Under the Spotlight: Airbnb (ABNB)
The world’s largest accommodation provider does not own a single hotel, motel or resort. Let’s look into how Airbnb became a generation-defining tourism enabler, and whether it will continue to compete with hotels.
The backpackers of the early 2000s would trawl online forums and city noticeboards searching for a cheap couch to sleep on. While the process may have been romanticised, it was due for an overhaul. Airbnb formailised an ultra fragmented, unreliable process.
While international travel was split between a flashy 5-star or budget hostel experience, Airbnb helped introduce clean, comfortable but affordable accommodation.
With that in mind, in 2007, Brian Chesky, Joe Gebbia and Nathan Blecharczyk, who shared an apartment in San Francisco, decided to put an inflatable mattress in their living room and charge for the stay. The idea of Airbnb, or airbedandbreakfast.com, was born. People with free space at home could receive guests from all over the world in exchange for a cheaper daily rate than that practised by hotels. This was no new process but centralising all listings was.
The idea would only get off the ground in August 2008, on the eve of the GFC. While the crisis brought challenges, as spending on tourism and leisure would decrease, now, thousands of Americans could use Airbnb as a way to supplement their income by hosting strangers in their homes.
14 years later, Airbnb is now responsible for more than 6% of the entire hotel and hospitality market in the United States and Europe. Present in more than 110,000 cities in 220 countries, the company currently has more rooms available for booking than all the Marriott, Hyatt and Hilton units combined.
Convincing Hosts
It may seem normal now, but Airbnb took a while to build trust with its guests. After all, travellers need to be convinced to stay in a stranger’s house without the usual comforts and securities of a hotel. On the other hand, hosts were required to host random travellers from all corners of the globe into their homes with no identity verification required. It comes down to more than just a rating system for guests and hosts.
To start, Airbnb offers insurance of up to US$1m per property, covering everything from damage that may have been caused by guests’ pets, to loss of income if damage to the property makes it impossible for the home to be occupied by other guests in the near future. In addition, the company allows hosts to file complaints against their guests up to 14 days after the end of the stay, in case any damage caused by a visitor goes unnoticed in the first inspections.
Then come the governments who regulate their existence. Some critics point out that subletting rooms and short-term rentals stimulates real estate speculation and end up making property prices unaffordable for locals. For this reason, some cities like Paris even limit the number of days for which an owner can carry out short-term rentals of their property. Airbnb has been trying to work collaboratively with local regulators, but as one case closes, another springs open. While Airbnb isn’t completely banned in any city, most major cities have some sort of restriction. For example, in Manhattan hosts are required to live with guests for rentals under 30 days.
The Biggest Challenge
Airbnb was founded on the eve of one of the biggest financial crises in history, but its biggest challenge was yet to come: the pandemic. Until 2020, the company’s revenue had steadily been growing quarter by quarter. However, with border closures, reservation numbers dropped by up to 96% in some cities. Revenue plummeted from US$842m in the first quarter of 2020 to US$335m in the following quarter.
To compensate hosts, the company paid out US$250m from their own books to hosts who had stays cancelled due to the pandemic. For every $100 in lost income, Airbnb redistributed $25. Subsequently, the company would undergo a new round of capital raising, but it was still forced to lay off 1,900 employees, cutting 25% of its workforce.
In December 2020, Airbnb ($ABNB) would IPO on NASDAQ, raising an additional $3,5b.
Turning a Page
Two years later, the worst seems to be over for Airbnb. The company is still not profitable, recording a loss of US$352m in the year 2021, which is the best result in the company’s history and a big leap considering the record loss of US$4.6b in 2020.
The company’s margins are also improving too. EBITDA is one of the most common metrics used to measure a company’s profits. It stands for “Earnings before interest, depreciation, tax and amortisation”. EBITDA margin measures the ratio of profit to revenue.
In 2019, their EBITDA margin was negative, at -5%. In 2021, the EBITDA margin was +27%. In short, the core business can be profitable (without accounting for the costs to grow, market, and build new products).
There are a number of factors that explain this improvement. First, the average price of daily rates increased +20% compared to 2020, totalling an increase of +36% compared to 2019. In addition, the improvements in sanitary conditions related to COVID-19 made the costs with chargebacks decrease as fewer visitors cancelled their stays.
Another factor that contributed to the improvement in margins is the growth in sales of “experiences” on the platform: in addition to booking their accommodation, customers can purchase tours with guides and other activities in the city they are in. The margins for selling experiences are much higher than for booking accommodation.
Change of Habits
After 2 years stuck indoors rotating between the bed, desk and couch, it’s no surprise “digital nomadism” is on the rise. A new wave of workers are embracing the work-from-anywhere lifestyle and city-hopping between Zoom calls with no fixed address.
As a result, more than 50% of all bookings made by the company in 2021 had a duration of at least one week. 20% of bookings were for a month or more. In fact, even CEO Brian Chesky has decided that from 2022 onwards he will only live in Airbnb apartments, eventually staying in different cities.
For the first quarter of 2022, the company expects revenue between US$1.41 and US$1.48b, with gains in both average room rates and booking volume.
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