The Airbnb Economy: How Expedia Inc (EXPE) and Priceline Group Inc (PCLN) Stack Up

The “sharing economy” is the buzzword of the present day. There is lots of merit in the notion of people taking dormant assets and monetizing them. There is also, however, plenty of other problems associated with this process, many of them coming from the regulatory front, driven by traditional operators who aren’t thrilled with having their territory horned in on.

The Airbnb Economy: How Expedia and Priceline Stack Up

Source: via Airbnb

One area that people have been speaking about in whispers is the effect Airbnb and others are having on the travel and leisure industry.

The reason it isn’t being blared loud and clear is because the hotel industry doesn’t want to advertise how much of an effect Airbnb is actually having, preferring to discount any influence to keep shareholders mollified.

That’s the wrong move. In my opinion, the crisis management aspect of the hotel industry is sorely lacking. They should be screaming about how unfair Airbnb is to the industry, checking off all of the risks and dangers involved to renters and patrons alike.

Absent that, one has to assess the impact of Airbnb on one’s own. It isn’t always easy, but one study shows an 8% to 10% impact on hotel revenue, and that means a lot.

What effect might this be having, and have going forward, on Expedia Inc (EXPE) and Priceline Group Inc (PCLN)?

The Airbnb Effect

One analyst theorized that Airbnb had $7.2 billion in bookings in 2015, but would explode to $12.3 billion this year, and that’s based on an expected doubling of bookings for 2016. That is pretty darn massive, yet much less than the 8% to 10% suggested by the study. One travel research firm says the U.S. hotel bookings market hit $341 billion last year, so Airbnb’s business isn’t that huge.

When talking about individual hotels, and hotels within certain categories, how those bookings are distributed could make a meaningful difference for hotels. For aggregating sites like EXPE and PCLN, however, the impact may not be terribly large.

For now.

Nobody knows where Airbnb is going. The expectation is that it will continue to grow. So much depends on who uses the service and the pricing competition that exists. Airbnb hosts have all the pricing power in the world. If hosts don’t need the money, but want the money, then they can undercut hotels that compete with their style of rental. It is easier for a host to cut a fee by $10 a night than it is for a hotel, which has to keep margins in mind. For hosts, it’s almost 100% margins.

Thus, while inflation is good for hotels because it means they can raise prices, Airbnb hosts that do not rely on the income do not have to raise prices in conjunction with inflation. That could lead to them taking more market share, and putting the squeeze on the margins of Expedia and Priceline. That in turn could force the two to turn around and demand higher commissions from hotels, but then hotels would raise prices even further or tell Expedia and Priceline to pound sand.

So much depends on the category of hotels that Airbnb hosts most compete with. For example, roughly 18% of hotels are “upper midscale” properties and about 8% are “midscale,” and those categories are probably the sweet spot for most Airbnb hosts. Those hotels may not have the kind of margins where they can afford to give up anything more to EXPE and PCLN, so the online agencies may have to eat those losses.

None of this, however, considers the possibility that EXPE and PCLN will set up their own versions of Airbnb. That’s the problem with the sharing economy. There’s no reason it can’t be copied. As it is, and as I predicted, EXPE actually bought HomeAway to help fill that gap in its model. Indeed, in Expedia’s latest quarterly filing, HomeAway added $142 million to Expedia’s top line, and room night growth for EXPE jumped 37% year-over-year.

My guess is that Airbnb will get bought out as well, possibly before its initial public offering, and the likely buyer will either be Priceline — because it has the cash — or one of the big hotel chains. That’s right, a hotel chain would buy Airbnb and just fold it in under its banner. Hey, if people are going to book the homes anyway, why not own the booking agency and make some money. If you can’t beat ‘em, buy ‘em.

The bottom line is that I don’t see Airbnb materially affecting EXPE or PCLN going forward.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

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