How Airbnb Can Survive COVID-19 After Burning US$1.2B Cash Reserves
Last week (October 7), it was reported that vacation rental platform Airbnb had spent more than $ 1.2 billion in cash between mid-2019 and mid-2020.
That’s more than a third of its cash reserves, according to documents viewed by technology news site The Information.
According to The Information, the drop in global travel has “eroded an already weakened balance sheet by sharp increases in recruitment and marketing spending.”
This raises questions about the fate of Airbnb and its survival in the Covid-19 crisis. How can they ever hold out despite the travel black hole?
How COVID-19 brought Airbnb back down
The pandemic has had a huge impact on Airbnb and other travel companies as global travel has come to a halt.
Airbnb’s revenue fell 72% in the second quarter of 2020 compared to the same period in 2019, to US $ 335 million.
In March, it was reported that short-term rental bookings in Europe had fallen by 80%.
Meanwhile, revenues have fallen by more than 50% in U.S. urban destinations like New York City, San Francisco and Seattle, according to data from analysts at AirDNA.
By April, Airbnb’s valuation had fallen to US $ 18 billion, nearly half of its previous high of US $ 31 billion.
Airbnb has had to dip into its cash reserves to pay off canceled bookings as well as overhead, payroll charges and more.
A large amount of money was spent to reimburse the trips
In the first quarter of this year, when Covid-19 first erupted, the company had to pay travel refunds because customers were quickly canceling their reservations.
Unlike Airbnb and Expedia, Booking.com typically collects payments on every booking after the stay is completed, reducing the impact of travel refunds on its balance sheet.
The refunds wiped out much of their cash reserves, highlighting how the pandemic has depleted Airbnb’s reserves.
As governments put locks in place and world travel came to a halt, another portion of the funds were spent helping the company recover and paying overheads such as salaries.
Spending cuts weren’t enough
In May of this year, Airbnb announced a company-wide layoff that resulted in the layoff of 1,900 out of 7,000 employees in an attempt to cut costs.
The 25% reduction in staff was substantial in terms of cost savings, but Airbnb paid generous severance pay to those who were made redundant. This includes several months of salary, a year of healthcare, and Airbnb’s help in finding a new job.
It was also reported that its founders would forgo their salaries for the next six months and that senior executives would suffer a 50% pay cut.
Financial records seen by The Information first revealed exactly when Airbnb cut spending in the second quarter in an attempt to offset the drop in revenue.
The biggest cuts apparently came from customer service and marketing.
Meanwhile, product development expenses and general and administrative expenses collectively fell 9% over the same period.
However, second quarter financial data is unlikely to fully reflect the impact of Airbnb’s layoffs that occurred in the middle of the quarter.
Either way, spending cuts were not enough to offset the drop in income once the pandemic struck.
Looming IPO Could Save Airbnb From US $ 2 Billion Debt
In April, Airbnb raised $ 2 billion in debt from investors at high interest rates amid mounting losses.
Thanks to the debt, Airbnb had $ 4.1 billion in cash, cash equivalents and marketable securities in June.
The company still has a sizable cash stack (two-thirds of its cash reserves), but how long can that even last?
Before the pandemic, the company planned to go public via a direct listing.
However, it continued with an initial public offering (IPO) in December, aimed at raising around US $ 3 billion.
Reuters reported last week that the IPO would involve a valuation of around US $ 30 billion.
Investors and analysts expect Airbnb to use this money in part to pay off its US $ 2 billion debt.
This would only be possible if they manage to raise funds through the IPO, with investors weighing heavily on the pros and cons. But will investors be ready to buy this struggling company?
Although the travel industry is gradually picking up, will people be as keen on staying with a stranger? This is a consideration that investors must reflect on.
The impact of the pandemic on Airbnb’s financial performance will force potential investors to bet on Airbnb’s ability to make a profit, as it did for a while in 2018 and contribute to a rebound in the market. travel industry for years to come.
Airbnb had already faced cost pressures before the pandemic. The company experienced its first year of profit – US $ 28 million in adjusted earnings before interest, taxes, depreciation and amortization – in 2016.
That revenue rose to US $ 231 million in 2018, but turned negative last year with a loss of US $ 253 million, according to the documents presented.
A thirst for domestic and home travel may help him recover
A request for domestic and near-home travel can also help Airbnb pull itself together for the time being.
In April, Airbnb began pushing the company towards extended stays during the Covid-19 crisis.
The company said the move was aimed at giving hosts the ability to provide “local accommodation in these difficult times.”
As a result of this move, there was a 20% increase in long-stay bookings on the platform in the last two weeks of March compared to the same period in 2019.
In March, AirDNA reported that the pandemic was causing a boom in remote Airbnb properties, despite poor performance in more urban areas.
Less frequented beach destinations, lakeside getaways and mountain towns were seen as safer.
By the end of May, bookings had rebounded, registering a 20 percent increase year over year.
Cleanliness remains a major concern for travelers. Hotel executives, for one, have tried to argue that staying in a hotel is safer and cleaner than an Airbnb.
Airbnb owners need to take it to the next level to ensure clean standards comparable to hotels.
While a demand for domestic travel or travel nearby may help keep it going for now, Airbnb must ultimately find other sources of income to survive.
Will Airbnb survive the pandemic?
Airbnb is set to experience a second consecutive year of losses and if it doesn’t venture into something else, it may not survive for a few more years.
Before Covid-19 hit, it was planning to branch out into new areas of business, including luxury rentals, hotel room reservations and airline tickets.
It had to cut back on new forays due to cuts in marketing, product development and other expenses.
The pandemic would have accelerated change and to remain relevant they must venture into other income-generating areas.
Airlines, travel agencies, travel booking startups, and attractions have launched alternative revenue streams.
For example, Singapore Airlines recently converted its A380 into a fine dining restaurant, and Klook has grown into local experiences such as activities in the city or other cities as well as DIY and cooking kits.
It might be time for Airbnb to take a leaf out of its book.
Featured Image Credit: Herwin Bahar / Zuma wire / Rex / Shutterstock / Airbnb
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