A hidden gem," declared Motley Fool. "A black box buy," said Forbes.com. Shanghai-based online travel service Ctrip.com has recently been making waves not just in China but on the global stage as well. And no wonder: As the leader in China's rapidly growing online travel services market (it had 54.2 percent of the pie in 2006), Ctrip has beaten Wall Street profit targets in four of the past five quarters. If 2007 second-quarter results are any indication - net revenues increased by 52 percent year-on-year to US$37.8 million (€28.1 million) - it shows no signs of easing.

And Ctrip is not alone. Competitor Mangocity.com, which only launched in April 2006, has swiftly grown to become China's third-largest online travel reservation supplier. Wedged between the two is eLong.com with 17.8 percent of the 2006 market. Despite its silver podium standing, the Expedia-backed company has hardly been resting on its laurels. In a wildly competitive sector, it doesn't dare, and has attempted multiple strategies, including a recent partnership with business centre operator Regus, to stave off fresh competition.

Attracting a crowd

More and more players have entered China's online travel fray - and why wouldn't they? In 2006, online travel services in China was a US$200 million (€150 million) market with 2.75 million users a 72 percent increase in volume and 82 percent increase in value from 2005, according to Shanghai-based iResearch Consulting. By contrast, the industry in the US is expected to grow 17 percent annually through 2010. And frenzied growth is not letting up - China's market is expected to double this year alone, reaching 5.7 million users by 2008. Its projected online travel market will hit US$860 billion by 2010.

The rapid growth can be attributed to several factors, a key one being the great advantage Chinese companies have had in leapfrogging the developmental growing pains borne by online travel pioneers like Expedia and Orbitz. Microsoft founded Expedia in 1995, and when Ctrip entered the market four years later - an eternity in the tech sector - it was able to lift US sites' tried and tested technological infrastructures and business models.

Two other obvious engines of growth have been China's leisure travel boom, fuelled by the surge in disposable income, and the rapid, widespread adoption of the internet as both information source and commercial platform. Recreational travel, once a luxury for the moneyed, is now a pastime of the masses. Annual passenger growth is firmly in the 15 to 18 percent range, with the vast majority still flying domestically. And as the Average Zhou is now taking off on weekend jaunts, he is also looking to the internet for advice on how to do so.

Finally, regulatory changes have accidentally contributed to China's online travel boom. In an industry-leading move, the China Air Transport Association announced last October that it would no longer issue paper air travel tickets. The International Air Transport Association, by comparison, has given its 261 members until the end of 2007 to abandon paper tickets. The move was economically motivated - an e-ticket costs one-tenth of its paper counterpart - but the repercussions have rippled beyond airlines' bottom lines.

Historically, hotel bookings have been the flagship business of China's online travel industry due to higher margins - commissions are roughly 15 percent for hotels and under 10 percent for airlines. The sharp spikes in air travel, however have caused a shift in their revenue streams. In 2006, the online air ticket booking segment leapt 130 percent to US$60 million while online hotel reservations, in comparison, grew by a mere 53 percent to US$120 million. Online air ticketing, predicts iResearch, will represent 40 percent of the total online reservation market by the end of 2008. Old-timers are feeling the impact - Ctrip's air-ticket booking revenues, at the end of the second quarter of 2007, had increased 67 percent over 2006 - and some newcomers are focusing solely on this sector. Four-year-old Yoee, for example, has positioned itself as an air travel specialist rather than a multi-service platform, and became China's leader for online air ticketing by sales value in 2006.

Although the large travel sites started by copying established models, China's distinct consumer behaviour patterns have forced them to adapt accordingly. Ctrip and eLong, despite being "online companies", only get 33 and 20 percent of their revenue through online sales, respectively. Chinese customers are still wary about completing financial transactions online, preferring to pay couriers cash on delivery instead.

May 2005 saw the launch of the first Chinese travel search engine, Qunar.com. If Ctrip is China's answer to Expedia or Travelocity, Qunar is its Kayak or Sidestep. The site does not provide ticketing services - revenues are realised solely through advertising - rather, it performs real-time price comparisons for flights, hotels and packages, then directs users to other sites to complete bookings. Other market innovators such as 17u.com, a "travel supermarket" that integrates various business-to-business and business-to-customer travel agents onto one platform, are also spicing up competition.

"Our company employs a range of proprietary search and information management technologies," says Fritz Demopoulos, Qunar's founder and chief. "We certainly innovate a great deal. A number of our product features have been copied in China and by North American players."

Outsiders beware

While Demopoulous admits his company "occasionally obtains inspiration" from global leaders like Sidestep and Cheapflights, he believes that the battle for Qunar and others in the Chinese online travel market lies on the home front. "Frankly speaking, no established US player has done particularly well within the Chinese travel space," he says. "Although we admire their willingness to take risks, our biggest threats ¡­ will always be home-grown giants."

Industry watchers agree. The depth and breadth of services offered by major Chinese sites today can hold their own against those of any global company, says William Bao Bean, a partner at SoftBank China & India Holdings and an expert in the Asian technology, media and telecom sectors. "Sites like Ctrip and eLong have systems that are easy to use and offer services that rival large international sites," he says. "They are controlling an increasingly large group of frequent travellers."

While the major players' grip doesn't seem to be easing any time soon - Ctrip and eLong held 70 percent of the market in 2006 - it hasn't deterred new entrants eager for a piece of the action, either. With the resource-intensive hurdles of consumer education largely cleared - and sites like Ctrip continuously investing in such programs - new competitors, many with similar value propositions, are instead rolling out lavish marketing campaigns in attempts to capture a slice of the growing pie.

Chinese airlines, with their sights set on reducing commission costs and gaining customer intelligence, are also braving the online arena. Last December, Hainan Airlines, one of the mainland's top four carriers, launched a new ticketing platform based on mobile phone WAP technology. In February, Air China signed a marketing and distribution agreement with Qunar. Their efforts, however, seem to pose little threat to the online aggregators - Chinese consumers are too accustomed to going through agents. At present, 90 percent of air ticket sales are made through traditional and online agents, and only 10 percent go through channels developed by air carriers.

Brick-and-mortar travel agencies have also ventured into the online sphere. China Youth Travel Service, one of the three largest in the counry, launched Aoyou.com in 2005, and traditional phone reservation hotlines have followed suit. But again, industry insiders say they pose little threat to the established players.

"As the hotels, the airlines and other smaller players improve the scope of their online services, the market will inevitably change. And though increased competition will mean more challenges for [the big travel] sites, I don't believe their business will drop," says Bao Bean. "If anything, we're likely to see them continue to increase their market share but perhaps they will face pressure in terms of their margins. Still, I don't think that will be felt until a ways down the road."

Though growth projections are highly optimistic for travel in China - it is expected to be the world's third-largest travel market by 2011 - predictions for the online arena are even better. Ctrip boss Min Fan predicts online travel in China will grow twice as fast as travel itself. With disposable income up roughly 10 percent in 2006, and internet usage up 30 percent, Min's forecast seems plausible. Earlier this year, Ctrip announced that it will build the travel channel for MSN China - a smart move for the market leader -and it will only be a matter of time before others announce similar strategies.

"About 10 years ago, it was easy for Chinese internet companies to merely emulate their US peers. In today's highly dynamic market, success will never come from simply copying pre-existing business models," says Demopoulos. "In fact, we have seen Chinese models copied elsewhere as is the case with the innovation carried out by Focus Media (outdoor ads), Netease (multiplayer games), QQ (wireless messaging) and KongZhong (wireless content)." And, in the online travel sector, with the success of Ctrip well documented in domestic and international media - it's safe to say that it is looking forward to continued prosperity.