I got a subscriber request to cover Airbnb (Private:AIRB) and the threat to hotel REITs as an asset class. At first, I shuddered, it's one of those complex topics that is really hard to distill into a reasonable-length article. But as a frequent traveler and Airbnb user that falls within the company's core demographic audience, I figured it was worth taking a shot.
To give an executive summary, the quick answer is that, yes, Airbnb is a threat. But it is not a major one, and it won't fundamentally destroy hotels as we know it. That said, hotels are not a monolithic industry there are various categories of hotels, and Airbnb impacts certain niches much more than others. So, if I owned hotel REITs, would I dump them? Absolutely not. Would I monitor Airbnb's development closely? Without a doubt.
Airbnb: The Budget Airline of the Hotel Industry
With that preamble out of the way, let me introduce my analogy of how Airbnb works.
In the old days, prior to 1978, airlines were regulated by the federal government. There was a board that determined who could fly routes and what the price level for that route would be. If airlines were granted permission to fly between two cities, they had to fly at the price set by the government.
Since there was little to no competition on superior routing or pricing, airlines had to compete on amenities. This led to high quality in-flight meals, attractive flight attendants, agreeable customer service, and other such perks.
In 1978, this all changed. The federal government deregulated the industry, dropping price controls and greatly relaxing restrictions on new routes. This led the way for formerly tiny intrastate lines such as Southwest (NYSE:LUV) to explode onto the national scene, winning customers with no-frills low -price service.
For those who bemoan the drop in airline service quality, remember that in nominal terms (not adjusted for inflation), airline ticket prices have hardly risen since deregulation started. There has been a tremendous drop in the average cost to fly within the US on an inflation-adjusted basis.
Southwest and other imitators captured a large portion of the flying market. But they did it more by creating new demand out of the ether, rather than stealing from the legacy carriers. Air travel, prior to deregulation, was the domain of the rich. Now even the middle class can fly half a dozen times a year without busting their budget.
Budget airlines took as much, if not more, of their passengers from ground travel, such as road trips and trains. Additionally, budget airlines created new demand. In the past, if you lived in a dreary cold place, you'd head to - say - a New Jersey beach or the Poconos in Pennsylvania for a change of pace. These tourist getaways have been in steep decline in recent years now the snowbird can get a cheap flight to Florida and forego the road trip altogether.
If you've been analyzing the airline industry in 1978, you might have suspected that the established airlines would get obliterated by discount carriers. And the airline industry indeed went through its share of troubles. But these were as much attributable to oversupply, terrorism events such as 9/11, and wildly fluctuating oil prices. The core business traveler market that fuels the upper end of the airline industry continues to grow.
If you view hotels as the big airline carriers and Airbnb as a discount carrier, you get a pretty good analogy. Airbnb is indeed competitive with hotels, but it seems unlikely to ever really dent the bread and butter upscale hotel market in the same way that wealthy people aren't flying on Spirit (NASDAQ:SAVE).
Airbnb: Not Cannibalizing the Key Market
If you are one of the big international hotel chains, is your core customer the business traveler that is on the road 50 nights a year or the family with three kids that has a week of vacation annually?
For the big hotel operators to run into trouble, they need their repeat customers to go elsewhere. Airbnb is a great service - I've used it repeatedly and recommend it to my friends. But it is like oil and water with what business travelers want and expect.
A business traveler is on a tight schedule. She doesn't want to wait to get keys to get into the place. She probably isn't interested in the social element of Airbnb - she's probably not looking for friends to go out shopping or drinking with. A business traveler expects a consistent level of cleanliness and services. Perks like a gym, a pool, and a dependable breakfast are often expected.
Additionally, there's a significant time sink necessary to find a good spot on Airbnb. Before selecting an Airbnb location, I always check to see if the neighborhood is safe, near stores and restaurants, accessible to the sites and places I'm going to see, and so on. Running through this whole procedure for every trip I took if I were a corporate traveler visiting dozens of clients a year would be prohibitively time consuming. On the various business trips I have taken, I almost always stay in hotels so that I can focus on my work rather than getting distracted.
On top of that, there's little benefit to being a frequent traveler with Airbnb. If you're familiar with corporate travel, one of the biggest perks is getting tons of points that can be used to gain status and upgrades. If you've watched the movie Up In The Air, you know what I'm talking about. Given the mental drain of always being on the road, the benefits of points are huge, and the consistency of having a repeatable hotel experience is hard to beat.
Airbnb: A Service For Tourists
Let's be frank. Airbnb, at its core, is a platform built for tourists. It is not streamlined, corporate or predictable. Every Airbnb experience is a new adventure - usually good, but sometimes bad or at minimum frustrating. It adds charm to your vacation, meeting local hosts and getting a different perspective on an area.
But it's not something you're likely to use if time is of the essence or you can't afford for something to potentially go wrong. If you look at who's actually on Airbnb, much of the clientele are under 30 and many are foreigners. They aren't predominately people with high incomes - Airbnb is creating a largely new market for thrifty young travelers.
If you look at Airbnb's usage data, it still relies overwhelmingly on large US cities to generate the bulk of activity. I have a theory for that. Outside of the US, hostels are very popular. Forget the horror movies, hostels are a great thing for college students and other cash-poor travelers.
In many countries (particularly in the third world) you can get a dorm bunk for under $10/night and a private room for $20 or less. You may not sleep great - alcohol runs rampant in hostels - parties and noise are hard to escape. But if you're young, that may not be a big deterrent. I've traveled in more than a dozen Latin American countries and I frequently stay in hostels.
But hostels don't really compete with hotels. If I'm paying $8/night for a dorm in Peru, I'm not taking business away from a $75/night hotel there. I simply wouldn't pay that much for a hotel if I'm backpacking for an extended period of time. They're totally different markets. And Airbnb generally skews much more toward the hostel type of traveler than the upscale hotel user.
However, in the US, hostels are very unpopular. You can generally only find them in large cities, and they are severely underrepresented as a type of lodging. Cities like New York have a pitifully small number of hostels compared to European cities with similar tourism markets. Thus, I contend that much of Airbnb's market in cities such as New York comes from taking business that should have been going to hostels.
If you're a 20-year college student from Eastern Europe, you don't have $200/night for a nice hotel. You're either staying in a hostel/cheap Airbnb, or you aren't traveling to New York at all. Again, Airbnb is expanding the overall travel market more than it is cannibalizing it.
To the extent this hurts any hotel, it hurts the no-name hotels that aren't parts of chains. They primarily get business from location (being next to the bus station for example) or rock-bottom price, rather than amenities, service or reputation. To the extent that Airbnb picks off hotel customers, it's more from the low-end.
If you look at the debate over the New York market, for example, you have some hotel operators of less known properties complaining that Airbnb is doing tremendous damage to their business. However the higher-end chains report little to no impact from Airbnb.
This fits with what Moody's suggested. In a research report, they noted that Airbnb primarily only effects leisure markets, and that the real threat to the American hotel industry is overbuilding by the big operators rather than Airbnb's disruptive impact.
If you take a look at what listed hotel REITs own, it tends toward higher-quality properties that are fairly immune to the Airbnb threat. If you owned a hotel REIT full of $50/night roach motels in New York and Chicago, Airbnb would be a grave concern. But as far as threatening the high-end sectors of the market, I don't see much reason for panic.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.