Interview with Andy Clayton, vice-president – Air, eLong

China Special: By EyeforTravel.com Correspondent

Commission rates in China are still closely linked to volume, and increases in volume leads to increased commission rates.

“We have not seen a drop in commission rates,” says Andy Clayton, vice-president – Air, eLong.

“Future revenue generation must come from full service provision, offering a full range of travel products to the consumer, such as hotels, destination services and leisure services. Airlines are concerned about price integrity, and very cautious of agents using commissions to offer rebates to customers. They are more supportive of, and give preference to, agents who are reputable, and are able to use new technologies to capture increased markets and modernise the industry,” he says.

Clayton, one of the speakers during the recently held Travel Distribution China 2006 conference in Beijing, shared information about trends in China, company’s operations and much more. Excerpts from an interview with EyeforTravel.com’s Ritesh Gupta.

As vice-president of Air for eLong since November 2005, what according to you have been the major developments for the company?

Fantastic technological development. As an innovative tech company, eLong has proven itself time and again able to develop smart, customer-friendly solutions to complex travel industry issues. For example, we now have advanced fare database software, which allows our international call centre agents to seamlessly check international inventory and fares for our customers. Our hotels have beautiful 360 degree tours on the website. Our domestic agents are now able to operate changes and returns for our customers in one simple call. And there is much, much more to come.

What new trends have you witnessed in Chinese aviation industry? How have these proved beneficial for eLong or for the OTA segment on the whole?

- Growth. Industry growth rates of 20 percent YoY, internal growth rates of 100 percent YoY. Leads to challenges across the industry, particularly in terms of infrastructure (airports, technology) and people (pilots, managers) development. Domestic growth rates outpacing international, demonstrating enormous potential of domestic market.

- Cheap fares. Ticket prices have continued to drop with increases in airline capacity, which has led to record low fares. Although this makes promoting of low fares easier, profitability suffers as actual commissions drop with fare price.

- Increased fragmentation. Disjointed implementation of new e-ticket policies in June demonstrated the difficulty of policy enforcement across airlines, Travelsky, CAAC and BSP/IATA. Other examples, such as China Southern developing their own e-ticket system, and the imminent opening of the GDS market, all indicate a trend towards fragmentation.

An analyst last referred to ticket distribution logistics during our conference last year. He said electronic ticket fulfillment and hotel confirmation capabilities will be important to the online travel model for flight and hotel sales in China. How so you assess progress made in this regard?

e-ticket fulfillment crucially important. Our e-ticket rate has doubled in the past two months, and some cities are nearing 100 percent. Fulfillment is costly, and in many ways not significantly different to paper tickets, usually requiring delivery. Real ease of fulfillment will only come with increase in credit card payment.

Is it true that online travel buyers in China need assurance that their transactions are secure and that they have access to good value and rates?

Certainly. Many customers in China either do not have credit cards, or are not comfortable using them over the phone or Net. We offer a secure over-the-phone credit card payment service, with a specialist team processing credit card approvals. The methodology is secure, with not one instance of fraud or customer problems. We are developing further systems internally, involving more direct connection to banks, to improve the speed and efficiency of the service, and provide an on-line solution.

Credit card fraud is not the problem in China that it is abroad. The financial services sector is heavily regulated and conservative in its policies. Control on information is tight, and credit card criminals have yet to emerge as a serious threat.

Recently when second quarter results were shared, you said - Year-over-year growth in air ticketing revenues was primarily driven by the acquisition of new air customers, increased sales of air tickets to eLong’s existing hotel customer base and better product offerings. Can you share more info on what led to increased share of air tickets?

Our website and call centre service offer a fundamentally better way of purchasing air tickets than traditional players. This has allowed us to rapidly acquire new customers at relatively low cost.

We have actively marketed the air business to our hotel customers with internal communications to drive cross-sell. Initiatives have included re-branding of the company as a complete service provider, call centre agent training and double-skilling, joint promotions, and SMS campaigns.

Coming to aviation sector, Shanghai-based Spring Airlines depicts the challenges facing companies pioneering business segments in China. China’s budget carriers account for one-two percent of the total market. Do you foresee any regulatory changes for growth of LCC sector in China? How can LCC segment provide fillip to your growth?

Hard to predict, national policies have been flip-flopping on this issue for some time. The market is still heavily regulated, and predominately state controlled, including the major airlines and airports. Few of the entrenched interests have much to gain from LCCs aggressively entering the market. However, increased fragmentation will lead to more opportunities for this type of business.

Some of the principal challenges facing the LCCs relate more to the viability of their business model in China. Where are the cost cuts going to come from?

- Travelsky GDS segment costs are already low.
- Direct sales to customers are challenging, as internet penetration is low, and most LCCs lack the website technology required. This leaves them reliant on agents.
- Due to large increases in capacity forced upon them, many of the major airlines are already offering very low fares.
- There are few airports to choose able to provide low cost slots, unlike in western markets where LCCs partner with small, regional airports at low cost.

As far as LCCs are concerned, the restrictions are related to strict government regulations on setting fares, sales and distribution networks, and aircraft purchasing for low-cost airlines. What would you recommend?

If I was an LCC, I would pick short, backwater routes poorly served by overland travel (shuttle routes, such as Hefei - Wuhan, Chongqing - Kunming or Nanchang - Changsha) and develop a regular `skybus’ service.

Many inland cities have enormous population bases, whose economies work on a regional basis. Without access to golden routes on the seaboard cities, these would be the key opportunity markets, competing with bus services. Critical would be the development of relationships with local authorities, and particularly with local airports and CAAC.

9.       What are your expectations from China online travel segment? What are your predictions?

The overall market is, and will continue to, grow fast. The online segment is growing proportionally faster again, with the shift in consumer behaviour from traditional agencies to online. eLong and CTrip have established themselves as leaders in this space, with strong technological and operating platforms, customer service, and brand presence, but overall market share is still small.

Looking forward, the two principal players will continue to grow market share, with eLong leveraging its connection into Expedia’s global network in order to gain advantage. Give the size of the market, it would be possible for other players to reach significant scale, but the catch up costs will be high. The current growth period is crucial in order to control market share in the long run.

The next stage of development will involve clearer positioning between the major players, focusing on certain products lines and target markets, such as business vs. leisure, domestic vs. international and traditional products vs packages.