UPDATE: This article was written in the first week of January, and today, Feb 11th, the price is $152.73 (4th July 2024). Written for VR-Analysis.
The Big Three.
The last few years have seen three companies gravitate to the top of the STR (short-term rental) marketing tree: Booking Group, VRBO (Expedia) and Airbnb. What has 2023 provided, and what does 2024 hold in store for a) Investors, b) Property managers and marketers, and c) Real Estate?
We are addressing these companies alphabetically for the purposes of this newsletter. These companies have seen wildly different share price trajectories, and we believe we will see 2024 with increased polarisation of results and investments.
Airbnb:
Probably the most well-known brand amongst the STR aficionados, ranking 416 in the “Brand Awareness” tables and making it into the top 500 in 2023. Airbnb is generally recognised as a “noun” in the industry, resulting in exceptional search volume, especially from the increased number of new short-term renters and properties. 21m organic searches monthly (.com only), circa 2.5m paid visits, 77% US traffic, and an authority score of 85. Other country extensions add more traffic, such as the UK, with 5m visits and circa 0.5m paid and an authority score of 74.
Is this good? Check the companies below; it pales into insignificance, but this is like comparing apples and oranges. Despite its venture into Hotels Tonight, Airbnb is a short-term (not sharing despite the PR) business only. We have created a table below to compare all this data. Share prices show both risk and longer-term investments. So, what did 2023 provide for Airbnb and its followers? It’s well down from its Feb 2021 peak of $212 but up over the year:
Is Airbnb challenged?
The answer is yes, and it continues to see headwinds-
- Legislation: With hundreds of localities facing complaints over tourism, lack of housing, and real estate values being out of reach in many areas, politicians have reason to challenge locally, nationally, and internationally. The current EU direction on VAT application could be disastrous for all marketplaces, especially those dependent on the STR sector. We are publishing a separate article on this. Please subscribe to receive this.
- Penalties: Online e-commerce marketplaces have faced challenges, and those countries where the Gig economy has not been so well received have punished and fined these businesses. Airbnb is no exception. They have agreed to pay the Italian tax authorities €576m ($620m; £496m) to settle a tax dispute representing the amount relating to money the company had failed to collect in income taxes.
- Recurring revenue: This is a big challenge. People do not travel daily; they use Airbnb for short breaks, family holidays, and less for business, and there are no other real independent services bringing customers back more regularly.
- Competition: All three companies have competition and not just from each other.
- Eco Focus: Airbnb unlike its competitors is behind the curve on addressing travelers concerns on environmental management.
Financial Results in 2023
Q3: Nights and Experiences Booked exceeded 113 million. Revenue of $3.4 billion grew 18% year-over-year (14% ex-FX). Net income of $4.4 billion, or $1.6 billion, excluding the one-time income tax benefit. Adjusted EBITDA was $1.8 billion.
We are also seeing significant strength in our app relative to desktop and mobile web, with 53% of our gross nights booked in the Airbnb app compared to 48% in Q3 2022. We continued to see double-digit supply growth across all regions, with the highest growth in Asia Pacific and Latin America. These two regions also had the most year-over-year growth in Nights and Experiences Booked.
Consistent with the prior quarter, urban and non-urban supply grew at similar rates year-over-year. With over 7 million active listings, we saw relatively similar growth among individual and professional Hosts and believe most fastest-growing new listings are exclusive to Airbnb.
Q2: 115 million nights and experiences booked and added a record number of new listings – ending Q2 with over 7 million total active listings. Nights and Experiences Booked exceeded 115 million. Revenue of $2.5 billion grew 18% year-over-year (19% ex-FX). Net income was $650 million—our most profitable Q2 on a GAAP basis. Adjusted EBITDA was $819 million.
Year-over-year growth in bookings for long-term stays accelerated every month during the quarter. Overall, nights from long-term stays were stable with the prior quarter at 18% of total gross nights booked in Q2 2023. For the past six quarters, long weekends have been the fastest-growing trip type on Airbnb. As our guests continue to have the flexibility to travel and work remotely, they’re opting to stay an extra night or two on Airbnb.
Q1: 120 million nights and experiences booked. In Q1, Nights and Experiences Booked hit a record high with over 120 million. Revenue of $1.8 billion grew 20 per cent year-over-year (24% ex-FX). Net income was $117 million – our first profitable Q1 on a GAAP basis. Adjusted EBITDA was $262 million.
Full Year: Analysts expect total revenue to be circa $9.85bn, with $7.7bn accrued in the first 3Qrts.
This report is not about investment, however. It is about the future of the company, its momentum, its opportunity, whether it can rise further and the risk factors.
OPINION
In the STR world, there are three pivotal elements to each transaction: The owner, host, lessee, the guest, and the booking methodology. The latter comprises Marketing on channels (e.g.Airbnb), technology to support the booking flow, guest management and most importantly, the operational activity.
DOWNSIDES TO AIRBNB:
- Professional Managers: Professional Managers: 7 million listings, with 4m of these as owners with one to five properties exceeding 55% and then 16% of the rest 21+ properties, then the larger professional managers with a pyramid volume shape of properties, the largest having over 50,000+ properties.
If we discount this further for direct bookings and Airbnb’s “only’s” portion of properties, the figure is probably close to 1m in total. Many of these businesses will market on multiple channels and markup prices by the commission and other fees.
You will note above that Airbnb quotes growth as being predominantly “exclusive”, which illustrates a focus on small clients. Professional managers book all year around, not just a few months and generate much higher revenue for Airbnb.
How much do individual hosts make? There are wildly different reports and averages; however, Airbnb expects $9.85bn revenue of $1,400 per property, including experiences. Without disclosing experience revenue, we have discounted this number by 5% to $1260 per property. With a quoted average ADR of $168, the total average gross income per property is close to $9,700, based on a 13% average take rate. This results in close to 58 nights per year or 16% occupancy. Airbnb quotes “active properties”, but this can mean restricted availability and therefore, we could anticipate this number could be significantly higher, perhaps 20- 30% or $12-$13,000.
Managers will be seeking 260 days per year matching hotels. Clearly, urban vs seasonal, there are wildly different occupancy levels, so if we discount this to 60% or 220 days = $37,000. What % of these bookings are made on Airbnb? The answer is only Airbnb knows. There are estimates that Airbnb is achieving a 20% share, and if this were true of professional manager inventory, then the risks of alienating them are significant. If 10% of a manager’s bookings were made via Airbnb on $37,000 gross bookings, this is $3,700 per property per year at 13%, or $482m revenue.
At 20% share of bookings, this is closing on $1bn or with 1.4m properties between $675m at 10% or $1.35bn at 20%.
Managers are important but are not loyal; Airbnb is just a channel for their business. Many have not forgotten their handling of COVID-19 either.
We see increasing support to book direct and creative ways to dilute all OTAs, plus more competing channels arising (HometoGo, Holidu and hundreds of smaller ones), which appears to be a risk of substance. It also explains Airbnb’s continual system tweaks and services to engage small managers and independent owners comprehensively. However, owners come with increased support challenges. With close to 7,000 staff, Airbnb realises $1.4m per staff member, which is an envious number from a manager’s perspective!
Airbnb Growth
Independent Owners, small managers and Co-Hosts/Airbnb Property Managers: This is the core target of Airbnb, but as we can see from the legislative challenges below, new territories and margins need to be breached to increase booking revenue.
The exclusive single-owner approach and the smaller Co-Hosting version of micro-managers are clearly the growth opportunities. This is measurable and is influenced much more dramatically by the world economies and legislation.
Airbnb is global, with properties in over 200 countries. The 70% (<21 property) segment has grown largely from the USA and Europe but has continually spread its wings. In 2008, Airbnb found itself in a prime growth position, moving past the real estate meltdown and increasing rise in budget travel and tourism. To a degree, it has self-inflicted injuries due to its phenomenal growth.
On May 3, 2023, Airbnb launched its “Summer Release.” This release included the launch of Airbnb Rooms, an “all-new take” on the original Airbnb, designed to take the company back to its roots. Other features of the new launch included a Host Passport, total price display, new hosting pricing tools, transparent checkout instructions, more flexibility to pay (now including Klarna) and more affordable monthly stays. Since 2020, it has been talking up longer and extended stays and moving toward this market, claiming up to 20% of searches are now for 28 days plus. It later announced a November release with extra features such as Pet Friendly (oddly very late to this game).
As an owner and guest, this is an improved complement of tools and adds value, making it harder for others to compete, but Airbnb requires three fundamental elements to increase traction further: a) more guests and b) more hosts, c) more margin. Can it achieve this?
Determining these factors globally is nearly impossible in a hyperlocal environment where complete homes (over 85% of all inventory) are rented out. It is, however, very clear that the greatest opportunity is expanding into virgin territories that are less regulated locally and are keen to invest in real estate and locations that can benefit from tourism.
Natural targets are heavily populated countries with densely populated urban areas that promote inbound international and domestic tourism. The Chinese experience, where Airbnb has retracted their listing business, is a good example of an unsuitable business and cultural model. Existing businesses hardly felt the Airbnb entry: Companies such as Xiaozhu, Tujia, Ctrip (Trip), Qunar and Meituan dominated.
India is an obvious candidate, and it is reported Airbnb contributed over USD 920 million to India’s GDP and supported over 85,000 jobs in the country between April 2022 and March 2023. India has some obvious high-traffic tourist destinations, such as Goa, Delhi, and Mumbai, but domestic ADRs will be significantly lower, with average salaries of circa $400 per month. With less than 1% earning the equivalent of an average EU salary, we can see a market comparable to the UK in revenue for Airbnb plus long tail low-value ADRs a fraction of the US and EU quoted numbers.
India and Asia are, however, culturally different, often much more administrative, technologically inventive and restrictive, with many firmly embedded hospitality and accommodation businesses. Asia has a much more hotel-aligned booking and customer service approach for international and domestic tourist destinations, which are also well served by a raft of OTAs and travel businesses. These are necessary markets to compete in, and growth will occur, but it will be incremental. Airbnb quotes this:-
In Asia Pacific, our business has fully recovered to pre-pandemic levels, with gross nights growing 23% in Q3 2023 compared to Q3 20193. China outbound travel increased over 100% in Q3 2023 compared to a year ago. Smaller Asia Pacific markets such as Taiwan, the Philippines, Thailand, Hong Kong, and Indonesia all experienced year-over-year growth above 30% for gross nights booked on an origin basis. In addition, we saw more guests return to cities, with high-density urban nights booked increasing by 15% in Q3 2023 compared to Q3 2022.
The markets have returned, and the figures are baked in for Q3. Will international travel increase or level off now? Looking at the global numbers and commentary for 2024 from professionals, the majority consider a levelling off and no increase in ADR or occupancy levels to occur. This is reflected internationally.
International Travel: The latest UNWTO World Tourism Barometer reflects a market that has been replacing the post COVID-19 domestic boom and return to pre-pandemic travel.
- World destinations welcomed 22% more international tourists in the third quarter of 2023 than last year, reflecting a strong Northern Hemisphere summer season.
- International tourist arrivals hit 91% of pre-pandemic levels in the third quarter, reaching 92% in July, the best month since the pandemic’s start.
- Overall, tourism recovered 87% of pre-pandemic levels in January-September 2023. That puts the sector on course to recover almost 90% by the end of the year.
- International tourism receipts could reach USD 1.4 trillion in 2023, about 93% of the USD 1.5 trillion earned by destinations in 2019.
- Germany and the United States spent 13% and 11% more respectively on outbound travel than in the same nine months of 2019, while Italy spent 16% more through August.
Airlines are always a good indicator of expected travel: The IATA predicts that the number of passengers travelling by air will reach 4.7 billion in 2024, a jump from the 4.5 billion passengers who travelled in 2019. This increase is driven by changing travel habits. IATA survey data shows that one-third of the respondents say they are travelling more than before the pandemic, while about half say their travel is the same. Just 18% say they are travelling less.
However, they add provisos based on economies’ fuel prices, tight labour market, and recent wars. They also add that airlines will not get cheaper and clawing back losses is necessary, which is helped by 1oo% booked flights, so less comfort and more travel distress overall.
European Statistics
The EU offers great insight into the markets by accommodation category. This is the file link. You will notice the % changes in newish markets, e.g.Croatia (=7.4%0 compared to, say, France (-5.6%, but hotels up 1.5%)
This summary graphic however should illustrate the fact that hotels are re- gaining momentum in 2023 and with high ADRs on rentals an other headwinds, this makes sense.
Plus, the number of guest nights spent in the first six months is comparable to 2019.
OTHER HEADWINDS
Legislation and Reporting: Legislation and Reporting: This has been a press headline item across all Western countries for a number of years now, and the list of city, region and even country restrictions on licensing and letting grows daily. Much of the impetus has been driven by transient visitors’ disruption of local communities, compounded by over-tourism, rising house prices (supported by the years of low interest rates) and increased homelessness. Europe has also seen a significant influx of asylum seekers and immigrants, adding more pressure. Powerful hotel lobbies have worked hard to “level the playing field”, as they term it, compounding the issues further. Politicians focus on election opportunities, and news channels are always attracted by local bad news.
This outcome is continual attrition into the urban (in particular and Airbnb’s original core business) and leisure markets. Many US and European towns and cities, such as Amsterdam, Vienna and Berlin, are prime examples. Still, we see this control creep across the globe, such as Malaysia, Hawaii, Japan, and Canada.
Supporting this urban challenge, a report from AirDNA and hotel data provider STR revealed in summer that short-term rentals are closing the gap with hotels, especially in less populated U.S. areas. Whilst hotels dominate with 85% market share, short-term rentals have nearly doubled their share from 8% in 2018 to 15% now. The report notes that demand for rentals was up 24% year-over-year in rural areas, while urban growth lagged due to tighter regulations.
Further to this, in Europe, “The Digital Markets Act” is a piece of EU legislation designed to ‘put an end to unfair practices by companies that act as gatekeepers in the online platform economy (think Google, Amazon, Airbnb, and Booking.com as examples). The EU asserts that the position of these platforms ‘grant[s] them the power to act as private rule maker[s]’ and clamp down on competition. This is still in its infancy, but we will see OTAs required to adhere to the rules or receive hefty fines.
VAT: The European Commission has determined definitively that the short-term rental of accommodation is not exempt from VAT (value-added tax) in the EU. Many small hosts were either unaware or still unaware of or even exempt from (in some countries) the obligation to collect VAT. The proposal requires all 27 states to agree that all bookings on OTAs and other platforms (qualified sizes and implementation dates) will be obliged to collect and charge VAT on all bookings and remit it to a central EU exchange for dispersal. This is huge and could add up to 20%+ on already elevated prices. However, unlike hotels, costs cannot be netted against the VAT income. Direct or lower commission and pricing platforms and direct bookings would benefit, as would hotels, who are lobbying for this. As mentioned above, Airbnb has agreed to pay the Italian tax authorities €576m ($620m; £496m) to settle a similar tax dispute (VAT) representing the amount relating to money the company had failed to collect in income taxes.
On this news, Airbnb’s stock price fell $4.47 per share, or 3.64%, to close at $118.17 per share on November 6, 2023, and has an investigation ongoing: “Pomerantz Law Firm Investigates Claims On Behalf of Investors of Airbnb, Inc.”
Markets and Competitors: It is not a primary household brand name but has been adopted as the term for an STR in the industry and regular guests in other sites or managers’ accommodations. There are many competitors to Airbnb, but none are as well known in this very specific niche.
As we will see, it has powerful mainstream competitors in Booking Group, Expedia, and many other businesses. Some press quoted Airbnb as a tech app, which carries relevance as Airbnb and Booking.com focus heavily on app-delivered business to dilute Google Search costs on PPC and organic positioning. Google, however, has its own designs on travel. If OTA-generated income continues to drop, it will and currently is focused on delivering direct booking opportunities, which will no doubt be monetised in time. There are also major corporations with millions of loyal customers and are in an excellent position to erode OTA business, too, unless they partner. The Marriott has done this on a small scale with Homes and villas.
Google, however, has its own designs on travel. If OTA-generated income continues to drop, it will and currently is focused on delivering direct booking opportunities, which will no doubt be monetised in time.
Mid-Term Stays, Cars & The Rest – Chesky Comments
In October this year, Brian Chesky made these comments:-
From next year: “We plan to go a little bit beyond its core business”, including expanding its experiences and services.
Airbnb is plotting a push into longer-term housing rentals and a renewed drive on experiences as part of the travel accommodation app shake-up.
“Eventually, the big frontier for Airbnb is to go beyond travel,” adding that “there’s an eventual opportunity for it Not just once or twice a year.”
Offering rentals of up to a year represented a “huge opportunity”, Chesky said. He vowed that more can be done, with only 18 per cent of gross nights booked in the second quarter this year coming from stays longer than 30 days. Extended stays of more than three months are even rarer. “In this post-pandemic world, there’s this . . . unrecognised market of a month, two months, three months, because people can work from laptops, people are going away for the summer,” Chesky said.
His vision for a renewal of Airbnb’s business model comes as the technology app faces pressure from policymakers worldwide over depleting housing stock in major cities. New York, which was one of Airbnb’s biggest markets globally, this month introduced rules limiting residents’ freedom to rent rooms in their homes on Airbnb, culling about three-quarters of listings in the city. Chesky does not see New York as a “precedent”, though.
Airbnb’s plans include expansion of its housing offering as well as “things to do on your trip”. Chesky also highlighted a “long list of ideas” under consideration, including rental cars and dining pop-ups. “The second biggest asset usually in someone’s life after their home is their car,” he said. “There’s a variety of ways you could do something with cars.” He said Airbnb has long considered plans for a pivot into car rentals: “Years ago, we thought like we did homes, let’s do cars, that’ll be the next thing, and it’s never kind of come top of the list, but it’s super interesting.”
SUMMARY
As we see from the above, Airbnb must increase inventory and maintain ADRs in the face of many challenges. The increase in properties fails to mention churn and the hotspot temporary rises such as France’s Olympics. The comments on experiences, cars, and mid-term stays may sound interesting, but they are all fraught with their own issues, and super-specialist companies are now late to the game. Perhaps acquisitions will follow in this space as long and mid-term stays are ripe for further disruption. Standard commission models and booking flows do not work, and although Airbnb enjoys income from this sector, it will be hard to develop a rich stream of long-term stays without radical changes to its brand and model.
One prudent comment and the Achilles heel of the company compared to Booking Group, for example, is: “Not just once or twice a year.” This is related to the fact that people do not stay in an Airbnb daily; many only stay once or twice a year.
It would appear that Airbnb senior management continually looks for the golden goose. Hotels and over 27 other acquisitions have been adopted since inception, more recently real estate letting and operational management, although these weren’t mentioned.
Please note we are not analysts, licensed or qualified to offer investment advice, but there are plenty who can. Our opinion is nothing dramatic; wins have been baked into a large degree, and it doesn’t look as exciting as others. We would expect 2024 to be a year of continuing expansion on volume and lateral market movement, perhaps real estate.