Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on October 24, 2022 - October 30, 2022

AFTER two years of pandemic-induced Covid-19 restrictions, earlier this year I began travelling again almost as if travel was going out of style. Criss-crossing Asia, Europe and travelling coast to coast in North America, I covered a fair bit of ground. I would have logged more miles had Japan and Hong Kong, which have only recently begun opening their doors, been more welcoming earlier. Now that they are ready to receive tourists, I am heading there at the year-end. 2022 has been a year of “revenge travel” for many people. Like many a revenge traveller, I have spent as much time in short-stay vacation homes like Airbnbs as I have in hotels or on couches at the homes of friends and relatives.

Little wonder, then, that the post-pandemic reopening has been the best of times for travellers, hotels, airlines, as well as online travel agencies and portals — Trip­advisor, Expedia Group which owns Orbitz.com, vacation rental firm Airbnb Inc, hotel booking portal HRS.com, and Booking Holdings, which owns booking.com, agoda.com and hotels.com. There was pent-up travel demand and cashed up travellers. That has led to booked-out hotels, airlines charging an arm and a leg to change bookings, and crowded beaches, museums, galleries and other places where tourists tend to gather.

Yet, if you were looking at the stock prices of listed travel-related firms — from aircraft makers such as Boeing and Airbus SE, global hotel chain operators like Marriott International Inc or Hilton Worldwide Holdings Inc to large carriers like United Airlines Inc, Delta Air Lines Inc and American Airlines Group Inc, you’d think investors were trying to bake in some other emerging variant or pandemic. The Dow Jones US Travel & Tourism Total Stock Market Index is down 22% from the start of the pandemic in mid-February 2020 while the barometer S&P 500 Index is up 9.5% during same period. Travel-related stocks bounced back from their lows of 2020, only to dip again. The subsequent rebound still leaves them way short of where they were before the pandemic. Investors have been forced to balance short-term gains due to revenge travel with a looming global recession in the aftermath of high inflation and rising interest rates worldwide.

Airbnb, a rival of Tripadvisor and Vrbo, may be slightly better positioned to take advantage of the next upturn than its peers. Global vacation rentals is a US$150 billion (RM709.2 billion) market that is growing between 8% and 10% annually. At current growth rates, it will be 20% of the global lodging market by 2030. Richard Clarke, global hotels, online travel and catering analyst at AB Bernstein in London, told me in a recent interview that he believes Airbnb’s core vacation rental business can grow at a compound annual rate of 14% over the next five years. That will make it a formidable giant of the online travel world.

I first wrote about Airbnb in this column back in 2016 when it was still a scrappy start-up. In 2007, Brian Chesky and his roommate Joe Gebbia were broke and desperately looking for ways to earn spare cash just to pay their rent in San Francisco, one of the most expensive places on earth for young people to rent. They decided to rent out air mattresses in their apartment to attendees of a tech conference when they heard all the hotels in the city were fully booked. They called their service “Air Bed and Breakfast”.

A year later, that experiment morphed into hotel industry disruptor, Airbnb, which by then had welcomed its third co-founder, and a former college roommate, ­Nathan Blecharczyk on board. From renting out just air beds to rooms inside homes to whole properties, Airbnb expanded into a vacation rental platform and is now on the cusp of becoming the biggest online travel operator in the world. Until it came along, nobody had disrupted the hotel business. Detractors said mayors and town councils would never allow homes to be converted into short-term rentals. They reasoned that communities would rise up to prevent neighbourhood homes from becoming makeshift hotels.

Ironically, Airbnb owes its success to communities that embraced its business model. People in big cities and small towns as well as in rural communities want to rent out their spare rooms, or sections of their homes, or in some cases the whole home itself for the short term, and get paid for it. Mayors and town councils quickly realised it was futile resisting and keeping Airbnb out. Some cities, like Chicago, banned Airbnb from renting out rooms for just a single night while others like Jersey City, in New Jersey, have restricted homes from being rented out to Airbnb guests for more than 60 days a year. New York City prohibits rentals for less than 30 days. Singapore frowns upon short-term rentals of less than three months.

For their part, Airbnb hosts and guests have adapted to local regulations and the online vacation rental firm has thrived as a platform. Initially, a key concern in many towns and cities was falling revenues. While hotels pay taxes, Airbnb renters could easily get away with paying too little in taxes, if any. But stringent regulations have taken care of that. Now, many municipalities that tax Airbnbs are making almost as much money from them as they are from traditional hotel operators. “Regulation rhetoric has diminished and there is far less talk of outright bans these days,” says Clarke. Airbnb, he adds, “has shown it can flourish in the most draconian regimes”.

Here’s how it works: If you are a host who is renting out a room in your home, you pay Airbnb a flat service fee of 3% of the booking, plus a portion of the optional fees you charge guests, like cleaning charges. Guests typically pay Airbnb a service fee of around 14% of the booking. Of course, in most jurisdictions, there are local taxes and taxes on total sales, like goods and services tax.

Airbnb has six million active listings worldwide. That’s in 100,000 towns and cities in 220 countries and regions. It has one billion annual users on its website and 17 million daily app users. Since it began operations in late 2008, Airbnb hosts have earned US$150 billion in revenue. A typical host in the US who rents out his or her home, or parts of the home, earned US$13,800 last year. Its payment platforms processed US$70 billion in guest and host transactions in 40 currencies in 2019. As a regular traveller and user of hotels as well as Airbnb, I can tell you two things. Airbnb isn’t always the cheaper or the more convenient option. Sometimes, you can find a better deal at the Marriott, Hilton or another chain. And, unlike a hotel room where cleaning is included in the room charges, at an Airbnb you need to pay a hefty cleaning fee to the host.

Scaling up

As Covid hit tourism hard in 2020 and bookings started to dry up, Airbnb laid off 1,900 people or about 25% of its workforce to cut costs and stay afloat. At the same time, the company was aggressively raising capital to scale up as soon as travel restrictions were eased. Airbnb raised US$3.5 billion in its IPO in December 2020, selling 50 million shares at US$68 apiece. Within weeks, the stock had more than tripled to US$212.

At its height in February 2021, Airbnb was worth over US$140 billion, or three times what Marriott is valued. The stock touched a high of US$212 soon after its IPO only to plunge over 59% to US$86 in June. From those lows, the stock has rebounded 35%. With a market capitalisation of US$75 billion, it is 8% bigger than Booking Holdings Inc and five times the size of Expedia Group Inc, both of whom have lost market share to Google Inc, which has used its search engine and advertising prowess to make a big dent in online travel bookings.

From a stand-alone, single-use vacation rental app, Airbnb is likely to transform over time into a more extensive travel portal business, challenging online travel agencies like Expedia and Booking. Airbnb’s brand can easily extend beyond vacation rentals and gain share in hotels and experiences, says AB Bernstein’s Clarke. “Airbnb is only scratching the surface of adjacent markets like mid-term stays of one to 12 months, which are being driven by millions of digital nomads who are working from home, rather than their offices,” he told me. Medium-term stays is already a US$200 billion market and growing rapidly. Clarke estimates that Airbnb currently has a 6% share of the market and can easily grow that manifold.

Another growth driver is likely to be hotel bookings. Airbnb refers customers and books them to hotels at their next destination, earning a commission. Hotels are crying out for diversification of the booking channels and will value Airbnb’s unique guest network, AB Bernstein noted in a recent report. Airbnb already accounts for 15% of bookings at some hotels. If the platform can leverage its inspirational “categories” to suggest hotels in a way Expedia or Booking.com can’t, there is little reason it cannot become a major player in selling hotel rooms. Airbnb has just a 1% share of the hotel booking market. A key growth driver is Experiences, one of the fastest growing travel verticals. Whether you are climbing the Himalayas with Sherpas or going on some other adventure tour, these immersive tours led by inspiring hosts are a big value-add for the firm, which can charge more for Experiences than by simply letting you rent a room for a day. Airbnb recently announced a refocus on Experiences, calling it the “next chapter” in its growth story. Among other opportunities is growing its portal to sell flights, book restaurant tables and open up its platform to advertising.

Turning profitable

AB Bernstein expects Airbnb’s revenues to grow to US$8.12 billion this year, boosted by revenge tourism, and US$9.89 billion next year. In 2018, the year before the Covid-19 pandemic, Airbnb revenues were just US$4.8 billion. AB Bernstein also expects the company to turn profitable in the foreseeable future. The key is its ability to rein in marketing costs — one of the biggest expenses for online travel operators.

“Airbnb will be the most profitable online travel firm within two years,” says Clarke.

Still, there are plenty of things that can go wrong for Airbnb. In May, the vacation rental firm abruptly withdrew from China. The zero-Covid policy as well as complicated and expensive laws and regulations that required Airbnb to regularly send detailed information on guests to the Chinese government were the key reasons cited in its exit from the world’s second largest economy. The exit is not as big a blow as it has been made out to be, however, notes Clarke. Moreover, outbound travellers from China will still be able to book vacations around the world, he says. There were few foreigners using the platform to book stays inside China. The domestic Chinese vacation rental market continues to be dominated by local Chinese platforms, including Ctrip.com.

If the economic slowdown gets worse as the US Federal Reserve continues to hike interest rates, Airbnb’s business will initially suffer but it might also force more homeowners to list their spare rooms, or entire homes, on the platform and prompt travellers who were previously thinking of booking a room at the Marriott or Hilton to switch to an Airbnb listing.

 

Assif Shameen is a technology writer based in North America

 

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