Mike Segar/Reuters
Brian Chesky, CEO of Airbnb, which charges fees to both the travelers and property managers that use its service.
- Airbnb is able to offer travelers accommodations worldwide without any of the costs of a hotel chain because it relies on third-party property managers to offer rooms and other places to stay.
- It makes money by charging fees to guests and hosts that amount to about $120 for a $1,000 booking; because it has few direct costs, it has plenty of room to profit.
- Airbnb's marketplace model can be problematic in a time of travel disruptions, such as during the present coronavirus crisis; customers often turn to Airbnb for refunds, not to the hosts who provide the listings.
- But its business doesn't allow it to please both guests and hosts in a time of mass cancellations; it can afford to reimburse travelers but not property managers.
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In more normal times, Airbnb has an ideal business model, with lots of room for profit.
In times of crisis, such as our present coronavirus-afflicted moment, when people are cancelling travel plans en masse, that business model is likely going to get severely tested and could just break.
To understand why, you have to understand how Airbnb's service works and how it makes money.
Thanks to its successful marketing, Airbnb has become the leading brand and service provider for short-term, non-hotel accommodations throughout the world. When consumers are searching for non-hotel travel accommodations, they typically turn to Airbnb's site.
And it does so without operating a chain of hotels, renting out rooms, or partnering with hotel companies.
Instead, the company works as something like an eBay for travelers. Individual property managers post their apartments, guest rooms, pool houses, and the like on Airbnb's service. Travelers find those accommodations by searching Airbnb's site or app. Property managers set the rates and terms of rental, including cancellation policies, and handle most customer service questions.
But the company's one-stop marketplace model has its downsides when the travel world goes awry, such as now, amid the COVID-19 pandemic. Travelers may have made their reservations with individual property managers, but they see Airbnb as the service they used. They want to be able to cancel their bookings, no questions asked, just like they could with other travel companies, such as the airlines or hotel chains.
Offering travelers that flexibility hasn't been so easy for Airbnb, though, because it's had another audience to consider - the property owners, who are also its customers and whom it generally has allowed to set their own cancellation terms. Overriding those terms to guarantee travelers full refunds means taking money out of the property managers' pockets without their say.
Airbnb could take a hit on the top line and the bottom line
Airbnb makes money by charging fees to both guests and hosts, collecting a fee from both the seller and the property owner, or host.
On a hypothetical $1,000 booking, Airbnb makes about $120 - around $90 in fees from travelers and $30 from property managers.
Here's how that looks:
$1,000 - Consumer payment to book an Airbnb-listed property
Airibnb revenue: $120 in transaction fees
Property owner revenue: $880
The problem is that when a traveller cancels, Airbnb is only one of three parties involved in the transaction.
If Airbnb pays the consumer back, as it's currently doing for certain reservations, the company has to return the fees it charged the guest and property owner for the booking. But the real losers are the property owners, who were due - and now have to forfeit - the lion's share of the booking costs. Because many of the cancellations are happening at the last minute, and because of the crisis, other bookings likely won't be made in their place, the hosts aren't likely to replace that revenue.
Airbnb has so far refused to compensate property owners for cancelled coronavirus reservations, and the company does not appear to be under any obligation to do so. But if Airbnb decided to compensate property owners - perhaps as way to preserve its business reputation - the company would incur a much bigger financial hit.
Here's how that would look, using the same $1,000 booking example:
$1,000 - Customer payment to book an Airbnb-listed property
Customer is then refunded $1,000 by Airbnb
Airbnb revenue: $0
Airbnb "make whole" payment to property owner: $880
Airbnb net loss on the booking: $880
In this scenario, Airbnb takes a hit on the top line and the bottom line: it forfeits the $120 in revenue and it must dig into its own coffers to repay the property owner the $880.
An expensive proposition measured in billions of dollars
Over the last two weeks, Airbnb has stumbled from one cancellation policy to another in response to the pandemic. Many of those policies have promised refunds only to customers living in or traveling to particular areas and initially simply asked hosts to provide refunds, rather than mandating that they do so. Its latest policy, announced on Sunday, finally allows all customers to cancel any reservations made before Saturday for travel anywhere between then and April 14.
Airbnb is promising guests that they'll get a full refund for such cancellations, including for the service fees it charged them. The company is also promising to refund hosts the fees it charged for those reservations. What Airbnb's not doing, though, is promising to reimburse property managers for the revenue they're going to lose out on due to those cancellations.
As we saw from the hypothetic above, doing so would get pretty pricey pretty fast and quickly exhaust even the copious amount of cash in Airbnb's stash - about $3 billion, according to recent reports.
Travelers make about $2.5 billion a month in US bookings through the company's services, according to market research firm AirDNA. If a month's worth of bookings were cancelled by customers, Airbnb would have to return all that $2.5 billion to those travelers, including the $300 million it assessed in fees at a 12% rate.
But if it also had to reimburse property managers, it would have to dip into its coffers to pay them the $2.2 billion in lost revenue. By contrast, Airbnb has just $3 billion in cash on hand, according to a recent report in The Wall Street Journal. Assuming mass cancellations, Airbnb's cash could be wiped out within two months if it tried to make just its US hosts whole.
So, Airbnb's move to finally allow a liberal cancellation policy is likely to satisfy its traveler customers. But the cost of it will largely be borne by its property manager partners. How they react to paying the price of Airbnb's new policy will likely determine how will its service will fare when things get back to normal.
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:
- The coronavirus crisis has exposed a crucial weakness in Airbnb's business model and it's likely to haunt the $31 billion company's IPO plans
- Airbnb is letting guests around the world cancel their reservations for a full refund and no cancellation fees, as the coronavirus pandemic continues to disrupt travel plans
- How to cancel an Airbnb reservation without a penalty
- Airbnb bookings in coronavirus hot spots have collapsed by as much as 96% since January
Axel Springer, Insider Inc.'s parent company, is an investor in Airbnb.