Read the news: Airbnb Racks Up Hundreds of Millions in Losses Due to Coronavirus

AirBnb is losing money at the speed or light and that will only get worse over the coming months.

The question on everyone’s mind is. Will AirBnb die? and more importantly, when?

Having worked in the travel industry for their main competitors, I’d like to share my perspective on the industry. The answers may surprise you.

Let’s talk a bit about the travel industry.

What is the business model of AirBnb?

AirBnb allow to rent a room online. It’s a very simple platform to connect prospective travellers with room owners.

Their entire value resides in being an escrow. They provide a layer of trust and handle payments.

Without AirBnb, you’d have to pay thousands of dollars to a random dude abroad you found on Craiglist/gumtree, a textbook recipe to be defrauded.

For the simple activity of listing rooms and holding transactional payments, AriBnb takes a fee of 20 to 30% of the booking.

A bit more if you pay in another currency and let them do the exchange, their exchange fees are atrocious.

It’s a huge reward for very little work.

Out of all the companies I’ve worked for in the past decade, that deal in physical goods. A room being a physical good. The travel middleman industry is probably the most incredible industry (think profitability or-risk reward ratio).

Remember that middleman always takes a cut, as high a percentage as they can because they’re middleman and they can by the virtue of being in the middle of the transaction. The accommodation industry deals in big numbers (hundreds of dollars per booking) with a big commission, so it’s a big cut on big numbers. A dream come true.

It’s not difficult work either and lend itself very well to branding (building trust and repeat business). Amazing business to be in really.

AirBnb for X limitations

One minor point. On AirBnb for X clone (or Uber for X).

One condition for that type of platform to be sustainable is that users can’t skip the platform (go direct to the room owner for example). More than that, it’s that users must actually NOT WANT to shortcut the platform.

For travelling it works. As a traveller, you will travel to different locations most of the time. You don’t get to shortcut AirBnb by calling back your last contact, because you’re going to somewhere else next time. (Of course if you go back to the same room and contact the owner directly, it’s fine, you’ll come back to AirBnb later anyway).

Better yet, as a traveller, you want to have AirBnb as a middleman every single time, you don’t want to send cash directly to a stranger in advance, no no no. As a room owner, you also want to have AirBnb as middleman, they give you a minimal guarantee and somebody to sue if the property is damaged (whereas the guest is long gone back to another country).

The business model doesn’t work when this constraint is not true. Let’s say, we do a AirBnb for finding a maid. AirMade.

You get a maid through the platform. Does a good job.

Want to hire again next month? You call directly and pay cash this next time. Neither of you want to go through the platform again and lose a chunk of change. There is no repeat business for a platform to be sustainable and highly profitable.

How about competitors business model?

The two closest businesses -that I may have worked for- are hotels.com and booking.com. They rent hotel rooms instead of private rooms. It’s very similar to AirBnb.

One minor difference with personal rooms. It’s possible for customers to short circuit the hotel platform and deal with a particular hotel directly. It makes sense actually, more so when it comes to business travelling or large chains of hotels with customer accounts.

Therefore these platforms have a bit more focus on searchability, ratings and a seamless booking experience (that AirBnb does not have).

Fact is, you need to be able to find AND compare hotels in the first place, searching “hotel in <city>” on Google Map is of limited help.
Plus hotel sites suck more often than not, the site is not working well or written in the wrong language or doesn’t accept the payment method you have and is billing in the wrong currency.

All things considered, users might as well just book on hotels.com.

Why care about individual hotels? There is no reason to. The only thing people care about is (cheapest) price and it’s usually roughly the same everywhere. Not always so it may be worth shopping around, but watch out for hidden fees beside the main price tag.

As AirBnb grows and gather more and more customers. Hotels will start listing on AirBnb and AirBnb will have to adjust its experience to cater to hotels.

How about revenues?

Hotels.com makes about 12 billion a year, roughly a billion per month.

Booking.com makes a similar amount. Hotels.com has more market shares in the US wheras booking.com has more market in Europe.

AirBnb is around 3 billion a year as per the last press release.

Commission is 20-30% per booking. A bit less sometimes for hotels due to (large) deals with (large) hotel chains.

Pretty much all of it is operating margin. It’s a tech company, a simple website. There is no costs like real estate or machinery or physical goods or storage or shipping.

It’s all profit hence they’re all very very profitable business.

Hotels.com is around 500 employees, so $24M revenues per head, or $4.8M in commissions.

For reference, it’s more per employee than NetFlix and Apple and Facebook and Alphabet and Microsoft combined. It’s more than most companies in any sector really.

Hotels.com is part of the Expedia conglomerate, that controls expedia, hotels.com, trivago, tripadvisor and a hundred more brands. The whole group is about 20000 employees as of 2020.

Booking.com is part of the Priceline conglomerate, that controls booking.com, kayak, opentable and a hundred more brands.
The whole group is about 25000 employees. (Edit: the conglomerate was renamed to Booking Holdings recently).

What’s wrong with AirBnb?

AirBnb is reportedly around 15000 employees with 3 billions in revenues.

They are as large as related conglomerates comprising tens of companies, except AirBnb is a single company running a single website!

They don’t even operate in as many countries or currencies.

Needless to say their strategy has been to burn as much VC cash as possible and hire has many employees as possible. A standard strategy to inflate valuation and raise even more money.

Fact is, there is nothing for these 15k people to do. The company could operate just as well (probably better actually) with a third of that, or go lean with as little as one tenth if the situation required it.

Don’t get me wrong, this is not a case where one team could redo this from their garage in a few weeks. It easily takes a baseline around a hundred employees to safely operate a major national company 24/7. Jumping to a thousand employees to operate a global company across multiple continents and tens of countries, having to deal with various jurisdictions, languages, payment methods and currencies.

The coronavirus has cut AirBnb revenues in half. It’s unknown how long it will last but could be years.

AirBnb will be haemorrhaging money at an unprecedented rate. Their fixed costs are simply too high. AirBnb will have to cut the fat sooner or later.

Meanwhile middle level employees are reportedly being hired with offers in excess of $400k.

It’s gonna be a rough awakening for employees. Forget about any bonus. Half of the offers were imaginary money in illiquid shares. It’s hard to estimate what shares might be worth at this stage -if anything- without knowing the fine print. They’re likely to never materialize, between VC shenanigans against common employee shares, probable lay-offs soon and any prospect of IPOing in the coming years down the drain.

For reference: There is a comparative historic case, Twitter. Twitter used to have 4000 employees many years ago. Most of which were doing nothing and notably self-reporting to be playing ping-pong in the office waiting to cash on their shares. A school case of a company inflating headcount to inflate a future IPO, which of course the market didn’t buy. They had to reduce expenses in the following years while increasing revenues. The headcount was frozen for years, it’s hardly bigger now than it was back then.

When will AirBnb close down?

Rest assured. AirBnb is a solid business that is at no risk of disappearing. Pretty sure that they could have turned profitable any minute if they wanted to. Fact is they are burning money for the sake of VC growth and valuation.

Can they afford to employ evermore thousands of people for half a million dollars each? Of course not, but there are pretty much no business in the world who could, so that’s not a reasonable metrics to judge that a company is doing poorly or in danger.

Expect a reality check, like most unicorns playing the VC game get sooner or later, that’s it.

What if they were to run out of cash? It’s not a problem because they will be able to get more very easily.

The business is extremely solid and sustainable as explained. The brand is strong and well established worldwide.

The only downside is unbelievably high fixed-costs (workforce) in the face of all travels (revenues) grinding to a halt from the coronavirus. This means a couple of bad years to go through, easily withstandable with cash reserves, debts and cost reductions, in some combination thereof.

There are hundreds of billions in cash sitting idle in the world with nowhere to invest in. Equities are crashing. Bonds have near zero returns. Cash has negative interest.

AirBnb needing few billions cash is a godsend for an investor on a 5-10 years horizon.

It is ripe for an hostile takeover from a Vulture Venture Capitalist. Get as much control as possible, lay off one third of the company, freeze headcount for 2-3 years. It will be printing money soon enough.

Alternatively, it could be financed by debt. Banks like SoftBank, JP Morgan, Goldman Sachs can arrange corporate loans in that order of magnitude. They do that regularly when financing factories for the oil or car industry for example. Banks are less invasive about how the company is run and don’t try to take it over.

Having worked for the aforementioned investment banks. The analysis in this article is my own and does not represent the view of the firms, who still didn’t figure out I have a blog.

What about properties?

AirBnb does not own any rental property, they’re simply a middleman. No liabilities.

Property owners who were renting on AirBnb will be affected by the travel bans and lose earnings. They can always lower rent or move back to the permanent rental market.

There might be some mortgage defaults on properties that were acquired for the purpose of AirBnb rentals. Depending on your views, this may be a great thing and will make housing more affordable for people trying to live in cities.

The cost of housing is the main expense for most households and it is being artificially held by current measures, transferring money to those who already have assets. IMO if governments wanted to reduce the economic impact of the virus, they should rather mandate that all leases for the tax year 2020-2021 are getting their prices slashed 10%.

Conclusion

AirBnb will be alright, don’t worry.

Individual employees, not so much. Take care.

It depends on how greedy VC and owners are really (hint: they’re always ruthless by nature). If AirBnb still has billions in cash from their last funding, the company can withstand a bad year or two doing nothing. If not, the company might re-raise money from a VC and it’s likely to impose strong terms to cut the workforce (hint: get a corporate loan instead).

Either way, the board might self-seize the opportunity to cut the workforce by one third anytime. Lower running costs, no loss of productivity, better outlook both short and long term. It’s a trivial business decision really, ignoring the human factor.