Hospitality Paradigm

Airbnb is losing money at the speed or light and that will only get worse over the coming months. What is the financial future of Airbnb?

Airbnb allows renting of a room online. It’s a very simple platform to connect prospective travellers with room owners. Airbnb’s entire value resides in being an escrow. They provide a layer of trust and handle payments.

For this simple activity of listing rooms and holding transactional payments, Airbnb takes a fee from 20% – 30% of the booking.

As a traveller, you want to have Airbnb as a middleman every single time as you do not want to send cash directly to a stranger in advance.

As a room owner, you want to have Airbnb as middleman as they give you a minimal guarantee and somebody to sue if the property is damaged after the guest leaves.

The two closest businesses are hotels.com and booking.com. They are similar to Airbnb though they rent hotel rooms instead of private rooms. Booking hotels through hotels.com and booking.com makes sense, more so when it comes to business travel or for large hotel chains with customer accounts. These platforms have a bit more focus on searchability, ratings and a seamless booking experience that Airbnb or even regular hotel sites do not have.

As Airbnb grows and gather more and more customers, hotels will start listing on Airbnb and Airbnb will then have to adjust its experience to cater to hotels.

On the revenue front, Airbnb makes US$ 3 billion per annum while hotels.com and booking.com each make up to four times this revenue.

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 are no costs like real estate or machinery or physical goods or storage or shipping. It’s all profit hence they’re all very profitable business. More importantly, while hotels.com  employs only 500 employees, Airbnb employs 15000 employees – a single company running a single website!

Airbnb’s strategy has been to burn as much VC cash as possible and hire as many employees as possible – A standard strategy to inflate valuation and raise even more money. Remember as a thumb rule, every dollar of VC funding you use now, you will get five in the next round. The fact is, there is nothing for these 15k people to do. Experts say that Airbnb 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.

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 going to 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.

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 typical 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 and it’s hardly bigger now than it was back then.

Rest assured. Airbnb is a solid business that is at no risk of disappearing. They are burning money for the sake of VC growth and valuation. Can they afford to employ evermore thousands of people for up to a half a million dollars each? Expect a reality check as most unicorns playing the VC game get sooner or later.

What if Airbnb 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 travel 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 billion dollars in 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.

The future of Airbnb depends on how greedy VC and owners are really (normally they are 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. Either way, the board might self-seize the opportunity to cut the workforce by one third anytime. Lower running costs, no loss of productivity raises a better outlook both in the short and long term.