Airbnb and travel bans on The Future, This Week

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Intro This is The Future, This Week on Sydney Business Insights. I'm Sandra Peter, and I'm Kai Riemer. Every week we get together and look at the news of the week. We discuss technology, the future of business, the weird and the wonderful, and things that change the world. Okay, let's start. Let's start!

Sandra Today on The Future, This Week: as travel stops, Airbnb and its super hosts struggle for survival. I'm Sandra Peter, I'm the Director of Sydney Business Insights.

Kai I'm Kai Riemer, professor at the Business School and leader of the Digital Disruption Research Group.

Sandra So Kai, what should we talk about today?

Kai So COVID-19 dominates the world, and so it dominates the news as well. We've actually looked at stories that might not be directly coronavirus-related since we're doing Corona Business Insights, our spin-off podcast that looks at the future of business impacted by COVID-19. But it's really hard to find anything that is not COVID-19.

Sandra We could go with Earth Day, that was a couple of days ago, but we've just done a podcast on climate and the environment on Corona Business Insights, looking at the rather bleak outlook, however, you've tried to analyse the impact of COVID-19 on emissions, on investments by companies, around focussing on renewable energies, or around customer and consumer habits.

Kai So, you know, imagine it is Earth Day and no one shows up. Because Earth Day usually used to be a big deal, now it's merely a news story. There was one story that we could have done, but it didn't really carry a podcast, which is Tesla's electric cars require less maintenance than gas-powered vehicles. And that's interesting, but that's as far as the story goes.

Sandra Well, it's also a World Book Day, that's actually today, when we're recording this podcast.

Kai Well, speaking of books, Facebook's Libra, some of you might remember that Facebook tried to launch its own cryptocurrency. Facebook tried to become a bank. And this was going to be the new payment system that the word would pay with online.

Sandra And that was dominating the news at the time, all the headlines were around this.

Kai This was a big story. Now, Libra has pivoted or some say failed. And this is a news that was hidden away in an outlet called Decrypt. Basically, Facebook is shelving its Libra plans and the brand will still be alive, but it will merely be yet another online wallet for cryptocurrencies. But the big plans for a multi-company consortium and revolutionising payment on the Internet is basically gone.

Sandra But speaking of Book day, in interesting news, Airbnb has pivoted their famous experiences to now have virtual experiences, and you can actually have a chat with a famous author, or listen to story time by famous people or authors on Airbnb. That got us thinking about what actually is happening to Airbnb these days and also got us thinking a bit about how would you even think about the future of Airbnb during and after this pandemic.

Kai And it turns out there was actually quite a number of stories both this week and in the past couple of weeks. So we thought let's do Airbnb as a topic. It's the kind of topic that we have touched on before on the podcast. It's about innovation, it's about tech, but it is also again a topic that very much revolves around the impact of COVID-19. So let's do this. So Sandra, what happened in the future this week?

Sandra Our big story today comes from Bloomberg and it's titled Airbnb is banking on the post-pandemic travel boom. And the article goes into quite a bit of depth into how the company has redefined the travel industry and tries to look into what might be coming up next for the home rental company.

Kai So Airbnb has obviously been hit hard by the lockdown, the global travel ban, bookings are way, way down from where they used to be, and where they used to be is actually quite important for where this story is going. So Airbnb was recently valued somewhere between 50 and 70 billion dollars. This was before the coronavirus hit. And before that Airbnb's inventory was about 7 million listings. And it's important to put that in context. If you add up all the rooms from the top 10 hotel chains combined, you would end up with about five and a half million guestrooms. That is in many markets, Airbnb has way more rooms than hotels.

Kai So it's an enormous business that depends entirely on the listings of hosts that make available their rooms and apartments and so forth. And Airbnb was actually scheduled to take its innovative business model public. The IPO was planned for this year to actually reap the benefits of this enormous growth and the market position that the company had built over the past 10 plus years.

Sandra And it's somewhat ironic that Airbnb did actually start out during the last global recession, that was 2008, on the back of that global recession.

Kai When travel via Airbnb was seen by many as a cheap, but also quirky alternative, to staying in expensive hotels.

Sandra But let's be clear Airbnb did go into this crisis as one of the success stories of Silicon Valley. Unlike Uber or companies like WeWork that were constantly in the news for various types of scandals, lost their CEOs and so on. Airbnb, although it was struggling to turn a profit with huge expenses even before the crisis, was seen as getting ready for what would turn out to be a very successful IPO.

Kai Well, the situation has changed completely. In many markets, bookings have dropped between 80 and 95 percent as people have been asked to shelter-in-place as countries have closed their borders. Business has crumbled away steadily and then rapidly over the past months.

Sandra And Airbnb, unlike traditional hotel chains, didn't just lose bookings, it actually lost more than a billion dollars’ worth of reservations when the social distancing measures and the travel bans took effect, as unlike hotels, they do actually require customers to prepay for the booking. So that money had already been collected by Airbnb, and by hosts as well.

Kai So income at Airbnb has broken away, while they still have significant cost. In reaction, Airbnb has stopped all marketing, all at advertising. The founders have suspended taking any pay. Top executives had their pay. Half and employees now are faced with the daunting prospect that many of the stock options that many of the early day employees have held will expire by November 2020, which means that if the company cannot stage a successful IPO by then, a lot of people will lose a lot of the money that they had been looking forward to. And it is not likely that any IPO will happen this year.

Sandra And that is also the case with investors into Airbnb. Whilst the company was valued at up to 70 billion dollars before this happened. And while it's costs had soared by over 5 billion dollars last year,.

Kai The valuation had dropped to $30 billion about three weeks ago. And since then, Airbnb had to take out a $1 billion loan at an interest rate of 11 percent, which is usually what junk companies have to pay when they take out loans, which dropped the valuation further to about $18 billion.

Sandra The way this crisis plays out for Airbnb for the travellers and the customers who make the bookings and on the other side, for the hosts who advertise their properties on Airbnb, it's a good opportunity to reflect the bit on the business model of two-sided platforms.

Kai So on a two-sided marketplace, obviously there's two parties that do business with each other. The hosts who list the bookings, and the customers who book and travel and stay in those properties. And faced with the looming crisis, customers were getting restless because lots of other businesses, hotels, would allow customers to cancel their bookings. And in the case of Airbnb, many customers had already paid about half of what they have to pay at the time of making the booking. So now Airbnb was faced with the choice, do we allow the hosts to keep that money? Or should we side with the customers and let them cancel all those bookings?

Sandra Airbnb actually agonised over whether or not to override the host's cancellation policy. And in the end it did. It sided with the customers and it allowed for full refunds to the customers that had booked and were affected by the travel bans.

Kai And I'm sure the reason is to protect the brand because, you know, obviously Airbnb wants customers to still be loyal when travel comes back, and when we're slowly coming out of this crisis. But it outraged a lot of the hosts who were counting on this money and were now faced with no business of their own. So it doesn't impact just on Airbnb, of course, but also on the livelihood of many of its hosts.

Sandra So what the CEO Brian Chesky did was announce a couple of weeks ago that Airbnb would spend about 250 million dollars covering about 25 percent of what the hosts would have been paid under whatever cancellation policy they had for their reservation between the 14th of March and the 31st of May.

Kai And before we look at why this is so important for many of the hosts to receive some financial support and relief funds, we want to highlight an article in CNBC which we don't know how representative it is, but it reports on a number of cases where our hosts have received what is called a 'pittance' or a very meagre refund. So it reports on people who have a number of listings. One person who lists 80 Airbnb properties across the US area, who said he lost more than $30000 through 50 reservation cancellations, and who would have thought that he gets back in the vicinity of ten thousand dollars, that he only received a payment of $106. And there's a number of other cases where people received very, very little money when they were expecting, as announced, at least 25 percent of the cancellation of the reservation fees. So they're not happy.

Sandra So Airbnb did set up an additional 10 million dollar relief fund for the super hosts, offering grants up to $5000 for those who hurt the most. But again, given the size of the hit that they Airbnb took, that is not really going to cover what hosts are losing, especially given the prolonged period that the travel ban and the fallout from the travel ban will last.

Kai And it brings to the fore one of the more interesting aspects of Airbnb as a business model, which is the existence of professional hosts, those people who either buy or rent properties on the market, to then list them on the Airbnb platform. So this is sometimes called rent arbitrage, where someone might enter into a long-term lease for an apartment in New York City, paying thousands of dollars for it, but making at least double that amount by listing it on Airbnb, being remunerated for the work of you know, cleaning it, maintaining it, listing it and engaging in the booking process. And many people have grown sometimes quite sizable property empires where the income would be used to acquire more and more of these properties. Now, most of those are now faced with bankruptcy, given that they are looking at sizable mortgage or rental payments with virtually no income against this.

Sandra So many such hosts have moved towards short-term rental. Some of them have actually offered, and there's about 100000 units being offered to people in need, or accommodation for medical staff in countries most affected by the COVID crisis, or that doctors and nurses can stay closer to hospitals or can self-isolate and not return to their families during the pandemic. But also, many of these hosts have decided to switch their listings to short-term rentals.

Kai So, for example, data from The Guardian shows that in the first week of the UK lockdown, property listings on the portal Rightmove, for example, where properties are listed for a month's rental or short-term, as in up to six months, increased by 45 percent in London, 55 percent in Brighton, 62 percent in Edinburgh.

Kai So a lot of the investor-based Airbnb listings have made their way onto these markets, and become available now to the local population rather than tourists and travellers.

Sandra But of course, there isn't a local population in any of these cities that can sustain short-term or longer-term rental of these properties with the same occupancy as you would have seen from leisure travel or business travel.

Kai So this puts price pressure on those listings and many will stay empty and put their hosts into precarious financial positions.

Sandra Which begs the question now, how do we look forward to try to understand what the impact will be on a company like Airbnb?

Kai So for this, we will have to speculate on how we will actually move forward as the crisis might subside. So we might move to a situation where international travel is still banned, but people can move more freely within certain countries.

Sandra Some have made a point that maybe rural properties will see a resurgence first. So people might not be able to travel outside of Australia, but we will be able to travel within Australia and we will choose to take. Holidays or long weekends in places around the country.

Kai But we shouldn't forget that this makes up only a tiny proportion of all the listings on Airbnb, especially in Australia, most would be tourists hotspots in the big cities in Sydney and its beaches, the surrounding areas where incidentally also the big hotel chains are located.

Sandra And at times where there might be a lot of uncertainty around how often places are clean, and how thoroughly they are scrubbed or who might have stayed there before. Travellers might prefer to stay at hotel chains rather than Airbnb.

Kai Yeah, absolutely. If I'm faced with the decision to go and stay, say, in Melbourne, I now can pick with either staying in someone's house where I do not have any idea about the cleaning regime, or I can pick between hotels that are largely empty where I can stay in a really nice hotel, in a branded hotel, at a very reasonable price. So people will want to make those choices, which puts Airbnb on the back foot, I think.

Sandra But there's something else that puts Airbnb on the back foot, which strangely was largely ignored by all the articles that we have read. All of them speak to some travel boom arising out of this pandemic, where people who have been locked in their houses for a long time will want to travel and will wish to travel. And aside from being actually allowed to travel, which is by no means a guarantee that travel restrictions will be lifted anytime soon, there seems to be no discussion about the economics of doing that. As we see in the news all the time, the world is facing recession and a huge unemployment crisis, companies are struggling to cut costs to maintain viability during the crisis.

Kai So the bottom line of this is there's no reason to believe that travel will come back in any sizeable numbers any time soon. Companies will want to save money by not travelling as much. People will not be able to take holidays and travel as much as they used to before the crisis. And on top of the worries around health and hygiene, the financial impact on the travel industry is likely to be quite sizeable.

Sandra And in that respect, Airbnb did make statements pointing towards the fact that they will probably focus on part-time hosts who are renting out their spare bedroom or just an air mattress, going back to the roots of Airbnb, which was during the last financial crisis as a way to offer low-cost alternatives.

Kai Can I call bullshit on this a little bit as well? Because while this is a nice, warm, feel-good narrative, we're pivoting back to the roots or going back to a community business model. Given the idea of social distancing, and the fact that we shouldn't congregate with people, going to live in someone's house or on someone's air mattress in someone's spare room, is probably not what people would likely want to do, when we come out of this.

Sandra Not just travellers, but also hosts themselves who have to take a stranger into their house.

Kai So one of the articles made a good point saying that even hotels can be crowded places. So they said there's a future for so-called 'apartment hotels' where people have a little bit more privacy, but they're still in a clean and professionally-managed environment. So I think we will see, at least initially, a lot of change in travel patterns, most of which will speak against a speedy recovery for Airbnb.

Sandra So what happens to Airbnb if it doesn't survive at the size that it is now? So more than seven million Airbnb listings spread across 100000 cities.

Kai So what you're asking is not only will Airbnb survive, but what will its business model look like? What will its size and shape look like after this?

Sandra Yes, exactly. And we've discussed previously on the podcast, companies that have started out as unicorns.

Kai So eBay is a good example of one that no longer has the growth rates that make it attractive to both the media and investors, but is still a solid business that draws a profit, that has a place in the world, that people go to to sell and buy things, but that is no longer sexy enough to be part of the Silicon Valley narrative. So it might well be that going forward, Airbnb will not be a unicorn. It will not be the growth and success story that revolutionises the world. But there is no reason to believe that an idea like Airbnb, and the company as such, would disappear completely.

Sandra And let's not forget that a smaller Airbnb, with fewer super hosts and professional listers who have many, many properties, especially in big cities where rents are quite high, might be a welcome relief on prices for rental properties for communities that are being affected by the economic downturn, in the wake of the pandemic.

Kai And that might actually put a resolve behind one of the more controversial aspects of Airbnb, the fact that it drives up rents in hot spots in popular destinations like San Francisco, Sydney, New York, London. So maybe a welcome relief for the urban housing shortage in some of those markets, if indeed this crisis will have a prolonged effect on travel, and we're not going back to exactly what it was before.

Sandra But I think that's all we have time for today.

Kai See you soon.

Sandra On The Future...

Kai Next week.

Sandra This week?

Kai Yes. But next week.

Sandra On The Future, This Week. Next Week. Thanks for listening.

Kai Thanks for listening.

Outro This was The Future, This Week, made possible by the Sydney Business Insights team and members of the Digital Disruption Research Group. And every week right here with us, our sound editor Megan Wedge, who makes us sound good and keeps us honest. Our theme music is composed and played live on a set of garden houses by Linsey Pollak. You can subscribe to this podcast on iTunes, Stitcher, Spotify, YouTube, SoundCloud or wherever you get your podcasts. You can follow us online on Flipboard, Twitter or sbi.sydney.edu.au. If you have any news that you want us to discuss, please send them to sbi@sydney.edu.au.