What U.S. Lodging Companies Are Saying
Most Companies Unfazed: Most lodging companies do not view rapidly growing Airbnb, Inc. as a competitive threat to their businesses. During the second-quarter earnings call season, several companies repeated a plausible, optimistic view that Airbnb is largely creating new travel demand, primarily from millennials — a long-term positive for the travel industry.
Fitch Ratings is somewhat less sanguine and notes that during this earnings season an influential hotel owner cited Airbnb directly for negatively affecting pricing power around select large, leisure-oriented group events due to some lost demand to Airbnb. These are the most granular comments we have heard to date regarding Airbnb’s impact on the lodging business. Only limited data is available from privately held Airbnb to analyze its lodging industry impact.
More Supply Could Amplify Downturns: Fitch sees the potential for Airbnb to exacerbate lodging industry downturns, in addition to the ongoing secular challenges the industry could face from lost demand. Airbnb listings are likely to spike during recessions when labor markets weaken, forcing some individuals to find alternative avenues to meet financial obligations. There is anecdotal evidence of this already occurring in high cost of living markets like New York and San Francisco, notwithstanding current tight labor market conditions.
The last three U.S. lodging downturns showed progressively more RevPAR volatility, which Fitch attributes to the widespread adoption of sophisticated revenue-management software, coupled with increased pricing transparency caused by online travel agencies. Whatever the cause, lodging companies have shown a race-to-the-bottom pricing mentality — despite credible evidence of demand inelasticity — that could be exacerbated by a corresponding spike in Airbnb supply during the next downturn.
Leisure, Economy Most at Risk: Fitch believes lower price tier limited service and extended-stay hotels and/or those that cater to leisure demand are most at risk from Airbnb’s growth. Examples include Wyndham Worldwide, Inc.; La Quinta Holdings, Inc.; Extended Stay America, Inc.; and Accor Hotels. Airbnb listings increase the supply of lodging accommodations, despite often wide differences in hotel service and amenity levels. Not all Airbnb stays represent lost hotel demand, and staying in someone else’s home will not appeal to all travelers. But it is a viable alternative for some, particularly budget leisure travelers.
Not For Everyone: Airbnb is unlikely to appeal to travelers that prioritize consistency, reliability and safety/security over price and unique experiences, in Fitch’s view. For these reasons, we believe Airbnb faces an uphill battle to make inroads in the corporate transient and group demand segments. Fitch views sole proprietors, independent consultants and small groups as the most logical business users of Airbnb. On the leisure side, Fitch expects budget and adventure travelers and small groups (i.e. families, sports teams) to find Airbnb most appealing. However, in both cases we expect hotels to remain the preferred choice for these customers.
Evolving Regulatory Landscape: Airbnb’s business model is facing increased regulatory scrutiny in several jurisdictions related to hotel occupancy tax collection, zoning violations and public safety. Although the state of play is in flux, momentum appears to be on the side of pushing Airbnb closer to parity with hotels, which Fitch views favorably for the industry. Airbnb has begun collecting hotel occupancy taxes in several domestic and international markets.
Lodging Company Airbnb Commentary
All quotations in this report are from transcripts of company-sponsored earnings conference calls for the quarter ended June 30, 2015. We have grouped the companies by Lodging C-Corps and Hotel REITs, and listed them in the order in which they reported earnings.
Lodging C-Corps
Marriott International, Inc. (July 28, 2015)
“There was a report out by a large corporate travel and expense management company looking at the sharing economy and I think everybody has tried to ask the Airbnb question in a variety of ways. But the study indicated that corporate or business-related travel bookings on Airbnb increased like 143% from one quarter to the next this year. And my question is not just … how much are we losing share, because I think it’s very small at this point. But as you talk to your corporate customers, can you tell us anything about the adoption of hotel alternatives at the corporate level, which I think [is] what we’re all trying to gauge.”
“When you get to the sharing economy, I think you look at the increase quarter over quarter or year over year in business travel. To some extent, that is still the law of small numbers. Overwhelmingly in this space, you’re talking about leisure travel. Overwhelmingly, you’re talking about travel [that] is at relatively lower rates than would be available in the traditional hotel.
“And so while there are some business travelers, probably particularly younger business travelers who use these kinds of platforms for their business travel, they are still the exception rather than the rule. There’s a lot we don’t know for certain, and we’ll watch to see the way this develops. Airbnb obviously gets a lot of attention for a reason. They have grown quite quickly, and I think in many respects, they are a captivating idea.
“… On the positive side, we think it’s quite good that Airbnb seems to be drawing travelers into the traveling marketplace sooner than they might otherwise be doing based on costs, and that’s partly a generational thing. That’s partly a wealth demographic thing. But we are seeing more and more travelers hit the road, both in the United States and around the world. And that’s a good thing. And we think ultimately they are likely in some meaningful percentages to stay not just at Airbnb facilities, but to stay in traditional hotels, and we’ll obviously compete to get as many of those as we can.
“When we listen to our special corporate and significant corporate customers, I think usually what we hear is that they would like to make sure that their people, when they are traveling, are taken care of and that risk profile is acceptable to them, and there are attractive features of hotels when it comes to those kinds of considerations. Whether that [is] life safety issues, whether that [is] security issues, whether that [is] simply the ability to find their people.
“I think there are some, though, where folks say, ‘OK, if we can save money on this and if our people want it, maybe we’ll do some of that.’ So that’s why you start to see some of this year-over-year growth. And again, we’ll watch it. We don’t think it’s a significant factor in terms of impacting our business today. And are optimistic that it won’t become one, but we’ll have to watch it and see.”
“… With regards to Airbnb, because that continues to be a recurring topic in conversations with investors, … obviously business travel is a big component of your business. Airbnb is now trying to get into that space and grow it. As you talk to your corporate travel managers, where do they put the priority on security? Is that [the] number one cost of entry, or is that something that they take for granted or don’t even think about?”
“Corporate customers are, I suppose in many respects, as different from any other kind of customers, so you hear different priorities from different places. We have big and really important corporate customers for whom security for their people is the primary feature. We have some for whom the primary feature is cost.
“I would think we haven’t done, at least not that I’m aware of, a survey of every corporate client. It might be something that would be worth doing. But I would think that security and productivity concerns, predictability concerns, would all rank quite high for the typical corporate customer of size.”
Hilton Worldwide Holdings, Inc. (July 29, 2015)
“… The first question you guys were asked … highlighted that investors’ top concern is just around the cycle. I think investors’ second highest concern is just around the threat from the sharing economy. And I’m often and people are often accused of being too flippant around that threat. Can you … address that?”
“You can imagine that we’ve sat around this table as a management team… with our board of directors talking about it, and … we’ve talked with the Airbnb folks. And lots of others in the industry. In the end, I won’t pontificate, I view it as a different sort of customer looking for a different type of experience.
“I think there’s a real business for sure, a growing business for sure. But what is really at its core is a leisure value adventure sort of need that it’s fulfilling. That is not what we are. … We are as some leisure, yes, but we’re not trying to be the cheapest — we’re trying to be the highest quality product and service to the people who will pay a premium, and we’re not trying to provide an adventure in that sense. Meaning, we want it to be very high-quality products and service that you know exactly what you’re getting.
“So [when] our customers are coming to us, what they’re looking for is something different than what they are looking for when they go [to Airbnb]. I’m not going to say there is zero overlap, that none of our customers ever use them, but I think they use them for a different need and I think largely as we look at it, statistically, … every market’s a little different … but if you look at the broad business for those guys, I think it is growing the pie more than anything.
“I think it is stimulating more travel that wouldn’t have occurred, and in the end, I think that’s a good thing, getting people traveling more is fantastic. Because we think once they’re traveling and they get the bug, they are eventually going to come stay with us, because we’re going to be able to satisfy a different kind of need that they’re going to have. Particularly as they sort of grow up and move up in their careers and families and all of those things where what they’re looking for may be a little bit different.
“So I’m not … trying to … say we don’t think about it, we don’t care, we dismiss it. We think about it a lot. We talk about it a lot. But both anecdotally and with hard statistics, I think in the end they are not impacting and I do not think they have a material impact on us. I think they make our pie bigger, and ultimately stimulating people to travel more is net-net, I think a good thing.”
“Is the risk that the rapid growth of alternative accommodation … is holding back pricing power? Or even has the potential to hold back pricing power for the industry, given that these types of accommodation can come into the market when there’s compression? So how do you think about the risks that pricing powers may be weaker than in previous cycles? Or what [they] should be, given favorable supply demand conditions in the industry.”
“… I mean obviously any type of supply could have the effect of taking away our pricing power. And there may be markets where there is some impact, but it’s not an impact as we look at it enough that we can measure. And as I said, I think it’s just a different kind of customer. So the largest part of our base of customers is really a business customer for a business purpose.
“And I know they’re trying to get in that business, and good luck, and I’m sure they’ll build a business, but I just don’t think in terms of the core customer that we are serving and what that core customer is telling us that they want from us, that there are enough similarities where … the overlap is creating a really credible alternative that’s affecting pricing power in a meaningful way, as we study it. Again, you can probably pick micro markets and there will be exceptions to it, but broadly, we are not seeing it. I don’t expect to see it.”
Wyndham Worldwide, Inc. (July 28, 2015)
“Vacation rentals in the sharing economy have been getting a lot of press lately, so I would like to remind you of our value proposition and what sets us apart. Wyndham Exchange & Rentals is the largest provider of professionally managed unique vacation accommodations in the world, and our mission is to send people on the vacations of their dreams. We do this by providing the right inventory to the right traveler at the right time.
“Our inventory spans the globe and includes virtually every nonhotel vacation option, literally from houseboats to castles to timeshare. In addition, we provide a wide array of value-added services, not just to guests, but also to homeowners and our B2B partners. Our strategic priorities at Wyndham Exchange & Rentals are to leverage our strength across all of our brands, including our technology and analytics expertise, the breadth of our inventory and our distribution capabilities.
“I spoke at our last call about enhancing our distribution channels through the use of online booking services such as HomeAway, and we have often [spoken] about analytics in yield management. Equally important to us are analytics around our customers’ preferences. We have been very successful at RCI in customizing member interaction to drive satisfaction and increase member retention.
“Now we are leveraging these best practices within our rental brands. In doing so, we have the opportunity to drive higher inventory utilization based on large samples of consumer data. For example, we will often work with homeowners across our rental brands on how to tailor their home to achieve maximum occupancy and yield using our unique knowledge of the individual traveling consumer.
“We may work with homeowners on how best to remodel their property for rental. But just as important on a more modest level, we may also help them determine what amenities to offer or whether to allow pets.
“We are also able to work with business partners on a larger scale on product development. For example, in our Hoseasons Holiday Park brand in the U.K., we have launched several exclusive niche sub brands. We package in market resorts under these brands to individual travelers based on their personalized preferences. We also work with the developers on a weekly basis exchanging ideas, expertise and pricing data to drive performance.”
Hotel REITs
Ryman Hospitality (Aug. 4, 2015)
“We pay close attention to new supply, and while it could be an issue for the limited service sector, we do not see this being a midterm threat to us, as our particular customer, the large group, simply wants the quality of a resort and the all-under-one-roof experience, and there’s very little of this type of product being built in the nation. And as someone who has built a few of these projects, I can tell you that it just takes a long time to birth these projects.
“And as regards new entrants like Airbnb, it’s pretty difficult to hold a large meeting in someone’s home. As a consequence, I think that if you are the owner of a large group-orientated resort, these are very good times with healthy demand driving higher occupancies and rate growth, and little new group-orientated resort supply being built, and that’s how we think about our unique positioning and our opportunity.”
Pebblebrook Hotel Trust, Inc. (July 24, 2015)
“I think there are a lot of generalists on these calls. And among them I find there’s also a good deal of concern around the sort of threat of Airbnb, particularly in the absence of information or real data around their success thus far. Are you able to quantify, maybe in your opinion, whether Airbnb has had a measurable or material impact on your business?”
“We don’t have any data to do that. What we can tell you anecdotally is where we see the biggest impact is … events, particularly either leisure-driven events or convention events … where much of your attendees are paying for their own lodging. If you look at business around marathons, as an example, where we used to have really intense compression and an ability to price at maybe what the customer would describe as sort of gouging rates, I’d say we’ve lost a lot of that ability at this point within the major markets where these events take place.
“And so while Comic-Con is great in San Diego, you don’t have the same marginal pricing capability today because of how much of that demand is getting filled by Airbnb hosts versus it having compressed and even pushed out into the suburban markets, and even up to Orange County, as an example for Comic-Con to some extent.
“I think that will change over time as the industry becomes regulated and … there’s enforcement of the laws that take place. But that’s still going to take several years. We’re seeing it happen. So particularly … and interestingly … many of the more liberal cities like Santa Monica and West Hollywood have passed bans, complete bans on Airbnb in the market. And now what they have to figure out is how [to] enforce [the bans], and where does the money come [from] to enforce that.
“So [the regulatory environment] is changing. It’s having an impact in a lot of areas other than just lodging. It’s having an impact on housing availability. It’s having an impact on affordable housing. It’s having an impact on the quality of life in apartment buildings and condominium buildings in some neighborhoods. And so the impact is far broader in a negative way than just the lodging industry. And so I wouldn’t say that it’s been material on the lodging industry, but I would say that anecdotally it’s been noticeable.”
“There’s somewhat of a domino effect where maybe Airbnb infringes on the economy sector and then the economy sector infringes on the middle sector and so on up the chain. Do you think maybe … Airbnb indirectly may be some of the reason why you are having difficulty attracting the upper-upscale client base?”
“I think there is a very complex dynamic in the hotel industry and we’re always out there saying when supply gets added to a market, it doesn’t really matter whether it’s economy or it’s luxury. … It matters a little bit obviously, but ultimately the market’s dynamic, and as you indicated, the economy competes with the midscale, midscale competes with the upscale, and upscale competes with the upper-upscale, and on up to luxury.
“And so Airbnb is adding supply into the market. It does have an impact. And I would add, not all Airbnb product is staying in somebody’s extra bedroom. In fact most of it’s not. A lot of it is fully vacant apartments, in some cases homes, and in some cases very nice homes. So … they’re not pulling business just from the economy segment.
“We’re not having trouble attracting higher paying customers. Our issue is the time it takes to go out and find those customers and get them into properties where we’re repositioning hotels. … We … haven’t had a problem with getting significant rate increases at the vast majority of our hotels within our portfolio when the markets are healthy, which is the case in most of our markets. Clearly there’s a pricing issue overall in the ability to grow rate much at all in New York. That’s not the case in the rest of our markets.”
LaSalle Hotel Properties, Inc. (July 23, 2015)
“As we see more and more of these soft brands entering various markets and grabbing up these independents and maybe a little bit of Airbnb, do you think any of this stuff is impacting your independent [hotels]?”
“When we think about the alternative lodging opportunities like an Airbnb, we know they are out there. We know that the biggest numbers, we were told, [are] San Francisco and New York. Are we are hearing from any of our prior guests or groups or corporate that they are using Airbnb? No. Is it coming up in any of our discussions? No.
“We are not so naive to think that it could not have impact, but we are just not seeing that impact really at either market. Certainly not the other markets … I think we are just going to wait [and] see what happen there. Obviously our concern is … new competition. You cannot fight off new competition that is technological progress.
“On the other hand, our concern is that they are playing the same playing field that we [are] in terms of making sure whatever taxes that we pay, they pay, and whatever life safety items that we have to adhere to and licensing [etc.], that Airbnb has to play fairly along those lines. That is our big concern. As far as specifics for either market, we do not have a direct impact hit that I can give you.”
Additional information is available on www.fitchratings.com.
