INDUSTRY TRENDS & DEVELOPMENT

Travel Agency Grows With Chinese Economy

Ctrip.com International (CTRP) is a hot ticket for growth in China. The travel agency's sales grew by more than 50% in the second quarter alone, as the company averaged 90 new customers an hour. Ctrip.com, which sells airline and hotel reservations via the Web and call centers, updates its progress with third-quarter results Wednesday after the close. Just like any other company, growth becomes more difficult with age.

Ctrip.com is counting on new initiatives and market shifts to keep growth at a frisky clip, even if that growth trails past performance.

The company recently launched a corporate travel business and is giving customers more travel options outside the mainland. Meanwhile, the government is pushing travelers to online tickets. The Beijing Olympics in 2008 should not hurt either.

Still, the biggest driver is the Chinese economy that has consistently grown at around 10% annually.

"It certainly stands to benefit from the rising disposable incomes," said Ashish Thadhani, an analyst with Gilford Securities. "There is an established correlation between high GDP growth on the one hand and discretionary spending on the other."

Ctrip.com, which started in 1999, built its reputation with hotel reservations. The company negotiated agreements for rooms with hotels, often one at a time, Thadhani says. The company folded airline reservations into its product lineup in 2002.

Ctrip.com also has opened a call center with hundreds of representatives. Many Chinese are more comfortable making the reservation with a live person than online.

Once the tickets are bought, the company usually taps a courier service to deliver them. In China, the postal service is often unreliable.

The model has worked so far.

In the second quarter, revenue shot up 52% to $23.8 million from the year-ago period. The company had forecast sales growth of around 40% for the quarter.

The company hit growth rates of more than 60% in the two prior quarters.

Min Fan, chief executive, says year-over-year sales comparisons are getting tougher.

"If you would just compare the percentage increase, it's not so significant, but if you compare the total volume it's still very significant," Fan said during the second-quarter analyst’s call.

Second-quarter earnings per share grew 10% to 23 cents. Earnings per share in the first quarter climbed 20% to 18 cents.

For the third quarter due Wednesday, analysts expect sales to grow by 48% to $25.7 million from the year-ago period, but earnings per share to slip 4% to 24 cents, according to analysts polled by First Call.

Analysts expect earnings growth of 8% in the fourth quarter and 28% in the second quarter. A challenge for the company in the third quarter: online tickets, or e-tickets.

There have been glitches along the way. "The general convenience benefits of using e-tickets are not fully realized by our customers yet," said Chairman James Liang during the analysts' call.

Many Chinese are unfamiliar with the process, and customers have dealt with long lines at airports. Liang says it could take nine, 10 months for consumers to widely adapt e-tickets.

However, the long-term prospects for e-tickets are promising. They will shift more Chinese travelers from the traditional travel agencies, says Tracy Cui, director of investor relations for Ctrip.

"E-ticketing helps us more on the top-line growth," Cui said in an e-mail. "More and more people will use us as opposed to small travel agents."
Another growth venture: corporate travel. In March, Ctrip launched a business that handles travel for big corporations.

Today, Chinese companies typically handle travel themselves. That is changing as businesses mature.

Liang estimated Ctrip is ranked No. 3 or 4 in the corporate travel market. However, it' has already stolen away accounts from competitors, including American Express. (AXP)

"Our position is getting stronger because compared to other corporate travel agencies we have a very strong hotel and air ticket service capability," Liang said.

Cui says the company would like to derive 10% of its sales from corporate travel accounts in five years.

Another factor that could drive growth: international travel.

Many Chinese travelers have flown within China, but more travel that is global is inevitable, Thadhani says.

This past September, the company launched a reservation service that includes 25,000 overseas hotels.

Ctrip says the network uses direct contracting with hotels and an alliance with international wholesalers.

The company did not give many more specifics, but its site lists hotel offers in the U.S., Vietnam and Italy, among others.

"The outbound travel demand on leisure travel is increasing faster than the domestic travel," Cui said.

Thadhani says the move also helps Ctrip.com better compete with its biggest online rival, Expedia-backed eLong.com, in China. ELong.com has offered global options for a few years.

Still, eLong.com has continued to trail Ctrip.com and has been unable to catch up.

Thadhani points out Ctrip.com has posted sales roughly 300% larger than eLong's the past two years.

One concern for Ctrip.com: Airlines eventually will push their own online services into China, just as they have done in the U.S., says Ming Zhao, an analyst for Susquehanna.

"You're going to see many businesses bypassing the middleman," Zhao said.

Liang says offering multiple prices at one site trumps single-brand sites. In addition, Ctrip.com's technology is more efficient.

"Customers tend to go to (an) independent Web site," he said.