Is Airbnb competitor of the Hotel industry?

Introduction

In the last decades, travelling became a trend in our generation and part of many people’s life. Alongside the growth of the travel industry, the lodging/hospitality industry increases with demand. Nowadays, travellers have an enormous choice of places to stay and the lodging/hospitality companies are in the biggest competition. In the last few years, one of the main topics which many people are discussing is about the rivalry between the Hotels and the online marketplace company called Airbnb. Airbnb is an online marketplace that allows individuals to rent out their apartments/houses and helps to connect them with individuals who are looking for accommodation. In 2008, Airbnb was founded in San Francisco, California by two roommates Brian Chesky and Joe Gebbia. The newly launched business was a small start-up which was struggling for the beginning but later received a great amount of funding and helped the founders to improve more and reach success. The popularity of Airbnb increased enormously in several years and 2019, the company reached the valuation of $35 Billion (Ghaffary,2019). Nowadays, the Airbnb community of guests and hosts are counting over 191 countries and 81,000 cities and in 2019, the number of guest arrivals reached 500 million (Airbnb, 2019). As Airbnb’s popularity grows day by day, more people are investing and entering the lodging business. In 2019, Airbnb’s total active rooms/listings resulted in more than 3.5 million, which is nearly 3 times more than the leading hotel's group by the number of rooms – Marriot International counting 1.3 million (Adamiak, 2019). One of Airbnb’s advantage which differentiates it from hotels is its broad selection of accommodation. Airbnb has enormous variations of accommodation starting from the most basic to the high-class luxury mansions. Airbnb offers entire apartments, entire homes, single-room apartments, rooms in shared apartments, entire villas, million-dollar mansions, etc. Besides the enormous numbers of rooms and variation of accommodation, Airbnb is ‘’beating’’ the hotel prices in most of the cities. According to the statistics from Mccarthy (2018), in 2018, Airbnb’s average room prices in major cities worldwide were at least 15% cheaper than hotel’s room. So, the competition between Airbnb and Hotels is getting more intensive time by time and lots of topics are featuring that Airbnb is a threat to the hotel industry. Lots of experts claimed that Airbnb has a negative impact on the Hotel industry and has the ‘’Unfair advantages’’. The reason why experts and hoteliers think that Airbnb has the unfair advantage is that Airbnb hosts can provide lower prices than the hotels as they don’t have to comply with safety requirements, fire safety codes, paying government taxes (Llewellyn, 2014).

Literature review

Airbnb, the online marketplace company based in 2008 offers accommodation to tourists and raised the discussion about whether it is a competitor to hotel businesses or not. Airbnb checks hotel rates and offers available rooms in many hot spots during high seasons (Gerdeman, 2018). Furthermore, Airbnb takes the opportunity of the hotels to rate their rooms at their biggest margins especially in peak periods. Conversely, tourists benefit from this fact, as they do not have to pay high rates to spend a holiday in hot spots during high seasons, such as the Christmas period or big events, for instance, festivals and sports games (Gerdeman, 2018). Moreover, ‘’released today, the research shows that in the 10 cities with the largest Airbnb market share in the US, the entry of Airbnb resulted in 1.3 % fewer hotel nights booked and a 1.5 % loss in hotel revenue’’ (Gerdeman, 2018). Another research has claimed, that during busy travel times guests could enjoy an average ‘’consumer surplus’’ of 57$, which did not mean more money in the pockets of tourists, but it meant accommodation at less price (Farronato, 2018). One more research has been made on the topic of competition between Airbnb and traditional hotels. The research studied prices and occupancies in 50 major US cities from 2011 until 2014. During the study period, research showed that Airbnb rooms represented 4% of all guests, but in high season 40-60% of hotel bookings would not have been made if the visitors did not have the option of choosing Airbnb (Farronato, 2018). This research proves the impact of the appearance of Airbnb on the hotels. As the hotel businesses realize, that they cannot charge high prices because of the probability of losing customers, they keep average prices and get guests this way. In 2014, according to the same research, in 10 US cities, the growth of Airbnb caused the reduction of hotel profits by approximately 3.7%. High numbers of Airbnb accommodations in these areas has caused this. Cities like New York and Los Angeles have always been offering high price accommodations and hence to the demand and the high prices Airbnb has started offering more accommodation in such cities. Despite the great number of Airbnb accommodations in many cities, there are some cities, which offer enough hotel rooms at reasonable prices. Such cities are Atlanta and Houston and Airbnb are not interested in increasing the number of its rooms in these areas, as because of the huge number of hotel rooms available, it will not appear beneficial for the home-sharing platform. Airbnb shares interests of hosts as well, as they allow the property to be kept as a private use during the low season and been rent during peak periods. Another research named one more reason why guest might use Airbnb room over hotel accommodation. The reason is the possibility of high occupancy in one room or in connecting rooms (Haywood, 2016). Most of the hotels do not offer rooms for big groups for instance for 6-7 guests. That is why such groups prefer to stay at Airbnb apartment and pay even less than they would have paid for the hotel room. Another attractive reason for choosing Airbnb is ‘’apartment-style amenities, meeting the host, and other factors unique to the accommodation. For example, a small percentage of Airbnb listings are eclectic accommodation types such as treehouses, camper vans, yurts, and castles’’ (Haywood, 2016). According to the report Airbnb provided in November 2016 Airbnb had just over 3 million listings worldwide, which was nearly three times the size of the Marriott International and Starwood Hotels & Resorts Worldwide. The deeper research of these numbers showed that taking amenities and bed numbers into consideration Airbnb appeared to be competitive only with 1.1 million shared and private rooms which are 0.1 million less than the entity of Marriot International offers (Haywood, 2016). By the same research, it has been suggested, that Airbnb rises healthy competition with hotels in terms of prices but is not the direct substitute to it.

The topic of Airbnb being a competitor and a threat to the hotel industry is widely discussed in news websites, journals, researches and between hospitality experts. There are lots of discussions about the fact that should Airbnb be considered as a threat or competitor to the hotels and there are lots of arguments why it must be considered as a threat or competitor. One of the main arguments is the topic of the price elasticity Airbnb can provide. In most of the cities, Airbnb’s rooms prices are beating the hotel’s prices. The following data Figure 1 shows the average room price per night in the major cities. 

As we can see from Figure 1, the prices provided by Airbnb is at least 10-15% less than the prices from the Hotels. A lot of experts believe that Airbnb hosts are taking advantage of having no safety requirements and regulations. For example, the hotel must follow lots of security and safety regulations as fire safety, personal protective equipment, fire extinguishers, maintenance, etc. As the Airbnb has no required safety regulations, hoteliers believe that Airbnb hosts have the unfair advantage of that, as they have less cost and can provide much lower prices than they can. In Europe, Airbnb rooms are 8-17 % cheaper than the hotel’s average daily rate, meanwhile in the United States 6-17 % cheaper (IPropertyManagement, 2020). Nowak et al. (2015) surveyed 4 thousand United States and European citizens and found out that The United States and European Airbnb user’s one of the top reasons they had chosen Airbnb was the ‘Cheaper price’ and was followed up by the location.

As already mentioned above, Airbnb hosts are able to provide the cheaper prices as they don’t have big expenses, for example, the cleaning fee is always added to the total sum and excluding that we can say that there are no serious expenses (only utilities or bathroom accessories). Also, many hosts are just renting out their own free spaces which they are not using, they don’t need to pay for an apartment lease or any loans which gives them the opportunity to ‘’beat out’’ other accommodation prices by renting out in minimal prices. Renting out entire apartments with more than 2 rooms or entire houses is also playing a big role as travellers groups can rent and share one big apartment and pay dividing by rooms. As stated by Airbnb (2017), roughly 4 out of 5 American travellers have been on group trips in the last few years, according to the survey from DKC Analytics. According to Airbnb, in the New Year’s Eve 2016, 15.5 million groups took trips on using their website. In 2017, Airbnb decided to launch split payments to make group travels easier. ‘’The split payments feature will ease the financial burden on group trip organizers and alleviate the pain for travellers to front costs associated with the booking. Airbnb guests won’t have to chase their friends and family after a trip to pay them back’’ (Airbnb, 2017).

Though the cheaper prices, 66 % of Airbnb users in the United States are earning over $75 thousand a year (Nowak et al. 2015). 

The statistics from Figure 3 shows and contradicts the belief that the Unites States Airbnb users are not only the students/millennials and individuals with low income. The similar income demographics showed in Germany and in the United Kingdom as well. ''In Germany, 14% of Airbnb users fell into the highest income bracket (2.3X more than non-Airbnb users), meanwhile the United Kingdom with 23% of Airbnb users falling into the highest income bracket (1.9X more than non-Airbnb users)’’ (Nowak et al. 2015).

There is a belief in people on Airbnb market that it takes demand from traditional hotels, rather than creating new demand. According to the research from Nowak et al. (2015), 42 % of Airbnb demand is coming at the expense of hotels. Airbnb also substitutes other accommodations B&B, staying with friends/family and vacation rentals.

According to the Chart above, Airbnb doesn’t create new travel demand and a new segment, as only 4 % of users mentioned that they would have not taken the trip if not for Airbnb.

Research from Guttentag (2017), shows the survey results of accommodation choice if Airbnb and other similar services did not exist. The survey confirms that a higher number of Airbnb users are substituting the mid-range hotels with Airbnb accommodations.

Accommodation alternative that Airbnb replaced.

When comparing the United States Airbnb users and European users, it’s conspicuous that hotel cannibalization caused by Airbnb users were higher in the United States (Nowak et al, 2015). The following chart shows the research results from Nowak et al. (2015), by 49 % of respondents have replaced hotels with Airbnb and 54 % will replace.

After the rivalry, the hotels are trying and are interested in making changes, to get the Airbnb’s user market. Many hotels are systematically changing their prices to be more flexible for customers (Menze, 2019). For example, Hilton hotels group has launched hotel brand ‘‘Tru by Hilton’’, which matches and targets the millennials using the Airbnb and similarly, the Marriot group has expanded its Moxy brand (Eric, 2016). The national hotel association said its push against Airbnb was not about the platform’s financial impact on hotels. The hotel industry has also lobbied for laws that would restrict the ‘’Illegal’’ operation of the hotels. In the last 2 years, the battle between the hotel industry and Airbnb is heated up in the United States as the fight is entering a new phase. As mentioned by Gangitano (2019), Airbnb accommodation owners are worried that the new legislation would require them to police their rentals. “For far too long, these Big Tech short-term rental platforms have been hiding behind this antiquated law …. from illegal rentals that are destroying neighbourhoods and access to affordable housing’’, many of the owners and operators of these units are failing to comply with basic consumer safety, public accommodations and tax requirements that the legal lodging industry has had to follow to conduct its business,” stated by American Hotel & Lodging Association President Chip Rogers (Gangitano, 2019). In summary, the hotel industry is doing its best to fight back the ‘’unfair competition’’ and get back their lost customers.

Conclusion Airbnb represents a unique online marketplace whose popularity increased enormously in the last few years and continues to grow day by day. Airbnb became the substitute of the hotel industry as it provides more variations of accommodation and flexible price. By becoming a substitute for a hotel for many customers, it has caused lots of problems for the hotel industry by losing customers and generating less income due to that. Hotel industry believes that Airbnb has the ‘’unfair advantages’’ and are trying their best to fight back with their best possibilities and get back into a better position. Airbnb does create new travel demand, it cannibalizes the hotels and it focuses more on leisure, non-hotel, long-stay segment than thy typical hotel corporate one-night segment. By summarizing all reports, researches and statistics mentioned in this research paper, it proves that Airbnb is not a threat to the hotels, but it is a competitor.

List of References

Adamiak, C. (2019). Current state and development of Airbnb accommodation offer in 167 countries. Retrieved June 17, 2020, from https://www.tandfonline.com/doi/full/10.1080/13683500.2019.1696758

Airbnb. (2017, November 28). Airbnb Makes Group Travel Easy with Global Launch of Split Payments. Retrieved June 17, 2020, from https://news.airbnb.com/airbnb-makesgroup-travel-easy-with-global-launch-of-split-payments/

Airbnb. (2019, March 27). Airbnb Celebrates Half A Billion Guest Arrivals. Retrieved June 17, 2020, from https://news.airbnb.com/airbnb-celebrates-half-a-billion-guest-arrivals/

Farronato, C. (2018, February 22). The Welfare Effects of Peer Entry in the Accommodation Market: The Case of Airbnb. Retrieved May 18, 2020, from https://www.nber.org/papers/w24361

Gangitano, A. (2019, September 12). Hotel industry mounts attack on Airbnb with House bill. Retrieved June 17, 2020, from https://thehill.com/regulation/lobbying/461018-hotelindustry-mounts-attack-on-airbnb-with-house-bill

Gerdeman, D. (2018, February 27). The Airbnb Effect: Cheaper Rooms For Travelers, Less Revenue For Hotels. Retrieved May 18, 2020, from https://www.forbes.com/sites/hbsworkingknowledge/2018/02/27/the-airbnb-effectcheaperrooms-for-travelers-less-revenue-for-hotels/#84d168ed672f

Ghaffary, M. (2019, July 17). Marketplace Checklist: How Airbnb Built A $35 Billion Business On Its Brand Strength. Retrieved June 17, 2020, from https://www.forbes.com/sites/mikeghaffary/2019/05/30/marketplace-checklist-howairbnb-built-a-35-billion-business-on-its-brand-strength

Guttentag, D. (2017, March 31). Assessing Airbnb as a disruptive innovation relative to hotels: Substitution and comparative performance expectations. Retrieved June 17, 2020, from https://www.sciencedirect.com/science/article/abs/pii/S0278431916302250

Haywood, J. (2016). Airbnb & Hotel Performance An analysis of proprietary data in 13 global markets. Retrieved May 18, 2020, from https://str.com/sites/default/files/2019-07/AirbnbandHotel-Performance.pdf

Llewellyn, M. (2014, May 27). Should You Worry About Airbnb? - LODGING. Retrieved June 17, 2020, from https://lodgingmagazine.com/should-you-worry-about-airbnb/

McCarthy, N. (January 24, 2018). Is Airbnb Really Cheaper Than A Hotel Room? [Digital image]. Retrieved June 17, 2020, from https://www.statista.com/chart/12655/is-airbnb-reallycheaper-than-a-hotel-room/

Menze, J. (2019, June 04). How Airbnb threatens to disrupt traditional hotel pricing strategies. Retrieved June 17, 2020, from https://www.phocuswire.com/airbnb-versushotels-pricing-strategy

Nowak, B., et al. (2015, November 15). Global Insight: Who Will Airbnb Hurt More - Hotels or OTAs? Retrieved June 17, 2020, from https://www.airbnbforwork.com/- /media/airbnbforwork/content-offer-images/gated-content-offers/n-co-3-2-3-morganstanley-global-insight-reportpdf.pdf?la=en&hash=C3A885DF19F5C4ECD1C87209BE0C974218286402

Nika Adeishvili

19.06.2020

Salzburg,Austria