Low cost travel, benefits, dysfunctionalities and spillovers


The global travel industry has come to a halt. Airlines are grounded, and borders are closed. Travel, as we know, is almost impossible and will be limited till a reliable vaccine is available for most of us. This may be a year or even two if, of course, no new dangerous mutations of the virus appear. We cannot be sure if travel, particularly air travel, will be low-cost as we got used to it in recent years, after this pandemic ends.


TRAVEL GOT EASIER AND CHEAPER IN RECENT YEARS

We used to treat low cost traveling as something obvious. But some years ago, about 30 years ago, it was not so. The national countries protected the skies. National carriers, today we call them incumbent carriers, had only limited rights to operate flights in other countries. For many years many people engaged in promoting the so-called air travel freedoms. Only as the international community agreed on air travel freedoms, the low-cost carriers appeared in the skies, making the market that competitive that incumbent airlines had to lower their prices. It was in the 90s of the 20th century.

At the same time, the new digital technologies allowed for real time or dynamic pricing. It was indeed the airlines who, as the first companies in the world, introduced dynamic pricing. The coincidence of those two events made air travel, both local and global travel, cheaper and more accessible than ever.

The 4.0 industrial revolution also changed the hotel business. Many years ago, you had to go to a travel tour operator, so that they book you a hotel in some other country. It was also possible to book some private accommodation, but you had to use an intermediary and pay a margin. With the appearance of platforms like booking.com, it got easier to make the hotel arrangements personally comparing the prices and locations paying only some transactional fees. The emergence of Airbnb brought about another change. It allowed many private owners of apartments and houses to join the tourism business. Short-term rental turned out to be so profitable that many of them gave up the long-term rental. Many very attractive offers appeared in the market at fairly affordable prices, which meant that traveling around the world you could not only live in a cramped hotel room but above all rent a whole house for several people and enjoy that you have at home like a washing machine, fridge, fully equipped kitchen and so on. Having access to a washing machine limited to a necessary extent the number of clothing you have to take with you while traveling if you want to feel fresh and clean every time. You do not need as much luggage as you needed before.

If someone told me many years ago that without any trouble going to Japan, I could just so for a couple of days live in an ordinary Japanese home, I wouldn’t believe it. Yet, in the 21st century, it became possible. The photo below I took somewhere in northern Europe behind the Polar Circle during a Polar night. Then we also rented a house on the edge of the fjord and from the windows we could have admired the northern lights while sitting by the fireplace.



AIRBNB THEN AND NOW

Digital platforms that appeared in the 4.0 economy are disruptive to old status quos by changing the rules of the game of the entire sectors. The Airbnb’s case has shown, they can also be a cause of spillovers in other sectors that their original game field.

The company was conceived in 2008, after its founders put an air mattress in their living room effectively turning their apartment into bed and breakfast to offset the high cost of rent in the city. It happened completely by chance. Its founders had no idea about the business before, not to mention the digital business. At first, nobody wanted to finance the company. Later on, it was easier, and the list of investors became very long. The amounts pledged were first counted in millions of USD, later in 2016, two funding rounds exceeded 1 billion USD each. But, Airbnb does not own any of the real estates, nor does it host events. It acts solely as a broker, receiving commissions from each booking on both parts property owners and guests.

With time they had expanded from air beds and shared spaces to various properties, including entire homes and apartments, private rooms, and other properties worldwide. Like Uber, they use the global network effects matching many property owners and many visitors, mostly tourists. Unlike couchsurfing that is sharing for free, Airbnb, in its original form, served property owners or tenants to share in practice the fixed costs of apartments, including mortgages, with guests so that apartments get more affordable for them. I underline here ‘in the original form’, as with years, it turned to be supporting the regular short-term or mid-term rental business.


Today during the pandemic, the company’s situation is not to be envied. Before the pandemic hit, their business was billions of dollars’ worth. They planned to go public, they were preparing for the IPO, but they did not make it in time. Now their turnover has dropped. Goodwill also fell. Already in May, they had to lay off several thousand people. If we visit their website from time to time, we will see that they are trying to adapt their services to the changing situation. When the pandemic broke out, in the first weeks, they were still willing to finance their top landlords’ mortgages that these landlords would normally pay off from the rental income. Now, this service is out of the question.

The documents necessary for the IPO are still kept by the Securities and Exchange Commission in the United States. But, it is difficult to speculate what the fate of this company will be. They themselves have not invested in apartments, so they do not lose on the associated fixed costs. The losses are by the landlords. The company’s funding sources were business angels, venture capital funds, and loans. The company was only profitable for two years before the pandemic. So, those who lost were the investors. Will landlords be willing to base their income on short-term apartment rentals in the future? Or maybe some of them will return to the long-term rental? Will investors be willing to keep investing in Airbnb to rebuild its business, or will they become more cautious about value for money?


FROM SHARING ECONOMY TO PROFESSIONAL COMMERCIALISED SHARING

Before the pandemic, Airbnb was the leading online marketplace for arranging or offering lodging, primarily homestays, or tourism experiences under the shield of experiences and adventures. Of course, stays, so the housing business was the most important one. But naturally, some hosts could have offered the guests more than only accommodation. For example, it could have been cooking local dishes together, learning local handicrafts or going out to the city together, and guiding guests around places they didn’t come across that they can be visited by reading guidebooks. In many non-urban locations, the hosts organized their guest’s trips to interesting places, e.g., the mountains, the surrounding forests, or trips requiring specialized equipment. Apartment and homeowners were quickly joined by people with all sorts of hobbies they could have shared with others.

Up to this point, we could talk about a sharing economy. It worked more or less the same way as in the early stages with Uber drivers. Quite quickly, however, professional companies joined the owners of flats or houses or hobbyists. Then things got complicated.

This first obvious group of landlords was, of course, private owners of apartments and houses who would like to rent them to cover their fixed costs and still earn some extra money. If someone rents a room in his house or an apartment that is near his proper apartment, then, of course, such a person can clean after the guests him or herself and prepare an apartment for the coming guests. Suppose, however, that someone has such an apartment far from where they live. Then he or she could, for little money hire someone, who would clean up for him or her and prepare the apartment for the next guests. Naturally, some people or companies had begun to provide such services on a larger scale to many owners simultaneously and even advertise themselves as such. In some locations, particularly very popular cities, it turned out that short-term rental of apartments is much more profitable than long-term rental. Therefore, individual homeowners had been joined by professional developers or people who built or bought several apartments for rent as part of their business activity. Instead of renting them to the long-term tenants, they started offering these flats via Airbnb short-term rent.

In the case of experience services, of course, apartment owners had been joined by professionals as well. An example might be here companies that professionally organized culinary events. They teach people cooking for one evening event. Cooking together, of course, ends with a dinner. So why shouldn’t they join Airbnb? After all, Airbnb could have expanded their customer base to include foreign tourists. The same happened with the adventures service. The hosts and groups of people with similar interests who deal with them professionally began to offer it; regular tour operators, as well. These could have been companies specialized in the so-called team building. They travel together with a group of people to the mountains or the wilderness and organize various exercises to allow team integration. It is physically demanding but also delivers a lot of fun. Since they had have the right equipment, it will not be very difficult to make an extra program for tourists who would like to experience something interesting.

In the housing business, the first consequence was the decrease in the number of long-term rental apartments in many cities. In countries where the rental rate is low, this was not a problem, but where most of the population lives in rented apartments, it has caused a significant increase in rental costs because supply has decreased. While in some countries the offers in which one person offered one house or flat for rent prevailed, landlords, offering more than one apartment or house for rent prevailed. Of course, it is difficult to say whether they were the owners of these houses and apartments or just companies that provided a rental service and guest service for the owners. This group also included professional developers who threw entire buildings onto the market for short-term rental via Airbnb.


DYSFUNCTIONALITIES AND SPILLOVERS

While in the case of Uber, we are dealing with a platform entering a usually licensed market because usually professional passenger transport requires having a license, so the Airbnb business did not involve in most cases any law’s circumvention. The only exceptions were cities where the private accommodation market was somehow regulated.

The Airbnb business’s major consequence was the disturbance of the proportions between short-term and long-term rental prices resulting in people renting apartments even only a couple of days in a month to tourists making more money than they would do on the long-term renting. I was looking once at both Airbnb offers and long-term rental offers in several European capitals. After analyzing the average income obtained by the apartment owners and the average price per night – this data was some time ago made publicly available by Airbnb, as well as single offers, the conclusion was that you could earn a little more on the short-term rental than on long-term rental, even if a given house or apartment were not rented for a whole month. Half a month or less would do. Of course, there were still other costs, like cleaning or water and power or even mortgages. Still, we can accept those unbalanced proportions as a stated fact.

The most attractive Airbnb rentals were, of course, the city centers and less attractive the outskirts. What happened in many cities was a lower supply for long term rentals in the city center locations. Suppose you want to rent an apartment in the very city center or some other central location, you had to pay more than you had paid before Airbnb appeared in the market. Housing costs are the highest fixed costs in a monthly budget. So, if those costs are rising, less of the salary you have at your disposal for the remaining monthly spending. And there is always a threshold of affordability. For many residents, that threshold was passed, so they had to change the location for a cheaper one.

The rising rental prices in the city centers result in an exodus of residents to the city outskirts. People who no longer could have afforded rents in the city center had to move further to the outskirts. It was probably a problem for many people and cities, but still, we have to be objective here. In Paris, it was already many years ago that people started to move to the outskirts, and it had nothing to do with Airbnb. In Lisbon, the problem was that there were many beautiful houses and mansions in the city center that were abandoned during the regime time. Because it was difficult to state the ownership right, it was impossible to renovate those houses. Another reason was that the rental fees were frozen through the years by the government, so the owners were no longer able to finance renovations out of the rental. So, people moved to the outskirts for quality purposes. Now, the situation has changed, but I can still remember how a few or a dozen years ago, at quite nice places in historic Lisbon, rats were flying like stupid through the streets, and some houses were boarded up.

The other major problem was the inconvenience of masses of tourists for residents. First, because the tourists occupied many apartments in the same buildings, in which people lived they live. Probably everyone who once spent a night in a hotel, hostel, or resort knows perfectly that tourists rather do not observe the curfew, especially those tourists who came to have fun. Regular residents of blocks of apartments did not have such a thing as curfew any longer. Secondly, a huge number of tourists enjoying the city’s central places until late at night or even until dawn disturbed order and disturbed the lives of residents. Barcelona has such a problem, for example. People there had enough of tourists who think that every Spaniard has fun all the time and does not rest at night. The main street of this city often turned into a popular pedestrian zone teeming with life until dawn.

And finally, there is the financial or taxation aspect. For example, a city that had a very serious problem with landlords was Cracow in Poland. Some time ago, the town hall admitted that several officials had been permanently delegated to check offers from Cracow on the Airbnb pages assigning them to the locations and checking whether the appropriate amount of tax was paid from the given location. Many people either did not pay any taxes on renting by not registering rental with the tax office, or they thought they could pay the taxes on short-term renting as personal income tax, which was on long-term renting about 8,5%. But short-term renting was a repeatable activity and hence in Poland classified as business activity. Instead of paying taxes on rental according to personal income taxes, landlords using the Airbnb platform should have set up business activity and paid taxes on the short-term rental according to corporate income tax. Even if exemptions apply here, the tax amounts would still be higher than the personal income tax in many cases. Rental businesses are obliged to pay 19% on income and 8% VAT if they earn more than EUR 50,000 a year. Ten small apartments for rent will certainly exceed this amount. I would not be surprised if there were owners in Cracow renting dozens of apartments. Cracow is popular among foreign tourists as a place for weekend getaways, fun, and drinking parties, although it has one of Poland’s most beautiful historical cities.

Last but not least it was a nuisance for the tourists themselves who found themselves in overcrowded spots. If you like crowds and you like to party it’s not a problem, but if you want quietly sightsee or enjoy the art it is no longer possible in places like Paris, Rome or even Bruges. The development of low-cost air transport and travel platforms’ appearance made international and even intercontinental tourism available to many people. Of course, there were cities such as Paris, where there have always been crowds. But these crowds 25 years ago and these crowds before the pandemic were on a completely different scale. We should add to this the nuisance of almost everybody taking selfies and thousands of photos with smartphones.



The room you see in the photo is an exhibition room where the main focus was Mona Lisa. Monaliza has recently been moved to another room. But there are, of course, many other interesting paintings there. The moment I entered this room, the first thing I saw was the amazing crowd gathered in front of her and the amazing crowd in the whole room. There was a moment when I even found myself completely unable to hear my thoughts. And, I took this picture in February, not necessarily during the winter holidays.

In the most crowded cities limitations had been already implemented at some places to give the visitors a relative comfort. An example might be the Galleria Borghese. For art lovers on the absolutely must-see list while in Rome. To get there, you have to apply for a reservation and be strictly on time. In exchange, you can visit it for two hours being one of only two hundred visitors allowed at the same time to the building. It is even possible to make a clean shot of Bernini sculptures with no people in your lens. The only disadvantage is that if taking a spontaneous trip to Rome that we decide on a week ahead or so, we would probably not get the ticket at the right time.


However, one of the alternatives that seem, today the foreseeable future for tourists and art lovers is that if we want to follow details of famous buildings and pieces of art inside, we could do this using virtual reality and augmented reality equipment. I did not have a chance yet to put a headset on my head and see the virtual reality of Versailles made in cooperation with Google. Still, I think this technology will also change the tourism industry by changing its focus. We know already that the Coronavirus pandemic might speed up the technological process in this respect.