Chinese online travel agent Ctrip’s wish to merge with its competitor Qunar has finally come true. At the end of October, Ctrip announced it made a deal for a stock equity exchange with Baidu. According to the deal, Baidu would acquire 25 percent of Ctrip’s shares and Ctrip would acquire 45 percent of Qunar’s shares.
Baidu invested $306 million into Qunar in June 2011 and became Qunar’s biggest shareholder. Since then it has pushed the company to become the world’s largest online travel agent. The estimated market value of Qunar is $5.3 billion to Ctrip’s $10.6 billion as of this year.
But while Ctrip is happy with the merger, Qunar remains uneasy.
The two sides announced their intention to merge in early June. Yet, because they couldn’t reach a consensus on which side would retain control, negotiations were put aside.
Meanwhile, Qunar released a statement exposing the details and its intention to reject the plan for merging put forward by Ctrip.
In August, Qunar and Ctrip reported each other to Anti-Monopoly Bureau under the Ministry of Commerce, each denouncing their opponent for violating China’s antitrust laws.
Then, while Qunar was absorbed in thinking about how to fight against Ctrip, all of a sudden it was “betrayed” by its shareholder Baidu for the company’s Online to Offline (O2O) strategy.
In the domestic online travel market, Baidu has two powerful opponents: Alibaba and Tencent. Alibaba owns two online travel agents Alitrip and Qyer, and Tencent has invested in the travel agents Elong and LY.com.
Baidu has long been trying to find a way to fight back against Alibaba and Tencent, and for that it needed a solid basis for its overall O2O strategy. Being an intermediary between Ctrip and Qunar and promoting their merger is Baidu’s first step.
Statistics from Enfodesk Analysys shows, in the second quarter of last year, Ctrip controlled 38.7 percent of the online travel market and Qunar took 30 percent. By exchanging stock equity, Baidu now controls the majority of China’s travel market and has an opportunity to integrate its other businesses.
As sad as Qunar may be about Baidu’s betrayal, the company has no choice: Qunar posted a deficit of 1.84 billion yuan in 2014.
“By the end of December 2014, the total value of Qunar’s cash, cash equivalent and short-term investments was 1.5 billion yuan,” Zhunang Chenchao, founder and president of Qunar, told Economic Daily. “If it continues to lose money at such a pace, Qunar won’t survive this winter.”
Faced with such an outcome, Ctrip’s merger with Qunar remains a better alternative.
Before the merger, Ctrip and Qunar had an overlap in many services. This overlap enhanced the competition between the two parties and increased their conflict. However, after the merger Ctrip will be able to make use of Qunar’s resources to make up for deficiencies in weak fields and consolidate its strengths.
In the first half of 2015, Qunar accounted for 35.3 percent of the online airline ticketing market while Ctrip accounted for 30 percent. As for online hotel bookings, Ctrip held 38.9 percent, and Qunar held 24.4 percent. The merger helps Ctrip increase its market occupancy in both the online airline ticketing market and online hotel booking market and gives it a chance to become the king of China’s online travel market.
Weakening one enemy and adding a friend allows Ctrip to pay more attention to improving its own service, increase its competitive power and develop its business. On November 12, Ctrip opened a new business unit to handle the business of travel in nearby regions.
But the merger also has far-reaching consequences for the online travel market.
China’s online travel agents have been locked in a price war. Over the short term, the low-price strategy has encouraged users to pay for travel and sped up tourism development.
However, in the long term, it has harmed the development of online travel agents.
The travel market is easily influenced by many factors: slack seasons, peak tourism seasons, national policies and emergencies such as infectious diseases and natural disasters. That instability means online travel agents must bear greater risks.
However, “Ctrip merging Qunar implies the price war in online travel market may end temporarily,” Wu Zhixiang, CEO of LY.com, noted in an interview with Economic Daily.
Online travel agents are gradually returning to rational business practices and considering how to compete for fair and healthy development.
That might mean online travel agents increase their emphasis on developing new products and services, not on money-burning price wars.
Unfortunately, it’s not good news for customers who have come to depend on low-price travel.
In addition, some customers and experts worry that Ctrip will monopolize the online travel market, because it now controls the biggest percentage of the field. But whether that happens and what to do about it will be the business of China’s antitrust regulators.