Third-quarter financial results show strong growth for online travel operators fighting for a share of China's $60bn domestic tourism market.

Total sales at Ctrip, the country's largest online travel company, will jump from $41m last year to about $63m this year, according to Deutsche Bank, which includes transactions completed offline as well as online.

China's travel industry has been transformed in recent years by the gradual easing of stifling regulations. Previously the government had strictly controlled the travel business, including any foreign investment in travel companies.

State-owned agencies and tour operators which used to dominate have mostly been unable take advantage of the opportunities offered by a more open market and greater personal mobility.

Meanwhile Ctrip and eLong, the earliest entrants to the online travel business, have found it comparatively easy to forge relationships with hotels, airlines and other travel service providers, because they initially faced little competition.

Founded in 1999, the two companies began operating mainly as travel consolidators, selling hotel bookings and other travel services to agents and individuals over the phone, but have begun focusing on online sales in recent years.

Ctrip and eLong have since come to dominate the online travel and travel consolidation markets in China. Similar to online travel agents in the West, the companies' websites handle hotel bookings, flight bookings, packages and other travel services.

They also sell international travel services, and Ctrip has plans to expand into Hong Kong and Taiwan.

Derek Palaschuk, eLong's chief financial officer, describes China's online travel market as "promising and potentially huge". Headquartered in Beijing, eLong is controlled by US-based online travel agency Expedia via a 52 per cent shareholding.

In fact, the market for travel services is already huge; total spending on domestic tourism in China will approach $60bn this year, Deutsche Bank forecasts, citing government data.

And the World Travel & Tourism Council (WTTC) predicts growth of over 10 per cent per year for China's travel market during the next eight years.

While Ctrip and eLong are taking advantage of the internet to reach customers, many of those customers are not yet ready to pay online. The two companies handle 20 to 30 per cent of transactions online, but the majority of their business is still finalised offline via call centres.

A WTTC report points out that modern payment methods, such as credit cards, which are critical for online travel services, are less commonly used in China than elsewhere.

However, Deutsche Bank noted that this situation is improving. "Internet payment platforms, penetration of credit cards and uptake in leisure travel can provide additional upside down the road," wrote Deutsche Bank analyst William Bao Bean in a report on Ctrip published last week.

One potential competitor is Zuji, a joint venture between US-based online travel leader Travelocity and 15 major Asia-Pacific airlines.

The online travel agency is based in Singapore, and operates in Hong Kong, Taiwan, Australia, Korea, and New Zealand.

Speaking last year, Zuji chief executive Scott Blume said the company planned to expand into China by the end of 2005, but in more recent published comments has not named a date.

According to Deutsche Bank, Ctrip and eLong have already had time to form close relationships with thousands of hotels in China, and continue to expand their reach, making it increasingly difficult for competitors to break into the market.

Bean did, however, caution that the currently optimistic market predictions could yet be derailed.

"The biggest risks to our assumptions are economic downturns, a market shock such as the bird flu becoming a pandemic and lower than expected penetration on the hotel side," he said.

Source: vunet.com