Analysis: Priceline and Expedia Trying to Figure out What Works in China

In the rough and tumble China travel market, what Expedia Inc. CEO Dara Khosrowshahi refers to as the “wild, wild East,” U.S.-based online travel agencies are measuring up each other and the market itself as they grapple to craft viable long-term strategies in what soon will be the world’s largest travel market.

Likewise, Chinese online travel agencies, including Ctrip, are playing the field when it comes to international partners, hedging their bets and playing off one against the other.

In moves over the last few days:

• The Priceline Group announced May 26 that invested $250 million in China’s Ctrip, in addition to the roughly $500 million it injected last year, upping its stake in Ctrip to 10.5 percent. Priceline got the right through its initial investment last year and indeed named an observer to the Ctrip board. With the latest investment round Priceline also gets the opportunity to increase its share of Ctrip to 15 percent of its outstanding shares.
• Expedia last week sold its controlling stake of money-losing Chinese online travel agency eLong to Ctrip. For the $400 million that Ctrip chipped in as part of the transaction, it gets a a 37.6 percent stake of eLong.
• As part of the Expedia sale of eLong to Ctrip and other investors, Ctrip and Expedia agreed to cooperate in building vacation packages to China and other markets.

Expedia’s Confounding Moves in China

On the face of it, Expedia’s move to sell its largest footprint in China, eLong, after Expedia officials have emphasized over the last few years their long-term commitment to participate in country, appears to be a positive financial move in the short-term but a confounding one strategically.

“It was a surprising move and suggests they [Expedia] are less-committed to China than they were a week ago,” says Michael Olson, a managing director and senior research analyst covering online travel at Piper Jaffray.

Olson says Expedia’s selling of its 60 percent eLong stake to Ctrip and other investors was designed to appease Expedia shareholders who were becoming increasingly frustrated with eLong’s losses and the adverse impact on Expedia’s financial results.

The move has less to do with strategy and more to do with the “optics” of Expedia’s financial results, Olson says, with the core business profitable and that picture now more readily apparent for investors to see.

Olson argues that Expedia likely believes that it can achieve its goals of inventory-sharing with Chinese travel companies without the drag of its 60 percent control of eLong and resultant red ink.

In that regard, Expedia and Ctrip — despite the Priceline Group’s increased investment in Ctrip — agreed to cooperate in several markets and vowed to work together on vacation packages.

Some contend that this partnership announcement was merely a face-saving gesture as a cover for Expedia’s about-face in China, while the counter-argument is that the vacation package business should not be viewed as inconsequential.

Not Done Yet

Expedia is not “done” in China and officials believe that the country is a super-fast-changing marketplace and is just in its initial phases of growth. The situation is very fluid, they say.

Because of the extreme discounting battle under way between Ctrip, Qunar, and eLong, among others in China, investing in eLong was just too expensive a way to engage in China over the long term, goes the thinking.

Although Expedia has greatly reduced its presence in China — for now — it still has several cards it is playing.

Expedia recently acquired its Air Asia joint venture, controlling 75 percent, and although there is no Expedia-branded site for mainland China, Expedia gets China business through an Expedia-branded site in Hong Kong, another 10 Expedia-branded sites throughout  Asia-Pacific, and AirAsiaGo.com.

Expedia also has a not-insignificant business through its Expedia Affiliate Network in China, partnering with airlines and other travel companies there, and Egencia, Expedia’s corporate travel offering, has a presence in China, as well.

“Everyone is looking at multiple different ways to have investments in China,” says one insider. “There are a lot of horses.”

One has to wonder, too, whether Expedia, which has acquired Travelocity, Wotif, the Air Asia joint venture and Orbitz Worldwide (pending), among other purchases over the last year, had too much on its plate to make a go of it with eLong and all its challenges in the fierce China market.

Priceline Answers Back?

The Priceline Group’s announcement May 26 that it increased its stake in Ctrip to 10.5 percent obviously was not a reaction to the Expedia-Ctrip statement that they would be collaborating on travel products in several markets because the heightened Priceline investment in Ctrip had been in the works for some time.

The Expedia-Ctrip announcement did not catch Priceline unaware. Priceline doesn’t see their collaboration on air and hotel packages as problematic as Booking.com, which is the primary vehicle for Ctrip-Priceline Group cooperation, doesn’t sell airline tickets and there is the question as to how extensively Expedia and Ctrip will work together in practice.

The Priceline Group initially partnered with Ctrip in 2014, invested $500 million in Ctrip in 2014, and now has piled on with another $250 million.

Olson of Piper Jaffray says the Priceline Group correctly views Ctrip as the market leader in China, and probably believes Ctrip will increase its clout now that it took a substantial stake in rival eLong.

Some observers believe that the discounting wars will be toned down in China now that Ctrip will wield influence with eLong although Qunar is still committed to growing its market share despite mounting financial losses.

“It is hard to say what the end game is” in the Priceline Group’s relationship with Ctrip, Olson says, adding that Priceline has invested in China’s online travel leader and is seeking to tap into the fastest-growing segment of the market, Chinese outbound travel.

Both Priceline, Expedia and TripAdvisor, for that matter, know that the key to investing in China is through local players. Expedia is working with Malaysia-based Air Asia in Asia-Pacific, and Expedia’s limited partnership with Ctrip now leaves Expedia without a strong partner locally in China.

For the moment, at least.

Ctrip’s Strategy

For its part, Ctrip appears to be seeking to hedge its bets and build its portfolio of foreign online travel agencies to work with.

The collaboration with Expedia on vacation packages fits Ctrip’s needs because Priceline’s Booking.com doesn’t sell flights.

Ctrip, too, took the investment from the Priceline Group, the largest global hotel player, to meet the needs of Chinese customers traveling internationally.

By diversifying its online travel agency partners, Ctrip is taking a page from Expedia and Priceline, which have long used multiple global distribution systems to access airline inventory. Ctrip can balance its allegiances and fill inventory gaps by collaborating with both the Priceline Group, Expedia and now eLong, among many others.

Suffice it to say that the Chinese travel market is fluid, growing and dynamic, and today’s moves by Expedia, Priceline, Ctrip and eLong will only be viewed in the future as a blip in the market’s evolution.