on November 23, 2020
Airbnb Pulls the Trigger and Tees Up For Its IPO
Airbnb has announced that it has filed paperwork for its initial public offering. The company did not divulge any financial details or the timeline for its public market debut. The fourth quarter appears to be the most probable date given the flow of events. Given all the disruption and poor visibility into the future of air travel, the company’s decision raises some doubts. However, several positive developments – call it green shoots – are supportive of the company’s decision.
The best validation of Airbnb’s decision is positive data points at Expedia and Bookings.com, the company’s closest competitors. Both companies have an increasing presence in the alternative accommodation segment with their respective divisions, which compete directly with Airbnb. With drive-to-accommodations increasingly the preferred choice for vacationers, both companies reported strong momentum in their alternative accommodations business segments.
Expedia noted in its 2Q20 call that Vrbo and alternative accommodations are the key drivers of travel demand in the near term. The unit’s gross bookings turned positive in May and June and is helping offset weaker demand in its other units. Similarly, Bookings.com noted on its 2Q call that global demand has increased for alternative accommodations as typical air travelers are staying closer to home to avoid air travel. Expedia with 2.1 million alternative accommodation listings and Bookings.com with roughly the same number of listings, the competitive landscape is heating up but Airbnb is still well ahead with over 7 million-listings on its platform. Additionally, relatively smaller travel booking firms, such as, Omio have also reported increased bookings of up to 50% above pre-COVID levels. This has helped Omio raise $100 million and it is looking to make ‘opportunistic’ acquisitions while valuations are low.
Airbnb has been seeing demand pick up on its platform. According to Airbnb’s CEO, as reported by Bloomberg, the number of nights booked at US listings between May 17th and June 3rd was greater than the same weeks from the previous year. Similar increases in domestic holidays are being seen in other countries including Germany, Portugal, South Korea, and New Zealand. As per Edison Trends, total consumer spending on Airbnb in July was 22% higher year/year. Many people are also reportedly changing their vacation preferences. Short international trips are being replaced with longer in-country stays in vacation homes, since the increase in remote working means some people can work from anywhere.
Things are far from being back to normal, but this latest data suggest that the types of holidays people are taking have changed, rather than disappearing entirely. Since the beginning of the pandemic, over a half of Airbnb’s bookings are at locations within 200 miles of the customer’s location, which is a short enough round trip to complete on a single tank of gas, up from a third of bookings in February. People are shifting their holiday travel “from airplane to car” according to the company’s CEO.
From an operational perspective, the company took the opportunity to streamline its organization. The staffing level has been right sized after laying off 1,900 employees, or a quarter of its workforce, this past spring. Additionally, the company enacted a hiring freeze, slashed its $800 million marketing budget and cut the pay of its top executives. Furthermore, Airbnb hosts have been compensated for cancelled bookings, as promised, a few unhappy hosts notwithstanding.
More importantly, the company improved its liquidity position by raising an additional $2 billion in debt and equity financing. The first of which was $1 billion in debt and equity led by Silver Lake and Sixth Street Partners at 10% interest rate and warrants that can be converted into shares with a valuation of $18 billion. The second was a debt round of $1 billion at 7.5% interest plus LIBOR for 5 years involving no equity or warrants, but senior to the first tranche.
This $2 billion infusion adds to the roughly $3 billion in cash on Airbnb’s balance sheet and access to a $1 billion line of credit. According to media reports, Airbnb predicts a return to 2019-levels of revenue by next January, and generated $4.8 billion in revenue in 2019, a 35% increase year-on-year.
With its financial and operational house in order and early signs of a pickup in demand, the long-awaited Airbnb IPO appears to be happening at the right time. Long the poster child for the gig economy, the company with over 7 million listings in more than 220 countries is well positioned to ride the secular socio-economic wave that has powered the collaborative consumption phenomenon.
Uber and Lyft Prevail in California – For Now
A California appeals court judge blocked an order requiring Uber and Lyft to classify drivers as employees, averting an expected shutdown of the ride-sharing services in California at midnight on Friday, August 21. The court granted Uber and Lyft a temporary stay while their appeals process plays out.
The big question now is whether this is a stay of execution – as some have called it – with the hope that both parties will come to an amicable settlement by October. Or is it the beginning of the end of the old legal framework designed for the pre-GIG era. Uber and Lyft have until October to convince the court to throw out the order that they employ their drivers. If they are unsuccessful, the companies will be back where they started, and may again decide to shut down operations in California.
This won’t be the final word. Uber and Lyft, along with DoorDash, were successful in getting a proposition on the state’s 2020 ballot that, if approved, would allow them to sidestep AB5 and continue classifying its drivers as independent contractors. The measure, Proposition 22, also stipulates that the companies provide more benefits to drivers, including minimum earnings guarantee of 120% of the minimum wage while on the job, expenses of 30 cents per mile, a healthcare stipend, and automobile accident and liability insurance. Uber has also initiated measures to enhance driver autonomy to set their own fares and cherry pick rides on the app. DoorDash has also taken steps to enhance Dashers’ pay leading to an average 12.5% increase.
A Lose-Lose Situation
Uber and Lyft say drivers prefer the flexibility of working as freelancers, while labor unions and elected officials contend this deprives them of traditional benefits like health insurance and workers’ compensation. If the companies are forced to comply with AB5 stipulations, the companies contend that the net result will be a lose-lose situation. Drivers will lose the freedom to pursue other jobs as they do now and see a decline in their earnings because of limits on total hours worked. The riders will suffer because service quality and availability will deteriorate, prices will rise as costs get passed through to the riders. Against this backdrop, if implemented the bill will very likely defeat the purpose of improving working conditions and even end up curtailing a few of the privileges that come from being self-employed.
“We would likely have to exert more control over drivers, telling them where to work, how to work, and who they can work for. Uber would likely hire far fewer drivers than we currently support, and we’d likely have to require a minimum number of hours per week. Scheduling and rigid shifts would become the norm, and Uber would likely prevent drivers from working for other rideshare companies.” –Uber
Contrary to Uber’s restrained and measured reaction, DoorDash’s CEO has been highly critical of the AB5 bill and opined that the bill if implemented could seriously hamper the food delivery market and its incumbents. Additionally, the ripple effects could very likely result in reduced order volume for the restaurants as well.
“It would have disastrous results if it’s implemented because it’s trying to impose an imperfect solution into a very big problem” – DoorDash CEO, Tony Xu.
While the bill impacts multiple industries besides the ride-hailing and food delivery companies – trucking, transportation and warehousing, print media, construction and health services, administrative and support services among others – the corrective measures are chiefly to address the issues raised by ride hailing and food delivery drivers. For instance, roughly 400k Californians work for gig platforms like Uber, Lyft, and DoorDash, but nearly 1.5 million freelance workers in the state could come under the ambit of the new law. Trucking firms in California that rely on more than 70,000 freelance drivers are under pressure of the looming threat and would suffer from the extra costs of implementing AB5 or risk losing business.
“There aren’t that many Uber and Lyft workers — it’s just that those companies are the ones making a big push about it.” – Cathy Ruckelshaus, General Counsel at the National Employment Law Project.
With so much as stake for both sides, the arguments for and against Prop 22 will be hotly debated over the next few months. The riders meanwhile will be tuned-in from the side lines, hoping that the compelling value proposition that the ride hailing companies offer will remain intact.**
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