Although air travel has not yet fully recovered from the disruptions of the past two years, consumers are taking to the skies in greater numbers in 2022, making for a healthy comeback for the industry.
The Transportation Security Administration says almost 230 million people have flown already this year, up 71% year over year and 46% more than 2020. While still below the 269 million people who flew in 2019 at the same point in the year, air travel is back, baby!
That's showing up in Airbnb's (ABNB -0.91%) nights and experiences booked, a key metric of growth for the vacation rental company, which exceeded 100 million for the first time ever in the first quarter. In fact, gross booked nights in urban areas grew 80% during the period, surpassing 2019 levels, while non-urban area travel was 80% ahead of 2019.
And while everyone expects summer travel to be even stronger, before you break out the confetti and champagne, be aware there are clouds forming on the horizon for the hospitality industry.
A dicey future
The Federal Reserve just raised interest rates a half percentage point and said it was open to raising them another half-percent in June and July to help combat rampant inflation. Previously, St. Louis Fed president James Bullard said it was a "fantasy" to believe inflation could be tackled without dramatic increases in interest rates, approvingly noting that former Fed chairman Paul Volcker hiked them as high as 20% in the early 1980s.
That also had the effect of causing the economy to grind to a halt, but Bullard has said putting the economy in reverse may be necessary to get inflation under control.
Consumers are already feeling the impact of rising prices, and the economy contracted more than 1% in the first quarter, meaning the Fed standing on the brakes could bring nonessential travel to a grinding halt.
Airbnb stock has tumbled 13% since the Fed made its interest rate announcement, giving up all of the gains it enjoyed the day after releasing its stellar earnings report.
Stay and rest up
Long-term stays, those lasting 28 days or more, are a hopeful catalyst for Airbnb's future, and they have become the vacation rental leader's fastest-growing segment by trip length. As a percentage of its business, the extended-stay crowd has doubled since the first quarter of 2019 and now represents 21% of Airbnb's gross nights booked, up from 13% three years ago. Overall, 48% of gross nights booked were from stays of at least seven nights.
The strength of that category helped Airbnb grow revenue 70% year over year to $1.5 billion. This number also benefited from rising average daily rates (ADR), $168 for the quarter, a 31% increase from 2019 and 5% higher year over year.
Yet that makes the cost of a stay in an Airbnb comparable to a night in a hotel. One of the original advantages of staying at an Airbnb was its lower cost, but hotel ADRs are around $150, meaning Airbnb is no longer the low-cost leader.
There are certainly other benefits to a stay with the vacation rental company, but particularly during inflationary times or an economic recession, travelers may become more price-sensitive when deciding where to stay.
Turbulent times ahead
Still, Airbnb has used the travel recovery to its benefit. Although it reported a net loss of $19 million for the first quarter, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $229 million compared to a loss of $59 million in the same period last year. And the company expects to report net profits for the first time this year.
Airbnb has also saved up a war chest of cash as well, ending the first quarter with $8.3 billion in cash and equivalents, which, coupled with less than $2 billion in long-term debt, gives it a lot of flexibility.
The company produced $1.2 billion in free cash flow last quarter, putting it on a strong trajectory, but investors should remain wary of buying in when Airbnb's valuation remains high. The growth stock might be down 18% year to date, but it may fall even lower if economic woes reduce travel demand in the months ahead.