Kurt Krieger/Corbis via Getty Images
Brian Chesky, CEO of Airbnb, which has seen its business struggle as a result of the coronavirus crisis.
- Airbnb has been hit hard by the coronavirus pandemic and economic downturn, with customers cancelling bookings en masse and making few new ones.
- But the company could emerge from this crisis stronger than ever, business experts told Business Insider.
- The company has a proven business model, dominates its portion of the market, and, unlike the hotel chains with which it competes, is able to adapt quickly to changing demand.
- Still, Airbnb will have to overcome some huge obstacles before it can thrive again, such as a likely need to raise cash in the middle of the downturn and a need to support and mollify property managers it has hurt and infuriated with a recent policy change.
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What doesn't kill you makes you stronger, so the song goes, and the same could end up being true for Airbnb with regard to the coronavirus crisis.
The short-term rental service has been hit hard by the epidemic, just like the rest of the travel industry. But assuming it survives the pandemic-sparked downturn, that people eventually return to the travel habits they had pre-crisis, and that it's able to largely hold on to its property-manager partners - none of which is a sure thing - Airbnb could end up in a better competitive position than it was in before anyone had heard of COVID-19, business experts told Business Insider.
"They will be like [Arnold] Schwarzenegger," said Mohan Sawhney, a clinical professor of marketing at Northwestern University's Kellogg School of Management. "They'll be back."
Right now, that may not feel at all obvious. In response to the coronavirus pandemic, much of the United States and many areas around the world are under shelter-in-place orders or other kinds of lockdowns, limiting movement. With the bottom falling out on demand, airlines have canceled thousands of flights, and hotel companies are furloughing tens of thousands of workers.
The short term stay market, Airbnb's focus, is similarly depressed. Bookings for stays in the US that were due to start between March 18 and April 7 are seeing 90% cancellation rates, according to data from AirDNA, an industry research firm. Meanwhile, new bookings have plunged precipitously, AirDNA's data indicates. With little revenue coming in, Airbnb is already losing hundreds of millions of dollars, The Information reported.
Airbnb has a proven business model
Despite that, Sawhney and other analysts are confident that while many businesses may fail in the current crisis, Airbnb has a good chance to survive and even thrive after it.
"Airbnb is not like your neighborhood restaurant," said David Hsu, a professor of management at the University of Pennsylvania's Wharton School. "This is a company that has a proven business model. It works. They will, after this episode, be again a leading platform that connects hosts with customers."
Part of what makes him and other analysts bullish on Airbnb is the way its business works. Unlike the hotel chains with which it competes, the company is able to offer accommodations around the world without owning or paying rent on those properties and without having to pay to staff them with desk clerks or cleaning or maintenance personnel.
Instead, it offers a kind of digital marketplace, pairing travelers with property managers - a model that eBay years ago showed could be significantly profitable. Indeed Airbnb itself was reportedly profitable, at least until recently.
Airbnb makes money when people reserve accommodations through its service, charging fees equal to about 12% of the total amount travelers pay. Even better, it frequently holds on to much of the total amount travelers pay until they actually check in, giving it an extra source of cash during normal times, said Scott Shatford, AirDNA's CEO.
Its lack of fixed costs means that the company's expenses should largely rise and fall with its revenue, making it better able to endure a recession, analysts said.
Compared with the hotel chains, "they actually have more of a scale up, scale down-type model," Hsu said. "That's the beauty of the platform," he continued.
Airbnb can be more easily adapt than hotels
Its lack of fixed costs also makes it potentially more adaptable to changing trends. In the wake of the epidemic, there's little demand for short-term vacation rentals. But there's been a growing demand among some urbanites for longer-term rentals in places outside of big cities such as New York where the contagion is rapidly spreading. Longer-term stays of 30, 60, or even 90 days now make up nearly the majority of bookings on Airbnb and other short-term rental sites, Shatford said.
Airbnb's service has quickly accommodated that shift in demand, with hosts changing their terms of service to allow longer stays, Shatford said. That's something a hotel chain would struggle to match.
"One of the beautiful things about being a tech company is they can and are pivoting," Shatford said.
Another factor that makes Shatford and other analysts optimistic about Airbnb's future is that it has a well-known brand and dominates its sector of the travel market. Although Airbnb has competitors such as Expedia's Vrbo and Booking.com, most of the short-term rental bookings are made through its service. And it has become the primary destination for travelers looking for such accommodations.
Whenever the travel industry bounces back, guests and hosts are likely to return to Airbnb, if only for those reasons, Shatford said.
"Airbnb still has the majority of the demand" for short-term bookings, he said. "There's not really too many options of where to go," he continued.
There are no guarantees
Still, there's no guarantee that Airbnb will actually survive. The pandemic-related downturn is already sending unemployment skyrocketing, which is likely to further depress demand even once the outbreak subsides.
With few new bookings, Airbnb's revenue and cash flow have likely been severely constrained. That situation has almost certainly been worsened by the company's promise to offer customers full refunds - including its service fees - when they cancel reservations as a result of the epidemic. Further taxing its purse, the company has promised to pay hosts some $250 million to partially cover those lost bookings.
"I do believe that this is an existential threat for Airbnb right now," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business.
Airbnb had about $3 billion in cash in its coffers as of February, according to a recent report in The Wall Street Journal. To conserve that stockpile, it has frozen its marketing spending and is severely cutting back on hiring new workers, according to The Information.
Still, in order to get through the crisis, the company is likely going to need to raise more funds, Siegel and other analysts said.
Airbnb had planned to go public this year, a move that would allow it to raise cash by selling shares on the open market, instead of to private investors. But the collapse of both its business and the stock market as a result of the pandemic have almost certainly scuttled that plan, analysts said.
"The IPO is off for the foreseeable future," Sawhney said.
That means the company will have to borrow money or sell shares in the private market - likely at a much-reduced valuation - to get cash. Already, the company internally has lowered its estimated value from the $31 billion it had at the time of its last fundraising round in 2017 to $26 billion, according to the Financial Times.
Hosts are upset
Assuming Airbnb gets enough cash to tide it over until the economy and the travel industry rebounds, it's going to have to do another thing to survive and thrive, analysts said - placate and support its hosts. Without hosts listing their spaces, Airbnb would have nothing to sell to consumers.
Generally, Airbnb allows property managers to set their own prices and terms for their listings. But last month, as the coronavirus epidemic grew worse, the company overrode hosts' cancellation policies to allow guests to cancel their reservations and get a full refund, no questions asked. The move infuriated many property managers, in part because Airbnb didn't consult with them before superseded their policies and the cost of the refunds fell largely on them.
In the wake of the move, some hosts have threatened to sue Airbnb. Others are looking into listing their properties on other services, such as Vrbo, or getting out of the short-term rental business entirely and leasing their spaces to longer-term tenants.
"The hosts feel like Airbnb broke their promise, broke their contract with them," Shatford said, continuing, "They need to gain trust with their core hosts again."
It's unclear what 'normal will look like after this
Airbnb has tried to do that with its $250 million reimbursement offer and another $10 million fund to help out its so-called superhosts, well-regarded property managers with popular accommodations. But for many hosts, Airbnb is their primary source of income. With bookings all but wiped out, their businesses may not survive the downturn and Airbnb may have a lot fewer property managers on its service after the crisis is over.
"There may be a permanent shift in the stock of hosts," Hsu said.
Even if the hosts largely stick with Airbnb or come back after the crisis passes, there's no guarantee that travelers will. The longer the epidemic lasts and the longer that people have to limit their movement, the more likely that their behaviors will change permanently, Hsu said.
It's possible that the travel industry never really bounces back from this episode or that it takes years to do so. It's also possible that business travel may rebound quickly, but leisure travel doesn't, which could leave Airbnb at a disadvantage, because it's largely seen to operate in the latter market.
"We just don't know what the other side of this is going to look like," Siegel said.
Got a tip about Airbnb? Contact Troy Wolverton via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
- Read more about Airbnb:
- Airbnb's hosts aren't impressed with the company's $260 million package to make up for coronavirus cancellations. 'People see it for what it is - it's PR.'
- Airbnb's CEO compared the coronavirus crisis to Hurricane Maria, saying its business will bounce back, just as it did after the storm that ravaged Puerto Rico
- Airbnb is paying hosts $250 million after they criticized the company for leaving them on the hook for coronavirus cancellations
- Airbnb hosts are furious that the company is sticking them with the cost of letting guests cancel due to the coronavirus crisis
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