FINANCE TODAY | ISSUE NO.7
AIRBNB GOES FULL STEAM AHEAD WITH PLANS TO GO PUBLIC
The process of an Initial Public Offering (IPO) is an essential time for any company, as it provides them with the potential to raise an increased amount of capital to fund their day-to-day operations, expansions and other business activities. It is critical for private companies to go public at the right time. Although difficult to accomplish, effectively timing an IPO will help to bolster its performance. Regardless of major setbacks this year due to the COVID-19 pandemic, home-sharing company Airbnb is continuing with their plans to go public this year, believing that there is likely no better time than now. The company plans to file paperwork for the IPO later this month. After experiencing a sharp decrease in revenues surrounding fears about the pandemic earlier in the year, they are now beginning to regain their footing. This emerging comeback has given them the confidence needed to proceed with their plans. Airbnb had initially planned to file paperwork earlier in the year, but the COVID-19 pandemic had forced the company to lay off a quarter of its staff back in May (Klebnikov, 2020). It’s impressive that amidst the significant losses Airbnb incurred this year, they are still confident in their ability to proceed as initially planned.
HOW HARD WAS AIRBNB IMPACTED BY THE COVID-19 PANDEMIC?
Amongst the layoffs Airbnb underwent, there were a plethora of other negative impacts the company endured at the corporate level as well on the front lines with each Airbnb host. As the virus began to spread globally, people actively made the decision to limit their travel as several countries put travel restrictions in place. On March 12, the Financial Times reported that Airbnb bookings were down 40% in major European cities and China combined (Ledsom, 2020). Similar events have unfolded close to home. As expected, the Airbnb landscape in Toronto experienced a significant decline as well. Evidence of this is shown via the occupancy rates for Toronto listings over the past year in the graph below.
Occupancy rates for Toronto listings decreased by a grand 60.53% from February to April of 2020, the initial period of the pandemic. The current standard for a reasonable occupancy rate hovers around 65%. Toronto has dropped well below that benchmark, and to this day, has yet to break that barrier again. In June, both Airbnb hosts and guests who used the platform were surveyed by IPX 1031 to accurately represent the severity of the situation at the time. At the time of the survey, Airbnb hosts expected a revenue decrease of approximately 44% from June to August and hosts had lost on average US$4,036 since the COVID-19 virus began to spread throughout the US (Lane, 2020). The loss in income led to hosts having difficulties making mortgage payments on their properties. Unsurprisingly, Airbnb hosts have suffered a significant loss during the pandemic.
The company itself has also had its fair share of financial setbacks during the first three months of the pandemic. Due to criticisms from hosts who were losing penalty payments because of the influx of cancellations, Airbnb introduced a US$250 million global fund to help hosts as well as a US$10 million Superhosts fund, which allowed high rated hosts to apply for grants to help pay their rent (Ledsom, 2020). The entire Superhosts fund was paid for by Airbnb staff donations and with contributions of US$3 million from Airbnb founders Brian Chesky, Joe Gebbia, and Nathan Blecharczyk (Ledsom, 2020).
THE FUTURE OF AIRBNB
Despite the heavy financial burden incurred by Airbnb, the company has begun to mount a comeback in the past few months. This has likely provided Chesky and his co-founders with the confidence needed to double down on their decision to move forward with the IPO. As US citizens are finally becoming comfortable to travel once again, Airbnb bookings were on the rise once again. At the beginning of May, bookings in Texas rose 10%, Georgia 8.3%, and Arizona 7.8% (Ledsom, 2020). With travel on the rise again, Airbnb would most likely want to proceed with their IPO as quickly as possible to coincide with the current upwards trend in their industry. The company seems to be ready to handle the financial costs that accompany an IPO, as the home-sharing company raised US$1 billion in debt and equity from Silver Lake and Sixth Street Partners. This was followed up shortly by another US$1 billion from Fidelity, T. Rowe Price and Blackrock (Klebnikov, 2020).
Timing is key to help bolster the success of a company’s IPO but is inherently risky as it is a difficult task to execute effectively. There are other factors which Airbnb may have taken into consideration when finalizing the decision to proceed with going public. Market volatility was likely one of them, as the lodging industry happens to be quite volatile naturally. The improving conditions of the COVID-19 pandemic have helped to push the market into an upward trend, which is ideal as Airbnb proceeds with going public. Disregarding the pandemic, Airbnb’s IPO provides the company with high potential for increased exposure and an improved public image. The latter is essential for Airbnb to improve on since the company is not held in high regards by many European cities. This is a result of their negative impact on the property market in these cities. Despite current skepticism, it seems that the company has all the resources and information necessary to make the process of going public as smooth as possible.
The pandemic has been unpredictable thus far and has left many companies in uncertainty when implementing long-term decisions; Airbnb’s decision to proceed with their IPO is a bold move given the circumstances but may yield promising results given the improving conditions of the pandemic in many countries.
Klebnikov, S. (2020, August 11). Airbnb Reportedly To File IPO Paperwork Later This Month. Retrieved August 11, 2020, from https://www.forbes.com/sites/sergeiklebnikov/2020/08/11/airbnb-reportedly-to-file-ipo-paperwork-later-this-month/
Lane, L. (2020, June 09). How Bad Are Covid-19 Pandemic Effects On Airbnb Guests, Hosts? Retrieved August 11, 2020, from https://www.forbes.com/sites/lealane/2020/06/09/how-bad-are-covid-19-pandemic-effects-on-airbnb-guests-hosts/
Ledsom, A. (2020, June 30). Airbnb’s Comeback: Longer, Local Stays But A Benefit To Bigger Cities. Retrieved August 11, 2020, from https://www.forbes.com/sites/alexledsom/2020/06/30/reduced-airbnb-stays-will-actually-benefit-big-citiesas-travel-becomes-local-and-forever-changed/