Airbnb: What’s the Problem?

By David Kong

Thursday February 25, 2016
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Did you sell out during your citywide conventions last year? Were you able to charge compression rates? For many hoteliers in major cities, the likely answer is no. Why is that?

Airbnb’s explosive growth has impacted hotel RevPAR across the globe. Its effect is particularly hard-hitting during high demand periods. According to Wells Fargo research, compression nights tend to make up about 5-10 percent of nights, but account for 7-13 percent of annual room revenue. Rather than booking rooms at our hotels during citywide conventions or special events, many travelers are turning to Airbnb or similar sites to book their stays.

According to the STR, CBRE Hotels’ Americas Research, Q4, 2015, Airbnb accounts for 9.9 percent of supply in the top 10 U.S. markets. If you are in New York City, you are definitely feeling the pain because there, Airbnb account for 19.5 percent of supply.

Since Airbnb’s launch eight years ago, the company has accumulated over 2 million listings and grown to an estimated value of $25 billion. Airbnb asserts that its property hosts primarily utilize the platform to make money on the side, with a typical listing earning $5,110 a year. However, a recent comprehensive national study conducted by the Penn State School of Hospitality Management with regard to 12 of the nation’s largest metropolitan statistical areas found that almost 40 percent of Airbnb’s revenue came from operators that host two or more units. Additionally, almost 30 percent of Airbnb’s revenue came from operators that operate units 360+ days a year.

Our industry has always valued competition because competition makes us better. However, we need to ask if it is fair and legal for these commercial operators to skirt zoning regulations, health and safety regulations, and avoid paying occupancy taxes? This illegal and unfair competition is having a dramatic and adverse effect on our industry. Not only is it eating up a significant portion of our demand, it is also causing lending institutions to think twice about the viability of future projects. Already in major cities in the U.S. and globally, some lenders are evaluating the impact of Airbnb before approving loans.

Everyone I have talked to in our industry supports the sharing economy – it is a good thing, and, we all agree it is here to stay. The issue is that Airbnb and other home sharing platforms are enabling commercial operators to illegally and unfairly eat into our livelihood.

Throughout much of Asia, Europe and South America, Uber and other ride-sharing services are facing increasing headwind to comply with taxi-like restrictions. In fact, countries including Thailand, Malaysia, Japan, Italy, Romania, Brazil, Germany, Belgium, Spain, Australia, S. Korea and China have full or partial bans/suspensions in place. One may ask why the room-sharing industry is nonetheless allowed to carry on relatively unscathed.

The answer is our industry is diverse and fragmented with many owners, brands and operators – many with strong and differing opinions on how we should respond. In contrast, the $11 billion global taxi industry is united on their fight. Transdev, a taxi company with over 10,000 vehicles in over 100 cities, is leading the charge against ride-sharing services. Transdev is a key player in the TLPA (Taxicab, Limousine, and Paratransit Association) – a powerful, well-funded trade association representing more than 1,000 taxi and limousine firms worldwide. Their website and campaign called “Who’s Driving You?” is powerful and highly effective.

Now, please consider the defeat of Prop F in San Francisco a few months ago that sought to place reasonable regulations in place regarding short-term rentals. Airbnb itself spent $8 million on advertising, lobbying and local awareness while our entire industry spent $482,000. It’s no wonder that despite Senator Diane Feinstein’s sponsorship and leadership, we lost!

The American Hotel & Lodging Association has a comprehensive plan to protect our interests. We need to be united and support their efforts. At the same time, keep in mind disruptors like Airbnb often implement a divide and conquer strategy, knowing our industry is fragmented. We must resist short-term gain to prevent long-term pain.

It is disconcerting to me that some hotels are listing their inventory on Airbnb. At every industry conference I attend, I hear hoteliers lament that we allowed the online travel agencies (OTAs) to become so powerful. OTAs now represent about 20 percent of our business. Let’s remember the OTA business was below 2 percent of our business back in 2000. By feeding the beast, we have empowered the OTAs to become a dominant distribution channel which has significantly driven up distribution costs (from 10 percent in 2000 to 20 – 25 percent currently.) More and more business that would have otherwise been booked through us directly is now going through the OTAs.

As we look to the years ahead and determine a strategy for how to respond to Airbnb’s growth, let’s make sure we don’t repeat the same mistakes we made with the OTAs. Celebrated author and playwright George Bernard Shaw said, “Success does not consist in never making mistakes but in never making the same one a second time.”