Airbnb will go public with an estimated market valuation of over $42 billion. A remarkable feet when considering just eight months ago, the home-sharing giant was in crisis mode with its business being crushed by the Coronavirus pandemic. From April to June, 2020, revenue was down 72% as travel and bookings came to a virtual standstill worldwide.
Here’s how Airbnb managed to pivot towards profitability during a global pandemic and how it might fair amongst continued travel restrictions and beyond. When the pandemic struck in March, travel restrictions around the world sent Airbnb’s bookings and revenues into free-fall. Bookings in Europe alone went down 80%. Airbnb was burning through its reserves and needed a swift infusion of cash. So its first lifeline was securing $2 billion in loans, but these didn’t come cheap.
When the pandemic hit, Airbnb was bleeding through its cash reserves and it needed a swift infusion of cash. But the loan that they got was, came at a very steep interest rate and it was an interest rate of 11%, which is often associated with distressed assets.
At this point, Airbnb’s valuation had fallen from $31 billion in 2017 to 18 billion in April, 2020. Despite this, Airbnb was still under pressure to go public by year’s end. Airbnb CEO had toyed with the idea of going public for years, but he’d stopped short of pulling the trigger. Now that was leading to some anxieties setting in among early investors and a handful of employees who were set to lose their stock options next year. Like many other companies during the pandemic, Airbnb dramatically reduced its cost to get by, costs that have grown significantly over the last few years.
Airbnb before pandemic
Before the pandemic, Airbnb had expanded into new areas like transportation and media and spent big on things like marketing and a new corporate headquarters, increasing the company’s total costs more than five fold between 2015 and 2019. Even before the pandemic, you had board members asking executives, “Hey, why are your costs so high?”.
Airbnb spent big to expand into all sorts of new areas. It also spent big on a new corporate headquarters and it typically spends heavily on things like sales and marketing. To alleviate its balance sheets, Airbnb cut big expenses, put many non-corporate projects on hold and laid off a quarter of its staff. They early on said that their founders wouldn’t take a salary. They cut pay in half for top executives. Slashed sales and marketing expenses, but it still wasn’t enough.
But none of Airbnb’s maneuvers would work if people didn’t start booking on its platform again. So the third move it made was to adapt its platform for pandemic travel. People were sitting at home. They still wanted to travel but they couldn’t get onto a flight. So what people start doing is that they start driving to smaller towns and cities. And what do they do? They book Airbnbs because big hotel chains don’t have a footprint there. So Airbnb gets lucky.
Before the pandemic, big cities visited by tourists had been Airbnb’s strength, but these new local stays in primarily suburban and rural locations became the company’s focus. The company redesigned its website and its app. So its algorithm would show prospective travelers, everything from cabins to lavish beach houses near where they lived.
By August more than half of bookings were made for stays within 300 miles of guests location, according to the company. And these moves help stem the losses in reservations. The company reported a surprise profit in the third quarter. This quarter is typically the most lucrative for the company and Airbnb has turned a profit in that period every year since 2017. Airbnb has never had a full year profit, but it’s turned around during the global pandemic, and at a time when the hotel industry is drowning, has gooey investors confidence and helped its valuation bounce back.
One of Airbnb’s near term challenges is of course the pandemic. What will that look like in the future? How does travel change as a result of that? Separately, the company has traditionally struggled to police crime on its platform, and that is expected to get a lot more scrutiny as the company sells its shares to the public. Skeptics wonder how long the company can keep costs down and stick to its core business. And questions remain on whether the growth in revenue and bookings is sustainable. Or whether Airbnb is simply the main beneficiary of a battered hospitality industry.