It’s Air-time: Airbnb plans IPO
August 26, 2020
3 min read
What's going on here?
On 19 August 2020, American holiday rental marketplace Airbnb filed papers for its long-awaited Initial Public Offering (IPO). However, the decision to launch IPO proceedings comes as a surprise to analysts after Airbnb cut 25% of its workforce in May in light of the Covid-19 pandemic.
What does this mean?
Prior to the IPO announcement, Airbnb sought a $2bn injection of emergency debt capital, including a $1bn private equity investment to finance its operations during lockdown. When deciding how to raise additional capital, the company firstly considered a direct listing. A direct listing means that no new shares are sold. Instead, existing outstanding shares are sold, and investment banks are not as heavily involved in the process. However, an IPO requires an underwriter to determine the price of shares, purchase the shares, and sell them onto investors in their network and to the public. An IPO will ultimately give Airbnb greater flexibility to raise more cash, and provide security in case markets become unstable.
Currently, Airbnb is valued at $18bn, down from $31bn in 2017. In preparation for the IPO (and in acknowledgement of the pandemic), Airbnb has cut costs in non-essential areas of its business, including its luxury stay division and marketing budget. However, the listing is still expected to be one of the largest this year despite the global economic uncertainty.
What's the big picture effect?
Airbnb’s IPO plans highlight how the global travel sector is beginning to make a cautious comeback. However, this may not be in a typical way. Staycations are growing in popularity as a result of international travel restrictions enforced by global lockdowns. For instance, in the UK, searches for trips to Scotland have increased by 532%, as previously unthought of destinations reach the top of travellers’ lists. This is good news for Airbnb: some holidaymakers see rentals as safer than hotels nowadays. Notably therefore, on 8 July 2020, Airbnb experienced over 1 million nights booked on this single day.
Nonetheless, the comeback that the travel sector makes is likely to be fraught with complications. According to UK travel industry trade body ABTA, 39,000 sector jobs have already been lost in the UK, whilst threats of a second lockdown could result in 96% of travel business reporting serious or critical impacts on their business capacities. This is only the beginning; if the sector is struggling in peak holiday season, the long-term outlook doesn’t look sunny.
The recent investigations by the UK’s Competition and Markets Authority (CMA) cast doubts too. In July, the CMA told travel companies to process refunds at a faster pace, as many holidaymakers had their trips cancelled as a result of the pandemic (to see our article on that, click here). Issues along these lines are likely to disrupt travel companies in the long run, as shining a light on malpractices is unlikely to inspire confidence in investors or customers. The situation will only get worse when these firms find themselves without funds that they would obtain from airlines, hotels and customers following seasonal bookings, which could then put them on the brink of collapse.
Despite the financial upheaval that the travel industry is facing, Airbnb’s IPO plans may be a catalyst for other industries to capitalise through making plans to raise their own equity financing, particularly if businesses in troubled sectors are beginning to make inroads. For Airbnb meanwhile, its market distinction and business model arguably present the safest way to travel now. Of course, this is an unequivocal reason for the IPO plans, but from the outside looking in, the overall industry deficit is theoretically enough to cast doubt on Airbnb’s market leverage and by extension, the timeliness of this ambitious IPO.
Report written by Evangeline Taylor
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