China with its special characteristics well.”