Airbnb: A Threat to Traditional Hotel industry?
Managing a hotel seems like a pretty routine task; taking care of the guests for a nightly rate, providing them with the room of their choice, providing them with healthy and delicious food, and providing them with services and amenities such as business centres, gyms, pools, gardens and also some additional services like valet parking or heated saunas. Once the guest checks out, the room is cleaned and prepared for the next guest. Hotels have both fixed and variable costs. Any luxury hotel usually has more than 10-15 floors, with fitness centres, spas, meeting rooms, valet service etc. When the hotel is in low season, accounting for only 30-40% of attendance in the guest list, the fixed price remains the same. This is because the rooms still have to be cleaned, hallways have to be vacuumed, and housekeeping still has to stay functional along with the bars, kitchen, security guards, doorkeepers, valet and all the other services in the hotel. It was found in a study that while luxury hotels generated a more significant amount of revenue, their operating costs were just as high. However, luxury hotel rooms account for less than 2% of all hotel rooms.
Airbnb began as a start-up which started to take momentum around 2010 when it started receiving funding. It allowed people to rent a whole house instead of the price of a hotel room. Soon enough, more than 25 million people began using Airbnb since they provided not only homes but also banquets, meeting spaces and castles! The market evaluation of Airbnb stands at $13 billion, which surprisingly surpasses the market evaluation of prominent hotel names such as intercontinental hotels.
It almost seems that Airbnb is changing the hotel industry at a fundamental level. However, the growth of Airbnb produces a detrimental effect on the rest of the hotel industry. It is estimated for one person’s increase in Airbnb’s business, the rest of the sector falls by five points. This is because the growth of Airbnb is not restrained by the limitations of real estate and capital. Capital stands as a significant barrier to building and establishing a new hotel. However, Airbnb’s innovation is on the supply side. Almost everyone worldwide can rent their house on Airbnb with minimum hassle. Airbnb charges a percentage from both the parties in the agreement to make its profits. The hotel business is seen as an industry which demands high amounts of capital upfront and other expenditures. Airbnb tries to mitigate this issue by acting as a middleman and monetizing already existing places. In 2021, Airbnb’s annual earning was $5.9 billion, rivalling Hilton and ahead of notable hotel names like IHG, Hyatt and Wyndham.
Airbnb may appear to pose a new alternative model of the asset-light, fee-based platform, far from the asset-heavy operators like Hyatt or Marriot. But in reality, we see that all the major hotel chains have been going through this transition long before Airbnb came in. Like any other franchise, Hyatt, Hilton, Marriot and all other major hotel chains engage in franchising. Franchising is so essential to them that Hilton owns and operates less than 2% of its hotel rooms as of today. Hyatt owns 5% of its hotel rooms, and surprisingly enough, Wyndham owns none of its rooms. Hilton makes up three times as much money from its franchises than the bookings at the hotels they operate.
Thus Airbnb, though a force to reckon with, is among the many entities of the extensive hospitality industry and does not necessarily signal the demise of traditional hotels.
Discuss more of such topics at the Hospitality Management College at Amrapali Institute, Haldwani. Amrapali Educational Institute is a top-ranked institute in Uttarakhand.