Everyone anticipated a big IPO from Airbnb this year. They are the most successful and widely recognized Y Combinator alum, and have had the luxury of staying private while fueling incredible growth. They raised big rounds along the way, but in recent years their own customers and revenues provide plenty of operating capital to launch expansionary projects. It’s a great place to be and more companies should try it!
What Is The Virus Impact on Airbnb?
The Covid-19 outbreak negatively impacts all travel and hospitality businesses, leaving Airbnb especially vulnerable. When consumers and businesses are afraid to travel and governments are telling everyone not to travel, who gets hurt? Airlines, hotels, and vacation rentals for sure. Demand for any travel and related services continue to shrink. Conferences and events everywhere are being cancelled (maybe even the Tokyo Olympics!).
Curse Of The Marketplace Intermediate
Booking cancellations are annoying for all hotels and airlines, but Airbnb takes a bigger hit than most. They act as the payment facilitator and reservation intermediary. When you reserve a hotel you found through an aggregation site, you are often booking directly with the hotel. The hotel loses revenue, but you need to sort out any cancellation fees with them. If the consumer threatens a credit card chargeback, the hotel will suffer through the dispute process.
Cancellation And Chargeback Double Hit
For Airbnb guests who want to cancel, the company must cater to both sides. The host has blocked off space and expects both a guest to show up and payment for the stay. Airbnb has taken an advance deposit, plus the full booking amount a week prior to the guest staying. Furthermore, Airbnb and the host agree to strict cancellation policies where the host might be owed 50%-100% of the stay on a last minute cancellation.
What happens if a consumer no shows and disputes the airbnb charge after the stay? Airbnb will have already released funds to the host, who expects the payment regardless due to the cancellation policy. Now the consumer’s bank claws back the payment. For a $1000 booking, Airbnb normally takes say a $130 commission. On a disburse and chargeback situation, what should be $100 in gross profits after credit card processing becomes a $930 loss ($30 in credit card processing plus $870 to the host). Even just a few of these cases would greatly hurt the bottom line!
The End Result?
No one knows. Maybe things magically clear up very quickly. Maybe things stay bad for a lot longer. But we can guarantee very rocky times ahead. For years there was an arbitrage leasing long term apartments and converting them to Airbnbs (sometimes illegally). But we expect that to unwind as hosts and investors everywhere see the full risks.
