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It’s another IPO season in the US. The last one in 2020. One of the biggest names to go public is Airbnb. In this week’s article, we discuss Airbnb’s recovery.

The resiliency of Airbnb

As the world grounded to a halt due to COVID-19, global travel came to a standstill, so did Airbnb’s business. But unlike its hotel competitors, Airbnb’s business model proved to be much more resilient.

Roughly, you can categorize travel into four categories:

  1. International / Inside Cities
  2. International / Outside Cities
  3. Domestic / Inside Cities
  4. Domestic / Outside Cities

Travellers can either travel internationally or domestically, within cities or outside cities. COVID-19 halted international travel and severely diminished travel within cities. What remained was domestic travel to areas outside cities. This has become key to Airbnb’s business recovery, because unlike its competitors, Airbnb has lodging supply in all four categories. 

This diversity of supply became a key driver in the company’s pandemic recovery. As the pandemic forced workers to work remotely and city residents to flee to the suburbs, domestic travel, specifically short distance travel outside the top 20 cities, and longer term stay rebounded (See Figure 1). 

Figure 1: Gross booking night breakdown based on travel distance. Data is from the company’s S-1

In Figure 2, we show the impact of the pandemic to Airbnb’s business model. Airbnb’s gross booking value went down from US $3.5 billion in February to US -$900 million in March (a negative US $4.4 billion swing in just a month!). However, bookings have mostly recovered through the summer, but as of September 2020, is still 17% lower compared to the same period the previous year. 

Figure 2: Airbnb’s Gross Booking Value (net of cancellations and alterations) over the past year. Data is taken from the company’s filing

In fact compared to other OTAs (online travel agencies – which is a more apt comparison for Airbnb, because both have asset-light marketplace models that match lodging supply and demand), Airbnb recovered faster. Booking.com saw its gross booking value over the first nine months of 2019 decline by 63% over the same period in 2020. Meanwhile Airbnb only saw a 39% decrease (see Figure 3).

Figure 3: Gross booking value of Airbnb vs Booking.com for the first 9 months of 2019 and 2020

Still not profitable

Despite its resiliency, Airbnb has not achieved consistent operating profitability. This means that the business is not yet efficient. In Figure 4, we compare the operating margin of Airbnb with that of Booking.com. Before the pandemic, in 2019, Booking.com operated at an average margin of 34%, while Airbnb operated at an average of -15%. To be fair, Booking.com is a much more mature business at scale, while Airbnb is still growing and is investing heavily in its growth. 

Nevertheless, after a deeply unprofitable Q1 and Q2 2020, Airbnb took drastic measures. It cut costs and marketing, which brought about a return to positive operating margins in Q3 2020.

Figure 4: Operating margins comparison between Airbnb and Booking.com

Loyalty of users

Despite the massive cut in marketing spend, revenue rebounded in Q3. Airbnb operates a two-sided marketplace. This means that it has to spend marketing dollars to ensure it has an adequate supply of hosts and travellers. Fortunately, the company is beloved by its users:

  • Almost all of its hosts stayed on the platform years after they signed up to become hosts. Despite COVID-19 disruptions and the decline in bookings, the number of active listings in the first nine months of 2020 remained stable at 5.6 million.
  • Almost 1 in 2 travellers continue to use Airbnb’s platform after 5 years. In fact, 69% of revenue in 2019 was generated by repeat guests, compared to 66% in 2018.

This high level of loyalty and brand awareness allowed the company to have a rebound in its revenue without spending heavily (and thus achieve a positive operating margin in Q3 2020). Its strong brand allowed it to still be the destination for travellers seeking lodging – even without advertising. From January to September 30, 2020, about 91% of all traffic to Airbnb came organically through direct or unpaid channels. This bodes well for the future efficiency of the business. 

In contrast to Airbnb, Booking.com is not as beloved. Hotels hate them. 

Figure 4: Airbnb’s user cohort revenue retention

Oh, and the tax thing

The S-1 also revealed that the company may owe a substantial amount of back taxes:

“We may have exposure to greater than anticipated income tax liabilities. In September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year proposing an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion”

This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms.  Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.

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