An Unpretentious Case for Blowing Some Tailwind into Airbnb
by Dan Colceriu | Aug 1, 2018 | 19 minutes read
August 2018 marks ten years since Airbnb was founded. The company is now facing a perfect storm of challenges, but it is precisely in storms that its future might lie. This article explores new opportunities, as well as the obligations the platform has to its stakeholders.
At the end of the article, as per the custom with low-cost airlines, please don’t forget to clap.
A conference is coming to town
When almost-broke, early-millennials Brian Chesky and Joe Gebbia decided ten years ago to turn into an online business model their initiative of renting air mattresses in their flat to the attendees of an upcoming conference who might have otherwise struggled to find hotel rooms, investors were pretty skeptical about the potential.
After all, people renting out their properties, especially in shore locations during the summer or in the mountains during the winter, was long-established in the offline world, and there were already some internet businesses at the time that were trying to move this world online. It was through this old-fashioned prism that Brian and Joe’s vision was found to be wanting to operate.
But slowly, and with a lot of unscalable effort, their idea took shape and the hotel industry started to feel the initial wave of impact in their economics of conferences: a surge in demand vs. a limited, not enough supply of hotel rooms was allowing them to charge higher rates during these events. However, the Air Bed and Breakfast business was now absorbing that extra demand, lowering therefore the ceiling of how high hotel price surges could go.
Brian and Joe didn’t see Airbnb as a vacation rental company (by vacation meaning the traditional rental of an entire beach house or a mountain cabin for 1–2 weeks), but rather as the embodiment of the new dynamics of urban life and travel: fast-paced, millennial-driven, price-sensitive, centered on personalities and experiences rather than comfort, yet still authentic and artisanal.
Of course, the hotel industry was serving a different clientele, and besides the limitations on the price surge during big events, they didn’t foresee any loss in actual market share. “What is Airbnb?” is how CFOs were replying to industry analysts even in 2013, when asked about the threat.
But Airbnb was-smartly-also focusing on the supply-side of its two-sided marketplace, positioning itself as a way to enable the ever-growing population of (young-)tenants to monetize their rented urban real-estate (a feature which was mostly available only to property owners), by mainly sharing rooms (and hence co-living, rather than renting out the entire flat) to travellers who, if not for Airbnb, would not make the travel in the first place as they couldn’t afford (or couldn’t find) hotel rooms, or they would simply crash in at friends or family (yes, that crazy uncle).
Fast forward to present times, Airbnb is now a global platform, considered as a real threat by the hotel chains, as it has moved aggressively, in pursuit of growth, to target, on the demand-side, anyone from the conference-goers, the one-night standers, the city breakers, the business travelers, to the long-form beach-house vacationers.
Starting from a beautiful idea, an urban safety layer to cover excessive demand during peak times, Airbnb created an incredibly successful, fast-growing and profitable business, projected to sell circa 250–280 million room nights in 2018, which in turn generates incredible consumer surplus, while also enabling the supply-side to monetize an asset that was otherwise very expensive to use and generating exactly zero-income. That is, before the supply-side got seized by wealthy multi-property owners, professional landlords, real-estate investment vehicles etc.
Lately, Airbnb seems to have reached its invisible growth asymptote, as it faces multiple challenges, a perfect storm believed to have already contributed to carving out some 10%-15% of its current growth rate in 2018. This pressure is exacerbated by an upcoming planned IPO:
- backlash from local communities over the platform’s increased role in driving up housing prices, by shifting long-term rental supply to more lucrative short-term tourism (locals who might not want to, or be able to partake in the extraction of benefits from tourism by making available their owned/rented house);
- increased scrutiny from regulators, who are trying to limit/ban the supply-side of short-term apartment-rentals, to mitigate the effects described above;
- increased pressure for sustainable growth, both from private investors who are now willing to liquidate their venture investments but also potential new pressure from future investors as the company prepares to go public;
- increased competition from hotels who are adapting their offering by either reducing prices (in some markets it can now be even cheaper to take a hotel room than Airbnb) or by making the experience more personal, with plans to even aggregate available housing stock from apartments nearby and distribute them through the hotel reception/website;
- increased competition from other aggregators, such as Booking.com and Priceline.com, who have successfully started to move beyond the traditional aggregation of just hotel rooms by using their proprietary distribution channels to move into the aggregation of private properties such as apartments and houses, or otherwise known as “alternative accommodations”.
Of course, Airbnb will continue to diversify (experiences, restaurants) and grow into emerging markets like Africa, China, India and Latin America, but the reality is that, in order to grow faster in its core business, it needs more sustainable supply to be available, as well as it needs to find the most efficient acquisition cost (on both sides of its marketplace).
That is, the platform needs to manage its imminent product/market unfit: convincing more people to try out hosting, while managing the housing impact dilemma, as well as finding ways to embed itself more deeply into where future customers who might never try Airbnb are found.
Airplanes do what they’re supposed to do, until they don’t
Some of the world’s first passenger airplanes were built as luxury aircrafts and flew somewhere in 1913/1914. The first such planes were built to offer a great deal of comfort, with spacious fuselages incorporating the passenger saloon, a washroom, comfortable chairs, a bedroom, a lounge. But gradually, the focus on comfort shifted more towards security, and then to operational efficiency, to lowering prices and eventually to adherence to timetables.
The airline industry expanded to provide services to every country in the world, playing an essential role in the global economy, eventually becoming a public utility and being regulated as such in some countries (meaning route and price control). The deregulation that started in the 1970s led to the creation of the low cost airlines, started by the American domestic carrier Southwest, proliferation of which led to a more market-driven industry, where the levels of service and price are allegedly determined by customer.
Indeed, the incumbent players saw a big hit in market share and profitability, which forced them to enter a downward price spiral (made possible also by the efficiency innovations that were constantly deployed to lower the cost of air travel), or launch their own low-cost brand satellites to compete against the new competitors.
Faced with this new competition, traditional airlines have also discovered the strategy of co-operation (Star Alliance, Sky team, oneworld) which contributed further to lowering operational costs (through code-sharing ticket-office sharing, linkage between frequent flyer programs etc.) that would increase competitiveness and which would be later on extended cross-industries (with hotels, car rental agencies etc).
It is true that the democratization of both long-haul and short-haul flights brought about by the appearance of low-cost airlines meant that consumers, faced with the novel opportunity to travel the world, would ignore things like comfort or scheduled times for departure/landing. It was the experience of flying that mattered.
But in present times, flying has become a part of life for the urban class, it is so ubiquitous, that it no longer represents an experience in itself, no matter how hard some very few airline companies still try to differentiate the in-flight service.
The value has shifted entirely to the place of destination, and so, in most cases (in the economy class), for both leisure and working-travelers, their main expectations from the airline industry (being it traditional or low-cost) is simply a minimum of comfort (a floor, however, for which every year consumers seem to be willing to go lower) and paramount safety. With the advent of flight aggregators like Kayak, the airlines were commoditized even further, with the only differentiation when choosing a flight, in the eyes of most consumers, being reduced to: 1/ departure, landing time; 2/ direct or with stops; 3/ what is the airport of departure and landing. Probably in this order. Of course, there are variations, like a very good frequent flyer programme might make one trade-off the flight schedule and choose a certain airline to accumulate further points. But in reality, most FFPs are useless and stuck in a different era.
So it seems that, with airlines, consumers are happy for the time being to allow this trade-off: in-flight comfort and quality of services to be sacrificed in return for safety, affordability, adherence to timetables and choice, at scale. In an ever-challenging competitive landscape, airlines are happily shifting investment from comfort to operational efficiencies, safety procedures, and route optimisation, hence more value is distributed to the customers in the form lower prices.
The only problem appears that when airlines fail to do the one thing that consumers expect them to do, which is move them from point A to point B over air, safely and on time—be it because of extreme weather conditions, union strikes, missing pilots, delays followed by inability to depart since the destination airport does not allow night-flights etc. — , the tacit agreement is no longer valid. Consumers should expect the best possible comfort and quality of services, at scale. In this situation, exhausted airlines have no excuse for not acting like a tech company, offering ever-increasing quality and personalization at scale, to manage the unpleasant situation.
However, there are plenty of cases where cancellations and delays end up with having lots of passengers stranded overnight in a city where they weren’t supposed to be. And in this situation, the whole airline/airport experience is simply, awful: lack of (personalized) communication despite being active users of airline mobile-apps, long queues, and a high chance of ending up sleeping in an airport — mainly because of the same equation I discussed at the beginning of this article: excessive demand vs. limited supply of hotel rooms.
As I was flying from Munich towards home, and so after one hour of waiting at the gate with no feedback, two hours of staying in a queue, tired and dehydrated, we were told that the hotel rooms have been exhausted and we should feel free to grab pillows and blankets from “over there” and find our way in the airport until the next day.
Of course, some airports might have some sleeping beds (usually occupied), but some not. But generally speaking, in today’s world of increasing customer expectations, if one is not on a political campaign tour like Robert F. Kennedy above, one should not sleep in an airport. Even worse than the poor in-flight experience, airports themselves have, in general, the worst possible customer experience. Sleeping in one is simply dehumanising (unless you’re Tom Hanks shooting The Terminal).
A layered safety net
So how does Airbnb’s challenges (the locals’ backlash, the regulators scrutiny, the growth slowdown, the loss of initial strategic vision, the increasing acquisition costs) link with airlines’ incapacity of acting like a tech company (at least when they fail in their main activity)?
It has to do with Airbnb’s recent strategic re-positioning, announcing its intention of becoming a company that operates on an infinite time horizon and also one that truly caters to and is therefore measured on metrics relevant to all stakeholders (not just the shareholders): but also to its employees, to local communities, to its partners ecosystem.
“We think that a company should survive to see the next century, not just the next quarter. A 21st-century company should eventually become a 22nd-century company. By having an infinite time horizon, a company can be more audacious, take more responsibility for what they make, and create more lasting change. […]
What is the purpose of a company? I would say its purpose is to realize its vision. But even this is no longer enough. We must realize our vision and ensure our vision is good for society. This means that we must have the best interest of three stakeholders in mind: Airbnb the company (employees and shareholders), Airbnb the community (guests and hosts) and the world outside of Airbnb. To be a 21st-century company, we must find harmony between these stakeholders.
If people are good and mostly the same, then we should be able to offer more than people sleeping in one another’s homes. We imagine a world where every one of us can belong anywhere. A world where you can go to any community and someone says, “Welcome home.” Where home isn’t just a house, but anywhere you belong. Where every city is a village, every block a community, and every kitchen table a conversation. In this world, we can be anything we want. This is the magical world of Airbnb. We will probably never fully realize this vision, but we will die trying.”
1/ The airline industry represents the industrial-era model of supply side economies of scale, focused on driving operational efficiency at the expense of quality. When airlines fail to deliver on their primary role, they become reliant on the hotel industry.
2/ The hotel industry is the embodiment of depersonalised customer experience, with pricing power derived from scarcity of supply. The problem is that, in the digital age, poor experience due to limited supply is no longer acceptable.
3/ Airbnb is a tech company that has specialised in matching supply and demand on the short-rental accomodation market (and relative to hotels, Airbnb can tap into a much larger supply).
The sequence above alludes to the role of tech companies. When certain peaks in demand exceed the fixed supply, rather than accepting a suboptimal experience (sleeping in airports) or a pricing disadvantage imposed by the licensed professionals (expensive hotel rooms in emergency situations), tech companies such as Airbnb can tap into the multitude, activating amateur-hosts as a third safety layer to absorb the excessive demand, all while offering superior experience and fair pricing.
This has happened in the taxi industry as well, where Uber and Lyft acted as a layer serving previously underserved segments by the taxi industry (either certain neighbourhoods or, unfortunately, certain races). In a way, as I remember reading on Twitter, now infamous Uber CEO Travis Kalanick might have done more against black and poor neighbourhood discrimination than our favourite activists. Furthermore, in cities like Paris, a new layer was developed by startups like Heetch, who operate at the frontier, where Uber drivers (in pursuit of better returns to make up for their increasing costs as they transition towards semi-professional), have stopped serving night-time party goes who need to get back in the suburbs in the morning. Heetch, operated by amateurs, serves that peak in demand.
As articulated by Nicolas Colin in his latest book HEDGE, technology business models enable an alliance between the professionals and the amateurs:
“…we should explore the idea of how amateurs could become allies of licensed professionals instead of foes. In my view, technology is showing us ways in which it will be possible to put a ceiling on the number of workers while satisfying consumer demand even in the most extreme circumstances. The stake is to prevent rent-seeking and ensure that demand is always served at the highest quality and largest scale. The goals should be to impose occupational licensing to professionals in exchange for certain benefits… while simultaneously using amateurs as a backup.
If an additional workforce is needed to match certain peaks in demand or serve particular segments of the market, the solution is there: inviting amateurs so that they focus on those slots and segments where demand cannot be met by the professionals alone. If contained on this part of the market, amateur supply can reinforce the professional workforce instead of weakening its bargaining power.”
The case for cooperation
I understand that the most optimistic, libertarian people out there would rather invent tech to fix the weather, or would lobby to dismantle pilot unions or remove pilots altogether, or would double down on streamlining airport and fleet operations in the hope that all of these will completely eliminate flight cancellations and overnight delays. But, unfortunately, as the number of flights worldwide is only going to increase, it is fair to assume that these cancellations are going to stay with us. And airlines are ill-equipped and lack the incentives to create a process for the scenario that is outside their core: the actual flying. So all they do is customer-service-washing.
Many of these flight cancellations, due to the chaos they create and due to inadequate mitigating processes on the airlines side, will result in people having to sleep in airports overnight, since more often than not, one of the situations will incur: 1/ the hotel supply in the area will be exhausted; 2/ by the time the airline organises itself, it’s already too late to leave the airport; 3/ in some cases, airlines might not even have the obligation to provide accomodation, as they would rather wait for the consumers to claim financial compensation instead (which doesn’t necessarily happen and that process itself is painful, since regulators don’t actively work to enforce and streamline it).
Banking on the idea that people are inherently good and would step in to help others while in need, and that strangers can trust each other, providing the right identity verification mechanisms are in place, Airbnb could and should go back to its roots and take the ambitious effort of enacting this safety layer.
First, it could engage airlines to explore platform integration, while providing in the same time design-thinking consultancy to these companies to help them streamline the digital process post-flight cancellation: in a world where smartphones are the norm, consumers should have the option to choose between queuing or engaging with the airline over their mobile — both the list of next flights available for the next day, and the list of available accomodation, either at a hotel or through Airbnb, can be made, almost Tinder-style, available to users in real-time.
Not only can Airbnb help both airlines and the hotel layer re-design the process of allocation emergency accomodation during overnight flight cancellation through smartphones, but it can also provide the necessary extra supply of accomodation (either rooms in shared flats, or entire flats) to absorb the extra demand (while also serving it in a highly personalized fashion, based on a better understanding of the preferences of end consumer). In the end, what other entity is better placed to list, at any given situation, be it emergency or not, all available, un-utilised housing stock, in pretty much any city in the world?
Second, it should engage regulators and local politicians, to convince them of the societal value of this initiative (since it is basically making possible the enforcement of consumer protection regulations which otherwise would be impossible to be respected). This will in turn create the necessary political pressure for airlines to undertake this modernisation (otherwise, airlines don’t have much incentive to do it, since no matter how badly they treat consumers, there is limited impact on the decision of those consumers to avoid that airline in the future). This can also be a better-starting point for Airbnb to launch discussions on obtaining some sort of a licensing procedure for its hosts (particularly the ones that are willing to join this specific programme).
Third, it should launch a targeted campaign especially with locals living in proximity of airports, to create this reserve army of emergency hosts. New conditions must be agreed, different from the current vacation-oriented hosts have, since emergency hosts must be willing to answer midnight-calls, allow showering at night etc. This can be either converting existing hosts into the new programme, or convincing a new cohort of people to join the platform as emergency hosts, people who otherwise would have never done it: due to many reasons, such as they don’t think they need it, they don’t think the hassle of sharing flats for the whole summer is worth it etc. But faced with the opportunity of hosting, on rare occasions, a traveller in need, while generating income at a premium with no real marketing effort, this could break the ice.
This is also a way to give something back to the people who live near airports and have to deal with the unpleasantness of it (noise, air pollution). It also creates the possibility for Airbnb to convert, at a later stage, these emergency hosts into more permanent vacation-hosts, to further fuel its growth-based business model (we established that it is critical for Airbnb to find more supply, if not build it from scratch).
Also, through the integration with the airline platform (technological, consensus, data sharing etc.), Airbnb can be embedded in the flight check-in process, and can better communicate with the airline which passengers have a history of using Airbnb, and therefore, in the case of an overnight cancellation, who would be most inclined to accept such an accomodation, instead of a hotel. This way, hotel rooms could go to the fussy ones, while Airbnb rooms could go to the others who would rather sleep in a “trusted home” than an airport. It also gives Airbnb the opportunity to obtain some kind of consent for data-sharing for passengers who never used Airbnb before (i.e. “in case of flight cancellation and no hotel supply, would you be willing to receive alternative accomodation options from Airbnb?”). This, in turn, is a channel for acquiring future Airbnb vacation-guests, who might have never used the service hadn’t been for the pleasant surprise they had when Airbnb saved them that night.
Add UberPool’s ability to create in real-time routes for multiple passengers depending on the direction of their destination, and you already have a much faster way to organize collective transport to the accomodation, in the middle of the night, rather than the slow process of contracting emergency coach-buses that leave every 45 minutes.
It does feel like a gargantuan effort, but Airbnb has proven once that it is willing to do unscalable things (i.e. visit apartments to take better photos) to convince people of its value. Furthermore, it now faces the perfect storm of challenges, and this kind of strategic re-positioning helps to mitigate some of them:
- Backlash from local communities — Airbnb can find an ally in people living close to the airport, by giving them an opportunity to monetize their real-estate asset in an infrequent, almost effortless way. This can also shift some of Airbnb’s growth, at least temporarily, away from entire-flat vacation-rentals in the city centers (since emergency-hosting can be preponderantly in shared-flats, near airports).
- Increased regulatory scrutiny — Without sacrificing growth, Airbnb can re-position itself as a safety layer for absorbing extra demand and reduce, if not eliminate, the big number of people sleeping in airports due to flight cancellations / delay. This can also help create a new licensing mechanism for emergency-hosts, further legitimising Airbnb’s business.
- Increased pressure for growth — This creates a new market for Airbnb, converting hosts that would have otherwise never converted, and similar with guests.
- Increased competitive pressure—By being the controlling node in this layered network along with airlines and hotels, Airbnb can embed itself in today’s ever-growing flight industry, and become the de-facto safety layer for emergency accommodations. This in turn re-establishes the public perception that Airbnb is a friend (and a saviour) of the hotel industry, which increases its competitiveness in the areas where they compete head-to-head.
It is normal to be skeptical about this, but if, against everyone’s opinion, Brian and Joe proved 10 years ago that inflating mattresses and renting them online can evolve into a multi-billion business, we should not underestimate their ambition and power.
It can start as small experiments (with selected airlines, at selected airports), and then further iterated upon. This not only raises the potential of increasing the frequency of interactions between guests and Airbnb (on top of the few times guests interact with Airbnb, maybe 2–3x per year for vacation-rentals, Airbnb can grab more share-of-mind if it manages to embed itself in the airline check-in process). Scaling this by working with airlines, with regulators and politicians would create a reserve army of hosts, as well as a streamlined process of matching supply and demand, which could potentially absorbe even the most extreme conditions:
Achieving this safety layer is possible, especially if it combines an infinite time horizon with the power of the multitude and its potential in bringing together professionals and amateurs, but most importantly, the attractiveness of a world where, anywhere you might be stranded for the night, there is a welcoming community where someone says — “Welcome home!”