A Chinese Travel Powerhouse in the Making?

The online travel booking industry seems to be consolidating across the board. In Europe and the United States, this has been going on for some years, with major players in the industry aggressively acquiring smaller websites. Now, China's travel industry seems to be looking to consolidate as well. Chinese online travel booking giant Ctrip (NASDAQ: CTRP  ) announced it was in talks with competitor Qunar (NASDAQ: QUNR  ) , in which Baidu (NASDAQ: BIDU  ) has a majority stake, over a possible tie-up. The combined company would be a powerful force in this fast-growing industry. What would the benefits of such a partnership be?

www.ctrip.com

The booming Chinese travel market
As the middle class in China expands, and consumers are left with more money to spend, the online travel industry is exploding. The market is estimated to reach 465 billion yuan, or $75 billion, by 2017, up from only 131.4 billion yuan in 2011. The package tour segment is experiencing particularly strong growth, as well as online car rental services. On the other hand, the air ticket market seems to be nearing saturation. 

In 2013, the total online travel market grew by a healthy 29% in China. According to a recent report on the subject by the Chinese firm iResearch, there is currently a price war going on between China's major players, with companies like Qunar and eLong hinting at large investments in the mobile channel, which is seen by industry watchers as the next major battlefield in the online travel space. 

A possible merger?
With Chinese online travel firms competing aggressively on price, it is no great surprise that companies are looking to consolidate, as this generally leads to cost reductions and synergy benefits. Ctrip, China's main online travel booking website, said it was in talks with Baidu's Qunar over a possible partnership, although the prospect of a merger has not been excluded. So far, Qunar has declined to comment on the rumors.

According to analysts, the deal makes sense for Ctrip, which often pays Qunar for web traffic to increase bookings. Partnering with a search engine is a logical step, as the two services are often intertwined. Moreover, the companies cater to different segments of the travel industry, and together, they would be able to more efficiently grow revenue in the space.

Qunar has been one of the companies making the mobile push, as Chinese consumers increasingly shop on their smartphones. A partnership would potentially give Ctrip increased access to this userbase, increasing traffic and lowering costs.

Meanwhile, a deal would fit with Baidu's current strategy of acquiring and investing in services to solidify its position in the Chinese Internet market, as Alibaba has increasingly been moving into Baidu's turf. In any case, a merger between Qunar and Ctrip would create a combined company valued at over $10 billion dollars, a formidable force indeed in the booming Chinese online travel booking industry.

The bottom line
Online travel bookings have been experiencing some fantastic growth in the West, but the market has also started to heat up in China, where the growing middle class is increasingly spending money on leisure travel. Following a process of consolidation in European and American travel websites, the Chinese online travel industry now also seems to be looking for partnerships, with major players Ctrip and Qunar rumored to be in talks over a possible merger, or at least closer cooperation. The combined company would be valued at over $10 billion, and would have a very strong position in the country's booming travel industry.

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