Back in March, when sheltering in place was still a novelty, Airbnb Chief Executive Officer Brian Chesky hung an oversized print from his company’s in-house magazine on a bare wall above his sofa, hoping it would brighten up his home office. The image, of a rustic cabin set against snowcapped mountains, seemed to signify the monumental task of running a home-sharing website during a deadly pandemic. Or perhaps it signified the absurdity of managing a multinational company via videoconference, appearing before employees, investors, and lenders exclusively from the waist up. “I do wear pants,” Chesky says in an interview over Zoom. “I want to be clear.”
Airbnb Inc., which Chesky founded in a much more modest San Francisco living room in 2008, is among the world’s most valuable lodging companies. It distinguished itself with an inventory of mostly short-term rentals (it takes a cut of about 15%) and had been preparing for what should have been a triumphant public listing right around now. The pandemic has crushed the global economy and shut down anything resembling a hotel. Officials who initially predicted a weekslong pause are now talking in terms of months or even seasons.
By comparison, Chesky’s problems don’t rate; he’s safe and comfortable working at home. But that hasn’t made the past few months any easier. “I’m not sure if there’s a more difficult thing that a CEO of a travel company could ever do than go through this,” Chesky says. “You feel like you were T-boned, or like a torpedo has just hit the ship.”
Chesky started Airbnb in the middle of the last global cataclysm. To homeowners struggling through the U.S. foreclosure crisis, Airbnb offered a way to help cover the next mortgage payment. To would-be travelers who couldn’t afford fancy hotels, it played up the character of the rentals its cash-strapped “hosts” were offering. Why stay at a cookie-cutter hotel in a financial district when you could rent a room in a cool-but-gritty neighborhood in Brooklyn or the Mission and stay a few more days?
Twelve years later, Airbnb is widely seen as Silicon Valley’s most promising still-technically-a-startup—especially after the previous holders of that title, Uber and WeWork, were consumed by scandals that cost each company’s founder-CEO his job. Now Airbnb is under pressure. Expenses had already been growing before the crisis, exceeding $5 billion in 2019 as the company sank money into new offerings aimed at increasing revenue before the initial public offering. And that was before the global lockdown. In early April, the Wall Street Journal reported that potential investors declined to put money into Airbnb unless Chesky relinquished some control.
Airbnb says this isn’t true. “Let’s be clear about why he’s endured as founder-CEO. He’s both a good CEO and a good person,” says Alfred Lin, an Airbnb board member and a partner at venture firm Sequoia Capital. “He’s larger than life and all of those things, but he’s navigated well.”
Early in the crisis, Chesky says, he told his board he wanted to meet virtually on Sundays because he planned to make three months’ worth of decisions every week. When guests demanded to be let out of their reservations, Chesky hesitated but eventually complied, ordering hosts to distribute refunds. That placated guests, but it enraged hosts, who complained the new policy would cause them to default on their mortgages. Chesky responded by creating a $250 million fund to help reimburse them.
Not all hosts were satisfied by the gesture, which gives them a small fraction of what they would have originally made and does nothing to address the underlying issue: how the company will find customers willing to stay in other people’s homes after all this. In April, Chesky struck a deal for $1 billion in debt and equity from Silver Lake and Sixth Street Partners. The agreement was a vote of confidence, but an expensive one for Airbnb, forcing Chesky to pay back the loan at about 11% interest, a rate typically reserved for companies in distress. Airbnb has since raised an additional $1 billion.
The Silver Lake deal includes warrants that value the company at $18 billion, down 40% from what investors thought it was worth in 2017. At that value, it would wipe out billions of dollars in paper gains for Airbnb’s early employees and venture capitalist backers, including Sequoia and Andreessen Horowitz. Even worse off are the hundreds of thousands of small-time real estate investors who list homes on Airbnb, and the retail and service businesses catering to tourists in Airbnb-heavy neighborhoods. (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.)
Chesky has cut ad spending and says he plans to focus on fewer new projects. But he insists the answer to the company’s troubles isn’t to change its business dramatically. “I’m betting on the idea that when social distancing is over, people are going to eventually want to connect,” he says. Unfortunately, no one knows how long the crisis will last or how it will change consumers’ behavior. As the world puts on surgical masks and latex gloves, the corporate sterility of a Courtyard by Marriott or Hilton Garden Inn suddenly seems a lot more appealing than somebody else’s bed. Perhaps, despite Chesky’s upbeat outlook, Airbnb’s moment has ended.
Hotel executives, who themselves are scrambling to deal with the fallout of the coronavirus, have taken some comfort in watching Airbnb suffer after a run of wild growth and good press. They’ve long grumbled that the company got too much credit as an innovator, given that short-term home rentals have been a travel industry staple since, well, forever. Privately, a top executive at a major hotel company has quipped that if you think about it the right way, Jesus Christ was born in an Airbnb, though there’s no record of Him leaving a review.
But the home-sharing business, much more than a chain hotel, depends on strangers trusting strangers. Chesky, a 38-year-old branding whiz who graduated from the Rhode Island School of Design alongside one of his co-founders, Joe Gebbia, proved adept at assuring travelers it was safe to stay in someone else’s manger, while making it easy for hosts to be paid for their trouble. Improbably for a site that initially included air mattress listings, the company made all of this seem kind of glamorous. It persuaded hordes of millennials that it would be cool to sleep in a yurt or a treehouse or that the best way to experience Oktoberfest was on a Bavarian local’s foldout.
As younger travelers embraced Airbnb, the site attracted lots of design-savvy hustlers who married a feel for interior decorating with an instinct for arbitrage. Before long, entrepreneurs were leasing Manhattan apartments for $4,000 a month and bringing in twice that amount by listing them on Airbnb a few nights at a time. These micro-hoteliers used their profits to add more units. By the middle of the last decade, a new class of professional host was becoming the norm on the site. Nearly two-thirds of Airbnb’s 1 million U.S. listings come from hosts who manage more than one property, according to AirDNA, which publishes research on short-term rentals.
This development led to a backlash from cities, which saw Airbnb listings as unregulated hotels that were driving up rents by taking apartments off the market. Some local governments banned or limited short-term rentals, starting yearslong legal battles that Airbnb is still fighting. Even so, the company kept adding listings, paying special attention to China, which Chesky saw as a growth market for the company. Today Airbnb has more than 7 million listings, including 1.3 million in Asia, according to AirDNA. It set itself apart from other venture-backed startups by turning a profit in 2017 and 2018.
Chesky’s ambitions were expansive, if quirky. He began publishing a glossy travel magazine. He spent years investing in a business Airbnb calls Experiences, in which travelers can book tours, cooking classes, and other activities. He even hinted that Airbnb had considered creating an airline. This past September, Airbnb announced its intention to go public in 2020. (“We are prepared to go public, and we will be ready when the storm clears,” Chesky now says.)
Bookings crashed after China put Hubei province and its capital, Wuhan, where the virus originated, on lockdown. Then came Europe, where Airbnb generates roughly a quarter of its revenue. “You could put it on a plotted curve, and you could say, well, United States is Italy, just two weeks behind,” Chesky says. “You started getting this very visceral, ‘Wow, the world’s going to be different.’ ” In early March, Airbnb told its employees to work from home.
By the second week of April, coronavirus cases were still climbing steadily, and it had become clear the shutdown would last a lot longer than the more optimistic early predictions. The U.S. hotel occupancy rate, normally 70% at this time of year, had fallen to 21%, a level at which it barely makes sense to stay open. Shares in Expedia Group Inc., the online travel agency that owns Airbnb competitor Vrbo, are down 39% since March. Airbnb has said its revenue could drop by 50% this year, according to projections shared with prospective investors. Of course, it could be even worse. No one knows when the world will decide it’s safe to go on vacation again.
Chesky says he doesn’t know if the company will return to profitability next year and that everything is on the table. The company has already ended contracts with temporary employees early, and it canceled $800 million in marketing spending. Other actions, such as full refunds to all the guests who can’t travel, have thornier implications.
Airbnb had more than $1 billion worth of reservations on its system when the social distancing measures took effect, and unlike hotels, which don’t charge a guest’s credit card until checkout and usually allow no-penalty cancellations up to 48 hours before check-in, home-sharing sites generally require customers to prepay for their lodgings. David Kauffman, who took out a second mortgage to build a granny flat in the backyard of his San Diego home, lost $10,000 when Airbnb implemented its new cancellation policy. From the company’s $250 million fund to pay back hosts, Kauffman says he expects to wind up with less than 15% of what he stood to make. He’s thinking about leaving Airbnb.
This dynamic isn’t unique to Airbnb—big hotel chains also offload risk to hotel owners—but Airbnb hosts, unlike hotels, are often sole proprietors without credit lines or much capital. “A lot of hosts feel like they co-built their business with Airbnb,” says Benjamin Vail, whose company, Housepitality, manages about 60 short-term rental properties for third-party owners in Columbus, Ohio. Yet the company has sent the message that it’s going to do “what’s best for Airbnb and for guests.”
Predicting the shape of a travel recovery is easier than pinning down the timing. Destinations that can be reached by car are a good bet to recover first, says Michael Bellisario, an analyst at investment bank Robert W. Baird & Co. Beach resorts seem like a better bet than the urban destinations where Airbnb tends to be strongest. It could be years before Americans get comfortable with the idea of booking into a Times Square hotel to catch a couple of Broadway shows. Breakfast buffets (sadly) may be gone forever.
Most industry analysts take it for granted that travel will bounce back, because that’s what has happened in the past. Rich Barton had already signed a deal to sell Expedia to Barry Diller’s IAC/InterActiveCorp. right before the Sept. 11 attacks. Barton, now CEO of Zillow Group Inc., says he figured IAC would back out of the contract, but Diller was unfazed and went through with it. “Rich, honey,” Barton recalls Diller saying, “if we don’t travel any more, we have bigger things to worry about than whether or not to buy the company.” Expedia’s revenue has grown 20 times since then.
Chesky is making a similar wager, hoping that the post-Covid-19 recovery will look a lot like the recovery from the last recession, with hard-up Americans more eager to list spare bedrooms, garage apartments, and second homes, even if it means taking in an asymptomatic contagious traveler. The plan, he says, is to focus on these part-time hosts and put less emphasis on the professional hosts who’ve been crucial to growth. He sees an expanding business offering longer-term rentals to city dwellers looking for a protracted retreat. Chesky says many of those guests may keep renting Airbnb rooms, even after the coronavirus outbreak subsides, as social distancing efforts leave more people freed from their offices. “This is a giant experiment where people are realizing they can work remote,” he says. “We think that’s a huge opportunity.”
If that sounds speculative, it’s more fully realized than the new plan for Experiences, the money-losing business Chesky loves that centers on tours and cooking classes. To adapt to the stay-at-home era, Airbnb recently began offering virtual sessions for indoor activities such as meditating with sheep. (Price: $9 for a one-hour session. Think of it as a walking tour for the mind.) Chesky says that once the worst is over, he’ll market in-person activities people can do in their own cities, on the theory that the world is going to need new forms of entertainment that don’t require packing into bars or movie theaters. Some of Airbnb’s investors privately gripe that there’s never been any evidence that Experiences can turn a profit.
Chesky argues that the sense of alienation that’s come with the pandemic could be the key to getting things going again. “Oddly enough, though I’ve not physically seen another human being in quite a long time, because of the crisis, you talk to people more,” he says. “So everyone is kind of closer together.”
The biggest risk to the company, and the toughest to plan for, will be the pandemic’s effect on people’s psyches. Even at its best, travel is inherently a little bit scary—it’s about leaving a comfort zone and generally requires close contact with a whole lot of other people. Some Airbnb hosts are already adding the phrase “thoroughly disinfected” to their listings. “To the degree that travel is based on human-to-human contact, this pandemic has made travel irresponsible or even life-threatening,” says Luis Vargas, CEO of Modern Adventure, a tour operator that caters to the millennial travelers that Airbnb built its business on. “The paradox is that we’re all in this together while at the same time experiencing extreme xenophobia because our fellow man could be asymptomatic and have the disease.” —With Olivia Carville Read more: Carnival Executives Knew They Had a Virus Problem, But Kept the Party Going
©2020 Bloomberg L.P.
