Airbnb knows it’s making too much money now

Social media was abuzz last month with anecdotal reports from Airbnb Inc. hosts of a collapse in bookings. There were precious few signs of that in Tuesday’s earnings report from the homestay platform, which saw a 29% increase in quarterly revenue from the year-ago period to 2 .9 billion dollars.

If there’s a problem — and it’s a problem from a shareholder perspective — 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 charging exorbitant service and cleaning fees. Fortunately, this promises more transparency, and it is long overdue.

Airbnb warned of moderating booking growth and pressure on average daily house rates, which scared shareholders a bit. But management said it “sees no evidence of a decline in demand and people’s willingness to travel” and expects still impressive revenue growth of around 20% in the fourth quarter.

The company posted record net income of $1.2 billion, equating to a profit margin of 42%, with the average daily rate for properties booked on its site exceeding $150. Airbnb’s algorithms prioritizing better overall pricing could explain the collapse of some of these anecdotal accounts of bookings, management said. Despite the stock buyback, Airbnb is sitting on nearly $10 billion worth of cash and cash equivalents.

It’s not a great look when your sales pitch helps owners 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 that it had heard client criticism of its “loud and clear” opaque pricing structure, and that it would be moving towards the displaying an “all-inclusive” rate earlier in the booking process, as well as giving more prominence to better value all-in-one deals in search results. Although it may give up some profits this way, I am convinced that the approach will benefit the company in the long run.

Airbnb’s poor financial health is astonishing considering that it’s been just two years since the pandemic caused bookings to collapse and laid off 25% of the workforce. The company went from “the Navy to the Navy SEALs, a small, lean elite group,” chief executive Brian Chesky told investors this week. It’s a colorful way of saying that its fixed costs are now much lower.

Unlike many travel agencies, Airbnb doesn’t have to spend a lot of money on marketing because over 90% of customers come directly to the site. So far, companies pushing their employees back to the office have failed to curb demand for longer bookings: About a fifth of stays are longer than a month and nearly half are at least a week.

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

However, guests get upset when the advertised nightly rate increases dramatically once Airbnb fees, cleaning fees, and taxes are added, reminding them of those pesky resort fees they thought they were getting away with. Sometimes Airbnb hosts don’t even know how much their guests are ultimately paying.

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

Increased transparency and prioritization of better-value homes could cost Airbnb some margin, and bearish investors will likely conclude that Airbnb is bracing for tougher times. But improving guest 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.

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