Airbnb delivers stimulation effect to hotel industry like low-fare airlines in aviation sector

22 May, 2017

In a twist on the way tourism boards promote their places, Sweden has this week listed the entire country on Airbnb, the online marketplace and hospitality service. In almost nine years, the room letting website has become a force to be reckoned with when it comes to holiday accommodation and this latest tie-up with VisitSweden has captured the world's attention.

Sweden's tourism agency says they are welcoming everyone to the country to share their "wonderful nature". People searching for places to stay in the Scandinavian nation will come across beaches, mountains and forests that are free for tourists to visit and roam made possible thanks to a Swedish right guaranteed by the constitution - freedom to roam. "This right enables the Swedish people to experience nature and enjoy the beautiful Swedish wildlife," says Jenny Kaiser, president, Visit Sweden.

This a is a great example of how Airbnb has become a popular platform, especially among the millennials. It now has over three million lodging listings in 65,000 cities and 191 countries. It says that more than a third of its guests would not have travelled at all, or would have shortened their trip and on average, stay 2.1 times longer and spend 1.8 times more than typical visitors, therefore boosting the tourism industry.

The battle between short term holiday letting communities and traditional hotels has been raging for some time - but new findings reveal that the market might just be big enough for both. Global hospitality benchmarking organisation STR recently highlighted some interesting facts about the accommodation industry, such as the impact of Airbnb on average daily rates, occupancy, as well as supply and demand.

In the data (Airbnb & Hotel Performance: An analysis of proprietary data in 13 global markets), STR analysed information from 13 key cities around the world, with Barcelona, London and Paris representing Europe. The full list of 13 markets comprised: Barcelona; Boston; London; Los Angeles; Mexico City; Miami; New Orleans; Paris; San Francisco; Seattle; Sydney; Tokyo; and Washington, D.C.

Since its inception, it has been suggested that Airbnb is negatively impacting hotels on the nights which they make most of their money, i.e. compression nights. A compression night, is where more than 95% of rooms are occupied and in turn, hotels are able to raise their rates, earning more money for the same service.

The implication was that Airbnb reduced the amount of available compression nights, by increasing supply, and offering the same service at a reduced rate. However, what STR found challenged this conclusion.

STR focussed its analysis on the seven US cities and identified that the amount of compression nights has been steadily increasing since 2005 when it was only 15 in the year. The number reached its highest in Jul-2015 at 76 nights, reducing slightly in Jul-2016 to 71. Airbnb launched in San Francisco in August of 2008.

What's really interesting is that during this time, the seven markets were seemingly not in fact negatively impacted, with average daily rates on compression nights in 2016 recording a 35% increase on non-compression nights. According to STR this margin has never been achieved before. The six international markets recorded similar results regarding compression night performance.

STR also reviewed occupancy rates across the 13 cities which unsurprisingly had hotels far outperforming Airbnb in the 12 months ending July 2016. What STR learnt from this data reaffirms the common belief that solid Airbnb occupancy usually reflects solid hotel occupancy.

Where the hotel industry is really feeling the effects comes more from the average length of an Airbnb stay. For the full 13 markets reviewed, STR found that half of Airbnb bookings were in fact seven days or longer, a massive multiplier. But, in general hotel average daily rates were higher than Airbnb rates; and increased in twelve markets analysed and decreased in just one.

Other interesting findings on Airbnb from the report for the 12 months ending July 2016 comprised…

  • 12 out of 13 markets reported supply increases of more than 30%;
  • all markets reported demand growth of more than 20%;
  • share of market demand was generally below 4%;
  • share of revenues was below 3%;
  • half of Airbnb bookings were seven days or longer;
  • Over the period average daily rates decreased in eight markets and increased in five;
  • Share of leisure travel far outweighs business travel

Airbnb has racked up over 500,000 property listings in Europe, with Paris being its largest destination, and the Continent overtook the online community marketplace's roots in the USA in 2015 to become the largest market for rentals.

Like the arrival of low-cost airlines in Europe, Airbnb has been a major disruptor in the hospitality industry. Similarly, as the low-cost carriers have matured and adopted their models from the budget market into the business arena, Airbnb is significantly growing its activities in the corporate travel world stating that a quarter of a million companies are using the platform for business trips.

It's modernity has clearly tapped into the millennial push to experience a destination city and it reveals that over half of business trips on its platform include a Saturday night stay, suggesting its customers are taking advantage to mix business and pleasure, experiencing more of a city than just a hotel room and convention centre.

But, at present around 10% of bookings on Airbnb are for work, and it clearly sees the opportunity to grow and put added pressure on the incumbent hospitality providers in a global corporate travel market set to be worth $1.6 trillion by 2020, according to US-based Global Business Travel Association (GBTA).

In terms of the STR analysis, inevitably each city has its own characteristics, but the findings suggest the impact on hotels tends towards Airbnb generally playing a largely complementary role rather than a diversionary one. The battle is sure to continue, but the value of studies like this is to provide some statistical background to the debate.