After two years of pandemic-induced restrictions, I began travelling earlier this year again, almost as if travel was going out of style. Crisscrossing Asia and 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 only recently begun opening their doors and been more welcoming earlier. Now that they are ready to receive tourists, I am heading there at the end of the year. 2022 has been a year of “revenge travel” for many people. Like many revenge travellers this year, I have spent as much time in short-stay vacation homes as I have in hotel rooms 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, and online travel agencies or portals — Tripadvisor, Expedia (which owns Orbitz.com), vacation rental firm Airbnb, hotel booking portal HRS.com and Booking Holdings (which also owns agoda.com and hotels.com).
There was pent-up travel demand and cashed-up travellers, which led to booked-out hotels, airlines charging an arm and a leg to change bookings and beaches, museums, galleries and other places where tourists gather have been teeming with people.
Yet, if you were looking at the stock prices of listed travel-related firms from aircraft makers like Boeing and Airbus, global hotel chain operators like Marriott or Hilton Worldwide to large carriers like United Airlines, Delta Air Lines and American Airlines Group you’d think investors were trying to bake in some other emerging variant or pandemic. Dow Jones US Travel & Tourism Total Stock Market Index is down 22% from the pandemic’s start in mid-February 2020, while the barometer S&P500 Index is up 9.5% during the same period. Travel-related stocks bounced back from the lows of 2020, only to dip again.
The subsequent rebound still leaves them far from where they were before the pandemic. Investors have been forced to balance short-time gains due to “revenge travel” with a looming global recession in the aftermath of high inflation and rising interest rates worldwide.
Formidable giant
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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 ($213.7 billion) market growing between 8% to 10% annually.
At current growth rates, it will be just 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 in the online travel world.
I first wrote about Airbnb in these columns in 2016, when it was still a scrappy start-up struggling to grow. In 2007, Brian Chesky and his roommate Joe Gebbia were broke and desperately trying to find ways to earn spare cash to pay their rent in San Francisco, one of the most expensive places for young people to rent. On a whim, 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.”
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A year later, that experiment morphed into hotel industry disruptor Airbnb, which had welcomed its third co-founder 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 world’s most prominent online travel operator.
Until Airbnb came along, nobody had disrupted the hotel business. Detractors argued regulators, particularly mayors and town councils, would never allow homes to be converted into short-term rentals. They reasoned that communities would rise to prevent neighbourhood homes from becoming makeshift hotels.
Ironically, Airbnb owes its success to communities that embraced its business model. People in big cities, small towns, and rural communities want to rent out their spare rooms, portions 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 to resist and keep 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 renting 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 worldwide 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 quickly 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 do from traditional hotel operators. “Regulation rhetoric has diminished, and there is far less talk of outright bans these days,” says Clarke. Airbnb, he says, “has shown it can flourish in the most Draconian regimes.”
Here’s how it works: If you are a host renting out a room in your home, you pay Airbnb a flat service fee of 3% of the booking plus a portion of optional fees you charge guests, like cleaning. Guests typically pay an Airbnb service fee of around 14% of the booking. Of course, in most jurisdictions, there are local taxes. And taxes on total sales, like the goods and services tax (GST).
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Airbnb now has six million active listings worldwide — in 100,000 towns and cities in 220 countries and regions. Its website has one billion annual visitors and 17 million daily app users. Since its operations in late 2008, Airbnb hosts have earned US$150 billion in revenues. A typical Airbnb host in the US who rents their home or parts of their home earned US$13,800 last year. Its payments platforms processed US$70 billion in guests and hosted transactions in 40 currencies in 2019.
As a regular traveller and a user of hotels and Airbnb, I can tell you two things. Airbnb isn’t always the cheaper or even the more convenient option. Sometimes, you can find a better deal at Marriott, Hilton or another chain. And, unlike a hotel room where cleaning is included in room charges, you need to pay a hefty cleaning fee to the host. Airbnb is trying to streamline this but cleaning fees is still extra.
Stock rebound
As Covid-19 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, Airbnb aggressively raised capital to scale up as soon as travel restrictions were eased. In December 2020, Airbnb raised US$3.5 billion in an IPO, selling 50 million shares at US$68 a piece. Within weeks stock had more than tripled to US$212.
At its height in February 2021, Airbnb was worth over US$140 billion or three times Marriott’s value. Its stock touched a high of $212 soon after its IPO, only to plunge over 59% to US$86 in June. From those lows, the stock has rebounded 35%. Its market capitalisation is still around US$75 billion, 8% more than Booking Holdings and five times the size of Expedia Group, both of whom have lost market share to Google, which has used its search engine and advertising prowess to make a significant dent in online travel bookings.
From a standalone 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 Bernstein’s Clarke. “Airbnb is only scratching the surface of adjacent markets like mid-term stays of one to 12 months which is being driven by millions of digital nomads working from home rather than their offices,” he told me. The medium-term stay is already a US$200 billion mar- ket growing rapidly. Clarke estimates that Airbnb currently has a 6% market share and can quickly grow that manifold.
Room to grow
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, Bernstein noted in a recent report. Airbnb already accounts for 15% of bookings at some hotels.
If Airbnb can leverage its inspirational ‘categories’ to suggest hotels in a way Expedia or Booking.com can’t, there is little reason it can’t 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 climbing the Himalayas with a sherpa or going on some other adventure tour, these immersive tours blend with inspiring hosts. They are significant value-adds for the firm, which can charge more for Experiences than simply letting you rent a room. 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. Any website with a billion visitors annually would attract a lot of advertisers.
AB Bernstein expects Airbnb’s revenues to grow to US$8.12 billion this year, boosted by “revenge tourism”, and grow to US$9.89 billion next year. In 2018, the year before the Covid-19 pandemic, Airbnb’s revenues were just US$4.8 billion. Bernstein also expects Airbnb to turn profitable in the foreseeable future. The key is Airbnb’s ability to rein in marketing costs — one of the most significant 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 and complicated and expensive laws and regulations that required Airbnb to send detailed information on guests to the Chinese government regularly were critical reasons for its exit from the world’s second-largest economy. The exit from China is not as big a blow as it has been made out to be, says Clarke. Moreover, he adds that outbound travellers from China will still be able to book vacations worldwide. Few foreigners were using the platform to book stays inside China. The domestic Chinese vacation rental market continues to be dominated by local Chinese platforms, including Ctrip.
If the economic slowdown worsens as the US Federal Reserve continues to hike interest rates, Airbnb’s business will initially suffer. But that might also force more homeowners to list their spare rooms or entire homes on the platform and force travellers considering booking a room at the Marriott or Hilton to switch to an Airbnb listing.
Assif Shameen is a technology and business writer based in North America
