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Airbnb knows it’s making too much money now

Airbnb knows it's making too much money now

By Chris Bryant

Social media was abuzz last month with anecdotal reports from Airbnb hosts about a collapse in bookings. There was precious little sign of that in the homestay platform's Tuesday earnings report, which saw a 29% increase in quarterly revenue from the year-earlier period to $2.9 billion.

If there's a problem – and it's a nice one from shareholders' point of view – it's that Airbnb is making too much money, not too little. The company risks alienating customers by advertising a low daily rate and then tacking on exorbitant service and cleaning fees. Happily, it's promising more transparency, and that's long overdue.

Airbnb did warn of moderating booking growth and pressure on average daily home rates, which spooked shareholders a little. But management said it's "seeing no hints of a decline in people's demand and willingness to travel," and is anticipating still impressive revenue growth of around 20% in the fourth quarter.(1)

The company reported a record $1.2 billion of net income, equivalent to a 42% profit margin, as the average daily rate of properties booked on its site exceeded $150. Airbnb's algorithms prioritizing better all-in pricing might account for some of those anecdotal accounts of bookings collapsing, management said. Despite buying back shares, Airbnb is sitting on cash and equivalents worth almost $10 billion.

This isn't a great look when your sales pitch is helping homeowners earn extra income or travelers find an alternative to expensive hotels. So it was a relief to hear management say on Tuesday's investor call they had heard customer criticism of its opaque pricing structure "loud and clear," and would move towards displaying an "all-in" rate earlier in the reservation process, as well as giving more prominence to better value all-in offers in search results. While it might thereby forgo some profit, I'm confident the approach will benefit the business in the long-term.

Airbnb's rude financial health is astonishing when you consider it's been barely two years since the pandemic caused bookings to collapse and it laid off 25% of the workforce. The company went from being "the Navy to the Navy SEALs, a small lean elite group," Chief Executive Officer Brian Chesky told investors this week. That's a colorful way of saying its fixed costs are now much lower.

Unlike a lot of travel businesses, Airbnb doesn't have to spend much on marketing because more than 90% of customers come directly to the site. Businesses pushing employees to return to the office so far hasn't dented demand for longer bookings: About one-fifth of stays are for longer than a month, and almost half are at least a week.

This is great news for Airbnb which makes money via the service fees it charges hosts and customers, with hosts paying 3% of the gross value of the booking while guests pay a 14% levy.

However, customers get angry when the advertised nightly rate jumps significantly once Airbnb's fee, cleaning costs and taxes are added on, reminding them of those pesky hotel resort fees they thought they were escaping. Sometimes Airbnb hosts aren't even aware how much their guests are ultimately paying.

My sympathy for hosts is limited – does it really cost hundreds of dollars to clean a home? Around 55% of active listings charge a cleaning fee, which on average is less than 10% of the total reservation cost, the Wall Street Journal reported in September.

Increased transparency and prioritizing better value homes might cost Airbnb some margin, and bearish investors are likely to conclude Airbnb is preparing for tougher times. But improved customer satisfaction should lead to more repeat bookings. As the company's impressive financial results attest, people are still desperate to travel. Airbnb is wise to stop giving them a reason to stay home.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe.

WASHINGTON POST

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