Top Chinese travel agent makes an odd diversion

April 22, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

China’s top online travel agent is making an odd diversion. Ctrip is buying a 3 billion yuan ($463 million) stake in China Eastern Airlines, and could yet buy more. Ctrip’s investors probably did not expect to own a minority stake in a state carrier. But this may be the only way it can avoid a damaging boycott by big airlines.

The $19 billion group is participating in a 15 billion yuan private placement, in exchange for about 3 percent of the carrier. Ctrip can also increase its stake to 10 percent within a year – which at the same price, would cost another $1 billion-plus.

The two could hardly be any more different: a lucrative, commission-driven travel agency and a capital-intensive, indebted airline. Yet the alliance is vital for Ctrip and 45 percent-owned affiliate Qunar. The two former competitors made peace last year with a complicated share swap which fell short of a full merger.

Qunar has since come under pressure after China Eastern and China’s other two top airlines pulled their sales from the site over a pricing dispute. A prolonged absence would have been very painful: the state-owned trio control 56 percent of China’s domestic market, according to analysts at HSBC. Qunar’s shares have fallen 19 percent this year.

Taking a minority stake should help smooth relations between China Eastern and Qunar. It also makes it less likely that Ctrip runs into similar problems. Some other airlines have stopped paying commissions on international flights sold via travel agencies, including Ctrip, and China’s authorities have been trying to encourage carriers to sell more tickets directly on their own websites.

There are risks, since the China Eastern link could make it harder for Ctrip to work closely with other airlines. And there are also opportunities: China Eastern may now route more ticket sales through Ctrip. It is extraordinary that a commercial problem had to be settled with a capital outlay perhaps reaching $1.5 billion, and an e-tailer effectively funding aeroplane purchases. Talk about getting re-routed.

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