China’s packaged tours industry will continue to consolidate, according to a study by Morgan Stanley Research, recognising the massive growth potential for vertical integrators in the highly-fragmented market.
The report showed that the packaged tours industry is seeing strong demand in the outbound segment, owing to language barriers, visa requirements and other complications in planning trips outside of China.
The industry saw a total transaction value of 500 billion yuan (US$76.7 billion) in 2015, up 19 per cent year-on-year, with the number projected to grow to about 700 billion yuan by end-2018.
OTAs are expected to be a chief beneficiary of this trend as online penetration for packaged tours are estimated to have only reached 13 per cent, compared to more than 50 per cent for air ticketing and about 20 per cent for hotel bookings.
The report cites leading Chinese OTA Ctrip as an example, which has been integrating the value chain since 2006 by investing in an airline, hotels, wholesalers and an offline retailer.
“Eventually we could expect a few vertically integrated travel companies to control a significant share of the mass market, and we expect upside in margins and market share, similar to what TUI and Thomas Cook have experienced historically,” stated the study’s authors.
Even smaller OTAs such as Utour, which accounts for less than two per cent of the market with a total revenue of 8.4 billion yuan in 2015, could see its revenue increase by 60 per cent with just a one per cent expansion in the market.
It further added that the highly-fragmented online packaged tours market makes the segment ripe for consolidation.
The offline packaged tours market is even more fragmented, stated the report, with travel services revenue of China's leading traditional travel agencies – CITS, CYTS and CTS – accounting for a combined market share of only 4.4 per cent in 2014.
This provides even greater opportunity for OTAs to integrate the value chain by acquiring its offline counterparts.
While both OTAs and offline travel agencies are trying to expand into each other's areas, mainly by buying shares or via strategic collaboration, the stronger position held by OTAs, such as Ctrip's more than 70 per cent market share, makes it difficult for traditional agencies to find an alternative collaboration partner.
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