The Online traveling market overview in China

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Online travel booking means that travel consumers book travel products, services such as air tickets, hotels, travel routes, etc. to travel service providers via the Internet or by telephone, and pay online or offline. In combination with the current status of online travel in China, inquiries from online travel service providers’ websites and booking successful transactions through Call Center are also considered as online travel transactions.

Online Travel Agency (OTA) is an intermediary for selling offline travel services. The industry has the characteristics of “low frequency and high unit price”. OTA companies provide convenience for consumers, provide customers with a source of business, and improve the overall operational efficiency of the industry chain, so they have long-term investment value. OTA enterprises solve the pain points of consumers’ booking air tickets, hotel or travel tickets, and information asymmetry, providing users with one-stop services such as price comparison, reservation, online payment, etc., while satisfying the merchants to increase attendance or occupancy rate. Demand. OTA enterprises have optimized the customer experience, reduced the cost of separate merchants, improved the overall efficiency of the booking process, and improved the value transfer process of the tourism industry.

First, online travel sales scale analysis and forecast

In 2016, the total number of global tourism exceeded 10 billion for the first time, reaching 10.5 billion, an increase of 4.8% over the previous year, 1.4 times the global population; the total global tourism revenue reached 5.17 trillion US dollars, an increase of 3.6% over the previous year, equivalent to Global GDP is 7.0%; global tourism total passenger and total tourism revenue growth rate is significantly higher than global GDP growth. In 2016, the number of international visitors exceeded 1.2 billion. In the global economic downturn, tourism, including cross-border tourism, has shown strong growth.

In 2017, global online travel sales were $613 billion, an increase of 11.7% compared to 2016. Among them, in 2017, the Asia Pacific region will surpass North America to become the world’s largest market.

    1. Analysis of income sources in online travel (OTA) industry

There are three main sources of revenue for OTA: Agency, Merchant, and Advertising. Most OTA companies use the proxy model as the main profit model. 1. Agent mode, that is, OTA sells products for suppliers (hotels, airlines)/agents (travel agencies), and draws commissions according to a certain percentage of sales. 2. Wholesale mode, OTA purchases products from suppliers at wholesale prices, and then sells them to users to increase the difference. 3. Advertising mode, OTA provides display advertising services for suppliers and charges advertising fees, which can be subdivided into CPM (pay by display), CPC (pay per click), CPS (pay by sales) according to the charging standard. The profit model that OTA companies can choose is not unique. Generally, OTA companies can choose a profit model with one mode or multiple modes.

In the agent mode, OTA serves as a platform to connect consumers and suppliers, help merchants to sell travel items or package products, and draw commissions in proportion. The commission is provided by the merchant, but will eventually be passed on to the customer. The participation of OTA in this mode is not high, and the actual transaction is conducted by merchants and consumers. Due to the strong voice of the airline, the ticket booking is widely used in the agency mode. The hotel and other bookings are both agents and wholesale models, but the agency model is mostly.

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In the wholesale mode, OTA first buys out some services (such as airline tickets/hotels/travel products, etc.) and then sells them to consumers to earn the difference. The return rate is higher and the risk is higher than the agent rake. The participation of OTA in this model is very high, and the actual transaction is carried out by OTA and consumers. OTA buys out the inventory in advance and bears the business risk. The consumer prepays the retail price to the OTA. After the user completes the service, the OTA will pay the wholesale price to the merchant. In the process, the OTA earns the difference income and also occupies the user’s funds. high. However, due to higher inventory risks, losses may occur once demand is less than expected.

The advertising model is aimed at merchants with large demand, and OTA provides them with a marketing platform, which currently accounts for the smallest proportion of advertising revenue. In order to attract more effective customers, airlines, hotels and travel agencies with high customer pressure will choose to advertise on OTA websites or mobile platforms. OTA will charge advertising fees and earn advertising revenue. At present, OTA’s advertising revenue accounts for the smallest proportion. As the platform value increases, its advertising revenue share is also expected to increase.

The international OTA giant BOOKING is mainly based on agency mode, and EXPIDIA is mainly based on wholesale mode. BOOKING Group’s 18Q1-3 agent/wholesale/advertising and other models accounted for 73%/20%/7% of revenue, respectively, and the business model was mainly agent. Expedia Group’s 18Q1-3 agent/wholesale/advertising and other models accounted for 30%/59%/11% of net revenue, respectively, and the business model was mainly wholesale. Agents and wholesale models have their own advantages and disadvantages. How to choose depends on corporate strategy and business planning.

    The international OTA platform is dominated by the proxy model (or the OTA platform is larger in the proxy mode). The agent model is more friendly to consumers (less charge, more convenient), and has a clear advantage in the expansion stage of the OTA market. The wholesale model is difficult to become mainstream or there are three reasons: First, the transparency of ticket business is getting higher and higher, and the space for price increase sales is narrowing. Moreover, the increase in sales is not convenient to issue an equal amount of itinerary for reimbursement. Second, under the full contracted production and sales, the hotel service level is also difficult to maintain. Regardless of how the benefits of the service are locked, the hotel lacks the incentive to improve service levels. Third, under the condition that the OTA is responsible for receiving the payment, the customer needs to prepay in advance, but the customer’s willingness to pay before the product is not strong. The hotel industry is highly decentralized and the information is not equal. The customers are not willing to pay before the store.

    In the third quarter of 18 years ago, the BOOKING wholesale model accounted for an upward trend, mainly due to the increase in bargaining power. The final form of the future business model depends on the degree of monopoly of the OTA, and the increase in monopoly can drive the increase in the wholesale model. With the increase in OTA’s operational monopoly, it is expected that the wholesale model is expected to increase, OTA will receive more advance payments (from consumers) and higher profit margins (from spreads), and the penetration as a travel agency will be further enhanced. .

    The domestic OTA faucet is mainly based on the business model of agency rake, specifically to the upstream procurement and downstream payment models, and is divided into direct mining and agency, prepaid and cash. OTA largely replaces traditional distributors, so direct purchases dominate and consumer choices are diverse, so prepaid and pay-as-you-go account for the majority. Although the ratio of direct mining and prepaid is not low, there are few cases where OTA wholesale buyouts and inventory risks are required. Ctrip only implemented limited wholesale business during the tourist season (for travel packages), and Tongcheng Yilong’s buyout spread income is also shrinking.

    Upstream procurement products can be classified into “direct mining” and “agent” according to their different sources. Direct mining is directly purchased from suppliers, and there is no middleman to make a difference. This is the most important form of procurement for OTA. For travel packages that require strong operational capabilities and a small number of travel items (there are cases where travel agencies are underwriting), OTA will implement secondary agents. Most of Ctrip’s hotel products are direct mining mode (80%), and even some secondary agents are direct mining mode.

    Downstream payment forms can be classified into “prepaid” and “pay” according to their different points in time. Prepaid is the payment to the OTA when the user makes a reservation. After the supplier performs the service, the OTA pays the supplier. The advantage is that the running rate is low, and the OTA can also occupy the user funds. For users who are more cautious in decision-making and hotels that need to settle their own accounts, OTA takes the form of pay-as-you-go. Ctrip and eLong have made prepaid products from around 13 years ago. Up to now, Ctrip’s more than half of the hotel products are prepaid models (55%), of which about 45% of the direct mining methods are prepaid, 55% are paid, and the agency method Almost 100% are prepaid (there are many intermediate channels, and it is not easy to control).

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    In the past, domestic OTA faucets have also used cash back red packets to get customers. At present, Ctrip and where to go have rarely used this method. The cashback method rewards guests with cash or red envelopes when they arrive at the store. This model makes travellers, OTAs, and hotels profitable, and companies that are responsible for reimbursement expenses are damaged. This business model with awkward values ​​will eventually fade away as society progresses. During the price war period, Ctrip, Yilong and Qunar used the cashback mode to seize the share. With the stable structure and increased voice, Ctrip and Qunar have significantly reduced the proportion of cashback products. At present, their cashback products account for the first- and second-tier cities. Less than 4% and 2%, but the return rate is higher. On the contrary, Tongcheng Yilong still adopts the cashback mode. Although the cashback rate is not high, it helps to promote the secondary consumption of its long-tailed long-tail customers.

    2. Analysis of operating expenses of online travel (OTA) industry

    The core revenue of the OTA platform comes from acting as an intermediary between C-side tourists and B-end merchants. Therefore, its largest expenditures flow to C-side marketing and service support, B-side resource development and daily maintenance, and OTA giants at home and abroad are all involved. The difference is that the difference in the competitive landscape between OTG and domestic and foreign markets directly affects the trend of the expense ratio.

    The main expenditure of BOOKING is marketing and sales expenses. The 2010-18Q1-3 rate has been slowly increased from 37% to 40%. The relatively stable marketing and sales expense ratio is mainly due to the relatively stable competition. Among them, the effect marketing rate is 31.5%, mainly for search engine keyword purchase and meta search site recommended purchase; brand marketing rate is 3.4%, mainly to enhance brand awareness of TV and other online advertising; other sales rate is 5.4%, mainly Including credit card processing fees, third-party call centers and content translation website service fees, other promotional fees, etc. In addition, the personnel and management expense ratio is stable at about 18%, the total operating expense ratio is stable at around 60%, and the overall expense ratio is at a stable and controllable level.

    The main expenses of Ctrip are sales and marketing expenses, product development costs and call center costs. The increase in sales marketing and product development expense ratio is mainly due to the fierce market competition, and the decline in call center cost rate is mainly due to the scale effect. In the 15 years of acquisition, where the competition pattern improved, sales marketing and product development rates fell to 27.7% and 27.6%, but with the threat of rivals such as the US group, the sales marketing expense rate rose to 30.3% in 17 years. The call center is a heavy asset investment. With the scale effect, its cost ratio fell to 9.6% and 7.2% in 16-17. In addition, the general administrative costs are stable at about 7%, the total operating cost + expense rate for 17 years and 18Q1-3 is around 82%, and the long-term goal is to reduce it to below 80%.

    The product development cost is mainly used for the development and maintenance of B-side merchants and technology investment. It is expected that the future expense rate will remain. Since merchants are born with profit, the development difficulty of the B-end will increase with the richness of the products, and the development cost will increase with the increase of income. Judging the product development expense rate will remain stable for a long time.

    Sales and marketing expenses are mainly used for C-side acquisitions and promotions, mainly including downloading and branding of C-side apps. In the long run, the sales expense ratio is expected to decline with the increase in user stickiness. The intrusion of the US group led to a change in the competitive landscape. The results of the third quarter report were less than expected and the profit outlook for the fourth quarter was lower than expected. In fact, it has a greater relationship with the increase in advertising expenses. After judging the pattern, the sales and marketing expense ratio will gradually decline.

    The call center mainly provides online booking and consulting services for users, and its cost rate is decreasing year by year, providing the main operating leverage. The scale operation of domestic call centers has gradually matured, and its cost rate has decreased year by year, from 9.4pct in 16 years to 7.2pct in 17 years. The increase in 18Q1-3 is mainly due to 1) the opening of several international call centers; 2) After the economic downturn, the increase in the number of cancellations resulted in an increase in call center expenses. Judging the future scale effect will further play a role.

    The change in advertising expense rate is closely related to the change of competition pattern. Due to the intensified market competition, Ctrip’s advertising investment has increased. With the increasingly fierce competition in the OTA market, Ctrip’s advertising expense ratio is increasing, from 15.7% in 2008 to 15.7pct to 17% in 17 years. After 16 years of Ctrip and where to merge, the competitive landscape was optimized, and its advertising expense rate fell to 14.6%. The rapid increase in Ctrip advertising expense rate in 17 years was mainly due to the rise of US Mission and Flying Pig, increased user competition and soaring customer costs. It is expected that with the gradual stabilization of the competitive landscape in the future, advertising investment is expected to slow down.

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    The high cost of marketing and investment has caused OTA companies to embrace search websites or social platforms. Ctrip and where to get Baidu shares, Tongcheng Yilong won the shares of Tencent, and then the entrants Feifei and Meituan travels get traffic from their respective ecosystems. As traffic barriers increase, the remaining entrants lacking financial strength and flow support will find it increasingly difficult to take their place.

    Non-advertising sales fees are mainly used for personnel expenses and promotional expenses, and their expense ratios are stable and declining, as well as operating leverage.

After the elimination of advertising fees, the sales expense rate has been steadily decreasing, from 4.5pct in 15 years in 12 years to 11.2% in 17 years, reflecting the operational leverage effect. Judging the competitive landscape, its impact is weaker than advertising, and the rate still has room to fall.

    Second, the analysis of the development scale of China’s online travel market

    1. Analysis of the scale of users in China’s online travel industry

    As of December 2016, the number of Internet users booking airline tickets, hotels, train tickets or travel and holiday products reached 299 million, an increase of 39.67 million compared with the end of 2015, with a growth rate of 15.3%. The proportion of netizens using online booking train tickets, air tickets, hotels and travel vacation products was 34.0%, 15.9%, 17.2% and 7.4% respectively. Among them, the number of netizens booking mobile tickets, hotels, train tickets and travel and holiday products reached 262 million, an increase of 51.89 million compared with the end of 2015, with a growth rate of 24.7%. The proportion of online travel bookings by Chinese netizens using mobile phones has increased from 33.9% to 37.7%.

    2. Analysis of the market scale of China’s online travel industry

    In 2016, the transaction volume of China’s online travel market reached 613.8 billion yuan, a year-on-year increase of 36.8%, and the growth rate was moderated from the previous year. The growth of online travel booking users is mainly due to the following three factors: First, the strong support of relevant government departments. The National Tourism Administration identified 2014 as the “Smart Tourism Year” and encouraged enterprises to improve the service quality and user experience of online travel bookings through advanced technologies such as cloud computing technology, Internet/mobile Internet, and intelligent terminals. Second, social capital has a high investment intensity for tourism, as well as active intra-industry investment mergers and acquisitions, which promotes the improvement of the overall environment of the tourism industry and the improvement of service quality. Third, the improvement of tourism products, the promotion of corporate promotion and promotion, the promotion and application of mobile APP stimulated the travel needs of consumers, and prompted a large number of offline travel booking users to transfer online.

3. The proportion of online holiday market

In 2016, the online travel vacation market in China was 98 billion yuan, a 42% increase from 2015, accounting for 15.7% of the overall online travel market, up 0.3 percentage points from 2015.

     In the online travel market, the online holiday market is the fastest growing, accounting for 5.8% of the online travel industry in 2009, up from 16.3% in 2016. Overall, the online holiday market has broad prospects and it is expected that the growth rate will remain above 25% in the next few years.

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