TRAVEL: Hotel Owners Unite to Counter Ctrip, Qunar

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Bottom line: A new alliance between some of China’s largest hotel operators is the latest reaction to Ctrip’s growing clout in the travel services sector, and could lead the anti-trust regulator to take remedial action next year.

Hotel operators band together against Ctrip

An increasingly powerful Ctrip (Nasdaq: CTRP) is in the headlines as the new week begins, with word that some of China’s top hotel operators are banding together to protest what they see as unreasonable demands by the online travel services giant. News of this action is once again spotlighting Ctrip’s recent purchase of big stakes in nearly all of its major rivals, in a bid to reduce the rampant competition that has plagued the industry over the last 2 years.

I wrote about this issue just last week, when media reported that Ctrip was in talks to take a stake in travel package site operator Tuniu (Nasdaq: TOUR), one of the few major players that doesn’t have an equity alliance with Ctrip. (previous post) I observed that such a tie-up would help Ctrip by neutering one of its last major domestic rivals. That could ultimately draw the attention of China’s anti-trust regulator, which until now hasn’t taken any action to break-up near monopolies in many  of the country’s Internet spaces.

Against that backdrop, this new action by major hotel owners could provide more reason for the regulator to take some action against Ctrip to prevent the company from becoming too powerful in the lucrative market for travel services. According to the latest reports, 8 major hotel operators have come together to form a new alliance whose name translates to “The Future Hotel Alliance of China”. (Chinese article)

The list of names is mostly big state-owned operators, and perhaps it’s significant that one of the largest, Jin Jiang (HKEx: 2006; Shanghai: 600574) isn’t part of the new group. Also absent from the list are China’s 2 largest private operators, Homeinns (Nasdaq: HMIN) and China Lodging Group (Nasdaq: HTHT).

The reports say the new alliance covers more than 80,000 rooms in 300 hotels nationwide, and its formation comes after another group formed a similar recent alliance. The hotel operators say they are taking their action following last month’s equity tie-up between Ctrip and its former archrival Qunar (Nasdaq: QUNR), which is controlled by leading search engine Baidu (Nasdaq: BIDU).

Rising Commission Rates

Following that tie-up, Qunar and Ctrip have reportedly hiked the commission rates that hotels must pay when people book rooms on the 2 companies’ websites. Such synchronized action by the industry’s 2 largest travel websites would immediately draw attention from an anti-trust regulator in the west, since it reflects behavior that is obviously anti-competitive.

Ctrip’s equity tie-up with Qunar was just the latest in a recent string of investments in most of its rivals. Ctrip already owns large strategic stakes in smaller rival Tongcheng and bought a large stake earlier this year in former rival eLong (Nasdaq: LONG). It also has a major equity tie-up with Priceline (Nasdaq: PCLN), after agreeing earlier this year to sell around 15 percent of itself to the US travel giant through a convertible bond issue.

This new action by the hotel operators is a direct response to Ctrip’s growing clout in the industry, since Ctrip and Qunar now appear to be working together on many of their pricing policies rather than trying to undercut each other. But the hotel owners may find they don’t have much leverage to fight back, since the number of online platforms with the reach of Ctrip and Qunar is limited.

I do expect these new hotel alliances will complain to the anti-monopoly regulator as part of their broader strategy to fight Ctrip’s growing clout. The fact that most of these companies are state-run and part of large well-connected groups could help them win a sympathetic ear in Beijing. In this instance I really do think they have a strong argument that Ctrip is behaving in a non-competitive fashion. Accordingly, we might finally see the regulator take some action sometime next year, which could ultimately force Ctrip to end its new Qunar alliance or sell recently acquired stakes in some of its other rivals.

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