Hotels or AirBnB: Ladies and Gentlemen, Place Your Bets

December 8, 2015


Imagine walking into a casino, approaching the Roulette table and seeing only two squares on the bright green betting surface: One for hotels, the other for AirBnB.


“Ladies and gentlemen,” says the dealer. “Place your bets.”


What would you do? It’s not quite like choosing red or black and knowing you stand a 50% chance. Roulette wheels are precision instruments, designed to exact specifications. The ebb and flow of the hospitality industry is more complicated—and it’s not a strictly win-or-lose scenario.


That said, it’s hard to ignore the number of investors crowding around this particular table—and how many chips are being heaped on AirBnB. In its latest (and most mammoth) round of private funding, the California-based company raised USD $1.5 billion. This gave it a market valuation of USD $25 billion by most estimates—more than any hotel chain apart from Hilton. One more spin of the wheel will, in all likelihood, make AirBnB the most valuable hospitality brand in the world.


This meteoric rise, and its overall effects on the industry, has now entered the realm of academic study. The recent work of researchers at Boston University looked into where and how the hotel business is being hit by the share-economy giant.


Leaving aside the impressively technical jargon used in the report (such as temporal rates, spatial densities and quadratic pre-specified functional forms) the findings are reasonably plain to see. Hotels are taking a hit—though not as big as some people believe, and not indiscriminately.


In the city of Austin, Texas—where the study took place—AirBnB is responsible for an 8-10% drop in revenues amongst two types of hotel:


  • Budget hotels, and;

  • Hotels that do not cater to business travelers.


For upscale hotels, and those that do cater to business travel, the impact was found to be slightly negative but insignificant. It’s the low-cost sector that’s losing a real slice of the pie.


These properties are aware that bookings are being lost to AirBnB and other sharing economy platforms. They’re lowering prices to try and compete, which is partly why revenue is down. This is good for travelers seeking better deals. Some suggest it may be good for the global economy too, and for social welfare as a whole.


But for those hotels caught in the crossfire, AirBnB is anything but a force for good—especially considering that the upper limits of AirBnB usership are unknown. Skift, an NYC-based firm that specialises in travel market trends, suggest that AirBnB is starting to claim business travelers who have been incentivized by their employers to spend less.



Doubling down


Clearly this is not a black and white—or shall we say black and red—situation. AirBnB consistently argues (and data seems to suggest they’re right), that they are making the hospitality industry more profitable as a whole, rather than just snatching profit away from traditional players.


Hotel revenues are indeed falling as AirBnB gains steam—but whether those losses are anything to be worried about depends on the type of hotel you run, and the local market in which you operate. In markets where AirBnB is flexing its muscles, industry is sounding any alarm they can—even questioning the legality of such platforms in Australia. Others are treating AirBnB like a cult and suggesting cult therapy to address it (no, really!)


Others like TFE Hotels have decided that the writing is on the wall to adapt however they must and hence now use AirBnB as another distribution channel. Municipal governments are in the game, raising concerns about the taxes they’ll lose if huge portions of the industry move to a platform that is more difficult to regulate.


Despite the quantifiable losses in these early stages, there is mounting evidence that hotels will continue to grow and flourish despite the rise of AirBnB. For now, the ball is still bouncing around. Hotels must not panic but rather push themselves to innovate, focus on fundamentals, and rely on their own strengths until the wheel stops spinning. And if all else fails, try the cult therapy.



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