Qunar's profitability in the next year is a much mooted topic in the Chinese travel industry.
While Ctrip never fails to remind everyone that its performance is reflected in its profitability, Qunar is confident that its keen watch on operating expense and technology strategy will stand it in good stead.
NB: This is a viewpoint from Ritesh Gupta, correspondent for ChinaTravelNews.
So what’s going to contribute to Qunar.com’s profitability even as it witnessed an increment in operating loss in Q3, 2014, largely owing to sustained investment in product development and product sourcing to drive business growth?
The company is counting on its expanding scale, top-line growth and believes it can manage operating expenses diligently.
According to a former Qunar executive:

"In 2014, Qunar invested resources in building and strengthening its technology infrastructure and product sourcing capacity.
"With an ever nimbler and more efficient technology platform, and ever growing product collection, profitability is projected to be a result of growing scale, and disciplined operating expense management.”
Technology supremacy
Qunar believes in technology-driven operational efficiency. If you assess the performance of Qunar in the last reported quarter then it has to be revenue growth (108% year-on-year in Q3, $81.6 million), mobile accounting for 40% of total revenue, and direct sales contributed 51% of total hotel volume.
This strong growth momentum is based on technology that is serving as its backbone. For Qunar, much like Kayak, the company has its roots in metasearch, but it considers that directing leads to other sites is not a winning proposition in the mobile age.
"In anticipation of the mobile potential, Qunar developed SaaS, and then when China went from offline to mobile in 2014, it fully embraced the seismic shift.
The company’s leading position on mobile is a result of its early determination," says the former executive.
Elaborating further, the source says:

"Qunar uses mobile technology to drive transaction volume, to service users and merchants through high machine touch on a more real-time basis, and to build an online travel community that helps with user stickiness.
"All of its mobile related metrics continue to be industry leading and also trending up rapidly, with mobile in Q3 accounted for 40% of total revenue, 55% of TEHR (Total Estimated Hotel Room-night volume), and 43% of TEFT (Total Estimated Flight Ticket volume). Cumulative activated downloads reached 457 million by end of Q3."
From a product mix perspective, Qunar is bullish on the hotel business.
"The hotel direct business has greater potential for monetization,"says the executive.
Competitive landscape
Ctrip has quite often stressed its profitability, its operating profit margin, and being ahead of all other online intermediaries. When Qunar started in 2005, two major Chinese OTAs were already public.
"Qunar came in as the disruptor, as the technology play. It follows a different philosophy and business model from its peers, and nothing is derailing it from its current path.
"Travel is one of only a few annual trillion RMB verticals, and it is a space where in steady state, dominance by few, not perfect competition, will likely happen. We don’t comment on other companies' profitability, but your statement (about Ctrip’s profitability) is not true if you look at our peer’s latest financials closely."
A source close to the Chinese travel ecommerce category says that in terms of the number of bookings for hotel traffic Qunar.com garners, 60-70% of CPC bookings are associated with the metasearch business, and the remainder are related to transactions directly handled by Qunar.com for commission-related revenue.
"The going hasn’t been easy for Qunar as the company isn’t working with Home Inns (which has Ctrip as a shareholder), and Ctrip, too,” says the source.
It would be interesting to assess whether Qunar can work with B2B players to gain access to Ctrip’s inventory.
In all, Qunar works with the leading 20 OTAs for its meta-search business. The key for Qunar is the overall utility in the booking funnel.
According to a source:

"Qunar.com isn’t going to do away with its hybrid model - metasearch plus transaction. As long as hotel suppliers are given value for their association, banking on traffic generation (Qunar garnered more than 60% of its traffic without incurring any payment for it in 2013) as well as transaction side of business, they would work with Qunar."
Counting on hotel business
The net commission rate for Qunar direct and platform businesses will trend differently over time, i.e. net commission rate for its direct business will trend higher than that of platform business.
Importantly, in Q3, the size of Qunar’s hotel direct business surpassed that of its platform business for the first time. The hotel business has evolved from metasearch to a much more direct model in less than a year.
On the flip side, a section of the industry also highlighted that part of this share shift is also due to Ctrip’s drop off its listing from Qunar in Q3, which has driven Qunar to push more direct business to customers.

"Given most of China’s hundreds of thousands of hotels are independent and previously offline, this is Qunar’s answer to bridging the needs between the hotels and the Chinese consumers," the source says.
A source says Qunar now features more than 200,000 properties in the domestic market for travel accommodation. The team says it has in place requisite infrastructure and e-booking system for more than 140,000 small independent hotels, B&B and apartment-oriented listings.
While some in the industry say Ctrip is lagging behind, the top OTA has also has been making progress in tier two and tier three cities. Overall, eventhough China has more than 350,000 hotels, above 40% of them just have data against them – name and address – but are yet to go online. So expect the battle to continue as far as hotel content is concerned.
The battle for economy/ lower-end of the fragmented hotel space is getting intense. For instance, Meituan is being termed as a key competitor in this segment.
One industry executive says:

"They have built the extensive network for product sourcing in the tier two to three market. Innmall, a mobile-only start-up for hotel booking, which has an investor in Ctrip, is also competing with Qunar in low-end market.”
The team at Qunar acknowledges it needs to catch up within the lucrative 5-star and 4-star segment, where the commission can be, on average, as high as 20%, translating into $10-12 revenue per booking.
Being a late entrant means that Qunar has found it tough to deal with a certain section of the hotel industry owing to its existing relationship with Ctrip. Even today Ctrip has a strong hold in the “star-rating” category of the market.
It is worth noting how Qunar's international ambitions are growing in the hotel sector, not least with an agreement signed with Wyndham.
Improving margin
In addition to possessing unique hotel content or gaining early mover advantage in the lower-end, Qunar has been pushing hard to gain control of bookers (featuring hotels with only 20-50 rooms).
Qunar believes once it starts to monetize this segment at a certain scale, it can attain meaningful margin. Also, the team will be counting on big data and analytics to understand the preferences of a mobile user, as the usage of mobile apps reaches a critical number to drive monetization.
Qunar also needs to watch out for some of the tactics that can adversely impact its performance, such as hotel chains jointly urging OTAs to stop cash rebates.
Also, the blurring of lines between traffic generation and transaction business models – just the way Qunar evolved is a threat to Qunar.
For instance, Ctrip recently introduced a hotel price comparison function that displays other OTAs’ hotel room rates and booking links on its search results page and enables users to click through to complete bookings.
It has emerged that the OTA is currently working on A/B testing for both air and hotel product. Existing players also need to be wary of startups, for example, Alibaba launching Alitrip, a platform for travel agencies big and small to set up online storefronts.
The state of distribution margin is also changing. Major carriers are lowering their base commissions, cutting it down to even 1%.
According to an expert, the key for Qunar would be to grow scale in the hotel business, managing it efficiently by cutting down on manual process, and driving bookings from the entire spectrum of its hotel content.
The team is relying on technology to keep its call center size at less than 500 people.
The former executive says:

"By using our proprietary SaaS system and various mobile tools, suppliers were brought online, and previously manually processed steps are easily done at their fingertips, for example, hotel room confirmation.
The team is looking at making inroads into Ctrip's traditionally strong areas, and also gearing up to garner revenue from the fragmented market that is yet to be tapped in a big way. The company is expanding its product mix, too.
According to available information, Qunar has set up a dedicated business unit so-called Smart Accommodation to develop "Airbnb-style accommodation".
A source shares:

"But the properties are centrally managed by Quhuhu (brand name, in English means going to sleep) and all check-in/check-out are automated by the smartphones. They have developed the so-called smart key/ locker.”
Quhuhu is managing the day-to-day operation for these properties. Now Quhuhu owns more than 10,000 plus listings across major cities in China. Also, one former Alibaba executive has been chosen to head this division.
Qunar is also looking at becoming a one-stop shop for the whole trip through initiatives such as promoting its car-hire app and recruiting drives across China. The strategy is to consolidate its presence across travel planning and booking journey.
Observers will be watching how all of these moves help the company on its road to profitability.
NB: This is a viewpoint from Ritesh Gupta, correspondent for ChinaTravelNews.