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Investors need to check out of Airbnb

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam1/8/2021 07:00 AM GMT+08  • 4 min read
Investors need to check out of Airbnb
Airbnb's value doubled on its opening day last month. At US$100b, it is worth more than the Hilton, Marriot and Hyatt combined.
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The Hilton Singapore is a majestic hotel on Orchard Road. It is perfectly placed within a short walk from Ion Orchard and Takashimaya.

When the hotel opened its doors in 1970, it stood out for its luxury. The plates were made of porcelain. The cutlery was silver. Each floor was carpeted. In those days, most Singapore hotels were like army barracks.

The Hilton Singapore did not mark its 50th anniversary with much fanfare. The Hilton Group, which has 95 luxury hotels in 29 countries, has suffered its worst-ever slump in revenue. Even the Great Depression was kinder to the group.

Ironically, Conrad Hilton, the group’s founder, started the chain in a pandemic. In 1918, the Spanish Flu claimed more victims than World War One (WW1). It killed 3% of the world’s population. The virus spread like wildfire, infecting one in four humans.

Conrad Hilton bought his first hotel in 1919 in Cisco, Texas, while the pandemic was raging. It was called the Mobley Hotel and had 40 rooms.

He was just a 32-year-old WW1 veteran whose family ran a store. Cisco was a town at the frontier of Texan oil wells. Many oilmen travelled to the town seeking fortune. Before the Mobley, there was just a few inns.

The hotel was immensely successful. Most rooms changed hands three times a day, as Cisco was close to the oil fields. There was demand for more rooms. So, he converted the lobby into rooms and added a bar.

While his guests were chasing oil, Conrad Hilton struck gold in hospitality. He wanted to deliver a uniform standard of luxury that travellers could afford, and went on to open many more hotels in Texas and New Mexico.

Conrad Hilton prospered in the 1920s, as the pandemic gloom was erased by a boom. By 1931, he had bought the Waldorf Astoria in New York, one of the finest hotels in the world. The Waldorf was the world’s first hotel to have a telephone and radio in every room.

After World War Two, Conrad Hilton devised a novel concept that would transform the hotel business — the franchise. Instead of owning a chain of hotels, one could franchise a hotel brand to other owners. The killer app of the franchise would be its reputation. Each hotel that was part of the franchise network had to conform to certain standards. These included wall-to-wall carpeting and room service, which were novelties in the 1940s.

The other advantage of the franchise model was the multi-hotel reservations system. Before the Internet, booking a hotel in another city was a complex exercise. Conrad Hilton made it easy for a booking to be made in New York for someone travelling to Singapore. Other chains such as Intercontinental and Hyatt followed suit.

Today, the Hilton Group’s biggest threat is not the pandemic. It is a disruptor called Airbnb. Airbnb is an online marketplace that links hosts with travellers. The app serves as a guarantor of standards and an intermediary. These are precisely the functions that Conrad Hilton’s franchise model provides for high-end travellers.

Airbnb listed last month. Its value doubled on its opening day. At US$100 billion ($132 billion), it is worth more than the Hilton, Marriot and the Hyatt combined. This is despite not owning or operating a single hotel room.

Airbnb is trading at 27 times revenue and is bleeding cash. In the first nine months of 2020, it had a net loss of US$697 million on revenue of US$2.5 billion. It was losing money even before the pandemic. The street expects the losses to continue, despite Airbnb cutting a quarter of its workforce.

The vaccine could revive travel in 2021. Travellers will not just seek a standard of luxury, but also health standards. The Hilton Group and its peers will ensure gold-plated safe-distancing measures. Travellers would be prompted to pay a premium.

The recovery from the pandemic could take a few years. The travel industry may return to its 2019 level by 2022. If the Hilton Group replicates its 2019 revenue in 2022, then it is at just three times FY2022 revenue. The Marriot and Hyatt are at similar revenue multiples. Investors should check into the hotel chains before the prices rise.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital).

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