After Expedia’s decision to sell its equity stake in eLong, it is expected that the operations of eLong will solely focus on the online hotel booking segment.

After Expedia’s decision to sell its equity stake in eLong, it is expected that the operations of eLong will solely focus on the online hotel booking segment. 

The plan may be to replicate the model of Priceline Group’s Booking.com, the established and powerful online hotel intermediary. 

Just days after the eLong departure for Expedia, Ctrip took an additional $250 million from its US-based cousin (following the $500 million it took last summer). 

Ctrip isn’t going to take over 100% stake in eLong, and will keep it as a public company in order to gain approval from the regulatory body. 

There are concerns about the anti-competition charge by the regulatory body so they keep talking to various investors, such as Wanda, Tencent etc. 

But none of them are interested in minority stakes. But in case of hotel chain Plateno Group, the organization has its own strategic thinking about this acquisition, so that’s why they have gone ahead with the deal. 

Sticking to lodging

Unlike its competitors, eLong has refrained from pitching its business as a “one-stop shop” for all travel-related services. 

Instead the OTA’s major focus has been on the lodging category (the 34 million room nights milestone was a jump from 25.8 million in 2013). 

Guangfu Cui will continue to lead the OTA as CEO. As for personnel, there is no official word on any lay-offs as yet. 

eLong will continue to have an association with Expedia in terms of cooperating on hotel content (eLong would provide China-related and Expedia would cooperate with international content), but again it isn’t clear whether this deal is going to be an exclusive one.

As of now Expedia, has rather a feeble presence with Hotels.com and corporate travel business Egencia in China, and it now seems to have backed off entirely from the market. 

While details of the new hotel platform are yet to be out, it is expected that the scale of the hotel segment would be much larger, considering the expected synergy resulting from Ctrip and eLong’s hotel content, coverage and contracting team. 

At the same time, one can also expect stronger grip over expenditure, deviating from the way eLong was scaling up the business over the last couple of years. 

In fact, eLong’s 2014 performance witnessed the OTA posting its largest annual operating and net losses since its inception. Losses from operations were close to $51 million, whereas net loss was $43 million. 

The company mentioned that the expansion of its service development as well as sales and marketing expenses contributed to this. Also, escalation of costs was due to higher employee compensation. 

Pressure on margins

The company’s eCoupon program and other promotions had a negative impact, along with reduction in commissions from hotel and air suppliers, and a rising share of lower-priced transactions.

It should be noted that eLong stepped up its practice of pre-purchases of hotel inventory last year. 

This meant the team at eLong could freely decide on the selling price, whereas the risk of incurring losses was also higher.

The risk is there until the point the online travel agency meets its agreed sales target. In comparison, in the agency hotel transaction there is no risk as such – be it for related to inventory or financial loss. 

As for eLong’s domestic hotel coverage, just like all other key players, the OTA too increased its inventory from around 70,000 in 2013 to over 200,000 hotels last year. 

For its part, Ctrip tripled its domestic hotel coverage to more than 220,000 hotels last year and almost doubled its international hotel coverage to more than 520,000 hotels from a year ago. 

One of the major challenges going forward for eLong is to arrest the decline in commission rates, not giving away margins due to lower average daily rates, and making judicious use of the eCoupon program. 

eLong acknowledged that it didn’t have long-term arrangements with travel suppliers, and needed to refresh its contracts on an ongoing basis. This could well be sorted out, considering the prowess of Ctrip. 

Timing

This strategic alliance comes at a stage when the industry has been contemplating which way the Ctrip-Qunar battle is going to shape up.

The deal should eventually cut down on some of the initiatives, including aggressive sales promotions, related to customer acquisition. 

In fact, this hasn’t gone down well with hotel chains such as Home Inns, China Lodging and Plateno, who have strongly objected to price wars and marketing gimmicks.

This deal is expected to result in more aggression from Qunar – it may try to exert more pressure with further price battles in the peak travel seasons. But it may also pave the way for a bigger M&A deal in the future. 

For their part, hotel chains have been recruiting independent hotels and smaller sized hotel franchises to their own booking platforms to rival OTAs, fuelling the apparent conflicts even further.