Ctrip Plunges; Airlines Cut Commissions To China Travel Agents

Ctrip (CTRP) shares are leading the way down this morning on a report that airlines are cutting commission to travel agencies in China on international flights; the news has triggered a flurry of negative commentary from the Street.

• Goldman Sachs analyst Kathy Chen notes that a June 29 in the China newspaper Global Times asserted that a number of airlines plan to cut the commission paid to travel agencies in China. She says the report indicated that All Nippon Airways, China Southern and Air China will cut the commission rate to 3% from 5% in July, while Swiss Air and Lufthansa will cut to 1% from 3% in August; Air France and KLM cut commissions to zero in April. The story also said Air China could cut commissions on domestic routes within 18 months. Chen writes that she has clarified with Ctrip that the airlines have switched from a 3%-5% fixed commission with a volume-based commission of 0%-3%, to a 1%-3% fixed commission structure, with a 1%-3% bonus structure. Chen remains Neutral on the stock.
• Deutsche Bank analyst Alan Hellawell this morning cut his rating on the stock to Hold from Buy, largely on a valuation basis, adding that the commission rate cut should have a limited impact on the company.
• Royal Bank of Scotland analyst Wendy Huang cut her rating on the stock today to Hold from Buy, citing both the commission cuts and the high valuation of the shares. “Ctrip has less than 4% revenue exposure to this [commission cutting] initiative in FY10, but a potential commission rate cut on domestic routes is a medium-term risk,” she writes, adding that “a rich valuation increases the de-rating risk for the stock in a fragile market.”

CTRP is down $4.79, or 11.2%, to $37.98.