By Perry Wu
Ctrip.com has quickly emerged as one of the leading players in the online travel industry in China. It is the operator of one of the leading travel agency websites in China, as well as a 24-hour customer service center. It debuted on the NASDAQ in late 2003 and its stock so far has held steady. Investors seem to believe that it is poised to profit from the travel needs of an ever-expanding group of prosperous Chinese.
Yet, it is misleading to think of Ctrip as a full travel service provider like the popular U.S. online travel retailers, Travelocity and Expedia. These American sites do a brisk business in selling both air tickets and hotel bookings and attract travelers who want both services. But these comparisons are not apt.
Much of the success of the American online travel players comes from the fact that the American system of air tickets is enormously complex. Most airlines in the U.S. practice a system known as yield management. Yield management uses some highly complex algorithms to determine what price should be charged for what seat on what day. In essence, as most frequent U.S. travelers are familiar, a company may charge $200 for a seat on a particular route on one day, but may charge $1,000 for the same seat on the same route if the ticket is booked several days later. As a result of this system, Travelocity, Expedia, and Priceline hold a competitive advantage by helping travelers search the airlines abstruse pricing schedules to find the least expensive seats.
However, China's airline ticketing system is much simpler. There is basically only one standard price for a particular route. Although some travel agencies can discount from this standard price, this discount comes only from travel agents, not the airlines.
So without this air ticket complexity, Ctrip lacks a strong competitive advantage in the air ticketing business. Fortunately, Ctrip seems to realize that its upper hand is in hotels, as about 85% of its revenue derives from hotel bookings. Ctrip's major competitive advantage comes from the sheer size of its customer base it can use to its negotiating advantage in dealing with hotels. In this, Ctrip clearly has the upper hand as China's hotel industry is highly fragmented, especially hotels below five stars. So Ctrip is not so much a Travelocity or Expedia, but more like a Hotels.com.
However, Chinese companies like eLong.com are poised to pounce on Ctrip's business model. eLong appears ready for its own IPO as it recently hired Sohu.com's former CFO, Derek Palaschuk. Though Palaschuk lacks much experience in the technology and the travel industries, he is an experienced barrister and accountant who will serve eLong well. eLong also holds a larger advantage over Ctrip in the distribution of its membership loyalty cards. These cards allow eLong's "members" discounts at thousands of locations all over China. Throw in other well-known companies like Hengzhong Weiye and Sina.com's own CaiFu card service and you have a bustling group of competitors vying for the discount card and travel market. Ctrip is attempting to break through the competition, but national and provincial spoilers will make this more difficult. You can almost feel the Ctrip boardroom fear of all the upstarts coming into the market!
Ctrip is also attempting to cash-in on the inbound China visitors, by launching English-language versions of its services. However the Ctrip brand is not as well known as English-language only services like ChinaTravelNow.com and eLong's own English-language service that nips at ChinaTravelNow's heels. Ctrip is trying to build horizontally across it's industry when it should concentrate more effort on building a richer, deeper Chinese-language online search platform.
But there is a deeper long-term problem with the company that lies with the management of Ctrip. The Chinese travel industry is now a ferociously competitive business, with an inexhaustible supply of entrepreneurs who hawk their air-ticket business by handing out business cards on street corners, and where there is hardly a city block in urban China without a storefront travel agency. This is a business where management experience and diligence are of utmost importance. But that is not Ctrip.
Mr Neil Shen, Ctrip's co-founder and current President and CFO, has engineered much of Ctrip's performance thus far. From a background as an investment banker in New York and Hong Kong, Mr. Shen has been expert at steering the company from inception to IPO and now publicly-traded company. But Mr. Shen has also retained some bad habits from his banking days. His photos show him sporting a slicked-back hair style, a curiously appropriate metaphor for how Mr. Shen is positioning the company to investors. He either forgets or does not seem to be aware that one primary job of leading a company is to be identified with setting goals.
In a recent press release, Mr. Shen showed his true colors. He said: "Q1 2004 was a stronger than expected quarter for Ctrip. We outperformed our guidance in net revenues by about 16% and in profit by about 42%."
Let's get real. If Ctrip is run well, this will be reflected in Ctrip's long-term stock price no matter what "guidance" Mr. Shen gives. However, based on Mr. Shen's own statements, that is not what he is doing. Setting goals is the domain of a company's executives, not outsiders. Financial analysts may ask for "guidance" and it is a company's prerogative whether to give it. But in no case should a company run its business according to financial analysts' estimates of how a company should be doing. If Mr. Shen wants analysts to set goals for the company, maybe Mr. Shen should leave the company, saving Ctrip his salary and just let the company's goals be set by outside analysts. Mr. Shen should keep his focus–and limited time–on running Ctrip, not on focusing on whether it is conforming to outsiders' expectations. Mr. Shen and his PR machine and living in a day-trader's world when they should instead focus on long-term viability of their services and brand.
And aside from Mr. Shen, Ctrip's board of directors is stacked like a mountain of mainly investment industry executives. There does not appear to be a single director with travel experience prior to joining Ctrip's board. More importantly there seems to be nobody with ties to China's major bureaus and ministries policing the domestic travel industry. Even Ctrip's other co-founder, Mr. James Liang, comes from a technology consulting background with companies like Oracle–not the travel industry.
So with this group running Ctrip, what else can an investor expect than the management to be more focused on flipping and merging and acquiring and dealing and spinning– which will do Ctrip no good. China's domestic travel industry is just beginning and there is enormous growth potential for Ctrip's competitors. You can tell a company's character by the executives that it keeps. The company's upper echelons are sorely lacking in seasoned and sober travel industry management. Ctrip's long, strange journey's destination is hidden in plain sight.
About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.